Sri Lanka to Devalue Rupee By 3%, Cut Taxes

Sri Lanka said it will devalue its rupee and cut taxes to spur economic growth as Europe’s debt crisis spoils export demand.

The central bank will weaken the rupee by 3 percent from today, Governor Ajith Nivard Cabraal said in a telephone interview in Colombo yesterday after President Mahinda Rajapaksa made the announcement in his budget speech. Rajapaksa also said he will raise salaries for civil servants and increase government spending in 2012.

Asian nations including the Philippines, Indonesia and Malaysia have taken fiscal or monetary stimulus steps this year, while the Indian rupee has slumped 14.6 percent against the dollar in 2011. The Sri Lankan rupee has gained 0.5 percent this year, making the nation’s goods relatively expensive in overseas markets. Sri Lanka’s exports rose 19 percent in August from a year earlier, compared with a 72 percent gain in January.

“This can support exporters to the point that the key European economies, which Sri Lanka supplies to, don’t drastically slow down,” said Kaushik Das, Mumbai-based economist at Deutsche Bank AG. “Just by depreciating is not enough, the global demand has to be there.”

The Sri Lankan rupee dropped 0.1 percent to 110.37 per dollar at the 4:30 p.m. close in Colombo yesterday. The Colombo All-Share Index has fallen about 8 percent this year, less than the 18 percent decline in the MSCI Asia Pacific Index. The benchmark fell 0.3 percent at the close of trading yesterday.

Concessions Withdrawn

Besides the strengthening currency, local exporters also have had to face the loss of trade privileges previously offered by Europe. The European Union in August 2010 withdrew tariff concessions for Sri Lankan goods due to alleged human rights violations in 2009 during the last stages of the civil war against the Liberation Tigers of Tamil Eelam separatist forces.

“Countries that are competing with us have depreciated their currencies,” Rajapaksa said. “To correct this disadvantage, as an incentive to exports, I intend to devalue the currency by 3 percent.”

India’s rupee, Asia’s worst performer this year, dropped past 52 a dollar yesterday and approached a record low after the government signaled the central bank may not sell dollars “aggressively” to stem the local currency’s depreciation. The Indian rupee has fallen 14.3 percent since Jan. 1.

‘Behind Competitors’

“With our appreciation, we were behind competitors like India and Bangladesh,” said Hasitha Premaratne, head of corporate finance at Colombo-based Brandix Ltd., Sri Lanka’s biggest apparel exporter. “This will be a positive movement in margins for most exporters.”

The International Monetary Fund said on Sept. 7 that Sri Lanka’s exchange rate must be made more flexible for the economy’s “long-run competitiveness.”

Inflation in Sri Lanka slowed in October to 5.1 percent, the lowest level in 14 months, giving the central bank scope to adjust its currency policy. Cabraal left interest rates unchanged for 10 straight months, keeping the reverse repurchase rate at 8.5 percent and the repurchase rate at 7 percent.

Rajapaksa said Sri Lanka will scrap all customs duties on yarn, and remove the value-added tax on import of equipment required to modernize the nation’s textile industry in the financial year starting Jan. 1. Sri Lanka will also offer tax breaks to drug companies and rice processing companies, he said.

The government will inject 10 billion rupees ($91 million) in Sri Lankan Airlines Ltd. to boost the capital of the national carrier, he said.

Government Spending

Total government spending in 2012 will increase by 14 percent to 1.59 trillion rupees, Rajapaksa said. He forecasts the budget deficit to narrow to 6.2 percent of gross domestic product next year from an estimated 7 percent of GDP in 2011.

Sri Lanka’s economy may expand 8.5 percent to 9 percent in 2012, from a projected 8.3 percent this year, the central bank said in a report yesterday.

“The fact that the currency is only being depreciated by 3 percent means the impact on debt and inflation is likely to be quite small,” Gareth Leather, an economist at Capital Economics Ltd. in London, said in an e-mail. “I don’t think other big emerging markets will be too concerned by this move. Sri Lanka is simply too small.”

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Shamim Adam at sadam2@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.