The rise and fall of the exchange rate

The rise and fall of the exchange rate

The rise and fall of the exchange rate

Written by Staff Writer

21 Jun, 2018 | 2:02 am

Colombo (News1st) – There are several key reasons that affect the exchange rate of the country. While the changes in market inflation cause changes in currency exchange rates, fluctuations in the interest rate also affect currency value and dollar exchange rate.

The other key factors are the Country’s Current Account or Balance of Payments. Other causes include the amount of debt the Government is in, as well as the political stability & international confidence.

INTEREST RATES

Over the past thirty-two months, various inquiries, investigations and judicial processes in relation to Sri Lanka’s biggest-ever economic scandal, the Bond Scams of February 2015 and March 2016, have been carried out by different authorities.

However, due to the complexity of this issue and the subsequent masterly cover-up attempt, the magnitude of the monetary, economic and social losses have yet not been scientifically or authoritatively assessed.

During the controversial bond scam on the 27th of February 2015, where bonds worth 10 billion rupees was issued for 30 years, the interest rates went up by 3.15%.

As is well documented, the interest rates in the Government securities market had been on a declining trend from about mid-2014 onwards, and just one week before the controversial Bond issue, the Secondary Market trading showed that the 3 month Treasury Bill was trading at around 5.86%, the one year Treasury Bill was trading at around 6.1%, and the 30 year Treasury Bond was trading at around 9.48%, while the latter rate had apparently dropped to about 9.35% before the February 27 auction date.

BALANCE OF PAYMENT

According to Central Bank data for the first quarter of 2018, Exports have increased by 7.7% during the first quarter of 2018 to 2989 million US Dollars in comparison 2774 million US Dollars during the same time frame last year.

Imports have risen by 13.1% to 5971 million US Dollars during the first quarter of 2018 while the value stood at 5279 million US dollars during the first quarter of last year.

The Trade gap thereby stood at -2982 million US dollars in the first three months of 2018.

US$ IMPACT ON OTHER COUNTRIES

Economists say after US elections in November most emerging markets currencies depreciated by sizable margins. In contrast, Sri Lanka’s exchange rate moved the least among EM peers despite similar movements in bond spreads.

 

If the government was able to manage the economy and have strict fiscal discipline and control, the rupee will not fall to this extent. In terms of the balance of payments, if the levies imposed on exports, such as the duty and cess on tea exports were relaxed further, the export quantities would increase causing the gap to reduce.

If the objective is to increase agricultural exports the government may well have to desist from relying on persons with no expertise or scientific knowledge who have tampered with invaluable resources similar to the use of Glyphosate that has significantly affected the production of tea and thereby exports.

 

 


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