Sri Lanka’s appreciating currency in the face of rising inflation has renewed fears of the so-called Dutch Disease gripping the country. Sri Lanka’s appreciating currency in the face of rising inflation has renewed fears of the so-called Dutch Disease gripping the country. In March industrial exports fell, reversing a trend of rising double-digit growth.
In March Sri Lanka’s, textile and apparel exports fell by 5.3 percent, plastic exports by 5.6 per cent, machinery and equipment by 55.6 percent and ceramic products by 22 per cent.
Analysts had warned that Sri Lanka could be gripped by the so-called ‘Dutch disease’ a condition where the competitiveness of tradable goods decline due to an overvalued currency.
In Holland, petroleum revenues caused a sharp improvement in the balance of payments resulting in rise in the real rate of exchange.
After the tsunami aid started to come in, the Sri Lankan rupee rose from 107 to the dollar to about 98.
The rate has since stabilized around the Rs. 100 mark.
Meanwhile rising domestic inflation has made sure that the Real Effective Exchange Rate (REER) is appreciating sharply.
Central Bank says the Nominal Effective Exchange Rate (NEER) based on 24-currency basket appreciated by 6.5 per cent during the first three months of the year.
The Real Effective Exchange Rate of the Sri Lanka rupee based on the 24- currency basket also appreciated by 5.7 per cent during the same quarter indicating deterioration in external competitiveness.
-LBR Newsdesk: LBOEmail@vanguardlk.com