Sri Lanka soft-peg drains reserves: ADB study

Mar 11, 2009 (LBO) – Sri Lanka’s foreign reserves have been hit due to poor foreign exchange reserve management coming from operating a soft-peg with the US dollar, an Asian Development Bank commissioned study has said.

Sri Lanka is now negotiating an IMF bailout with foreign reserves halved from September to December when active peg defence began.

The ADB document said Sri Lankan apparel exporters were having a tougher time than those in India or Bangladesh.

“The risk of textile exporters’ orders being cut is more probable for Sri Lanka than India and Bangladesh because the Sri Lankan garment exports industry faces increased challenges,” the study said.

“There is a serious shortage of skilled labour which is driving labour costs up. Labour costs of unskilled labour are also becoming impractically high for exporters operating in a highly competitive market.

“Higher labour costs have already forced some garment factories in the country to shut down or downscale.”

Sri Lanka has had high inflation since 2004, when monetary and fiscal policy loosened simultaneously but the rupee was propped up with the help of periodic doses of foreign borrowings.

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