Sri Lanka needs to depreciate rupee: ADB

Mar 31, 2009 (LBO) – Sri Lanka should adopt a more flexible exchange rate policy and depreciate the rupee to make exports more competitive and better manage import demand, the Asian Development Bank said. ADB Lead Economist for Sri Lanka Narhari Rao said two issues of concern are the fiscal deficit and the external account in which the exchange rate policy will play a key role.

“If the rupee is devalued now it may not have a dramatic impact on exports. But looking at the future when the global economy revives, then Sri Lanka will be in good shape if it has an appropriate exchange rate policy,” said Rao.

“Now what is important is to have a more flexible exchange rate management policy.”

ADB country director Richard Vokes said that a more market determined exchange rate would reduce distortions in the economy.

“Rather than introducing many ad hoc (import) taxes that distort the market, it is better to manage import demand through exchange rate policy,” said Vokes.

“The ADB will argue that we want your exchange rate to be appropriately valued so it maximises exports, minimises imports, and maximises export substitution – a lot of items imported could be made domestically. So you w