Dec 20, 2016 (Reuters) – Sri Lankan Finance Minister Ravi Karunanayake said on Tuesday the rupee currency, which is under downward pressure, will recover and be steady next year with expected foreign inflows.
The rupee, which has fallen 3 percent this year after a nearly 10 percent loss in 2015, is under pressure because of higher imports and foreign outflows from government securities even though the central bank has raised key policy rates by 100 basis points since February.
The strengthening of the US currency globally after the Federal Reserve’s rate increase last week, and a lack of exporter dollar conversions, have also hurt the rupee, dealers say.
“I am quite sure that we will see a reversal trend,” Karunanayake told Reuters in an interview at his office, citing expected strong foreign investment in 2017.
He did not elaborate on the expected foreign inflows next year. “This year was for things to get done because we have got such a perilous economy. People had lost confidence.”
Karunanayake, however, said a steady rupee could come at the cost of higher interest rates, though the efforts to ensure strong macroeconomic fundamentals could help to keep borrowing costs in check.
“You can’t have it all. You can’t have the rupee strengthening and interest rates coming down,” he said, adding that the government would make a steady rupee a priority while economic policy would have its own impact on interest rates.
Since President Maithripala Sirisena’s new government came to power in January last year, the economy has faced a balance-of-payments and debt crisis, partly due to heavy, expensive borrowing under the previous government.
The rupee reversed its downward trend after the International Monetary Fund (IMF) approved a $1.5 billion loan in June, but optimism soon evaporated due to lack of foreign inflows.
Under the IMF loan, Sri Lanka has committed to carrying out strong reforms for fiscal consolidation through higher tax revenues and minimising losses at state-owned enterprises.
The island nation is aiming for a budget deficit of 5.4 percent of gross domestic product (GDP) this year from last year’s 7.4 percent. It has targeted a deficit of 4.6 percent of GDP next year.