Sri Lanka industrialists forging ahead amid uncertainty

June 8, 2012 (LBO) – Sri Lanka's see sawing policy ranging from labour, exchange rate, taxation and interest rates are challenging manufacturers, who are also finding ways to remain competitive in the export market, officials said. "We need policy consistency from the government," Sunil Wijesinha, chairman of Dankotuwa Porcelain, a tableware maker said, referring to a sharp drop in the exchange rate, higher interest rates that has chipped away earnings last year.

Sri Lanka rupee fell from late 2011, with the sharpest drop in March from 110 to 130 rupees, after the Central Bank started to sterilise foreign exchange sales to prevent interest rates going up.

Policy Contradiction

To keep an exchange rate fixed, interest rates have to be allowed to float. Such a monetary arrangement, where monetary and exchange rate policy is complementary, is known as a hard peg or currency board.

Sterilising foreign exchange sales with freshly printed money is also a 'stimulus', boosting domestic demand and bank credit to an unsustainable level which then spills over to the balance of payments via imports.

To correct the problem coming from contradictory monetary and exchange rate policies, high interest rates or a st