The Central Bank (CB) has reiterated the accuracy of its analysis on the impact of the GSP+ scheme on Sri Lanka from a risk management perspective.

In a media release, CB has stated that the factual data has not been questioned but, however a few persons unfairly criticized the analysis on misperceptions, which the bank has highlighted.

The thrust of the Central Bank position is that if exporters were able to compete in the international market when the Sri Lanka rupee appreciated significantly against the euro and pound sterling in late 2008 and early 2009, they should now be able to perform even better, when the rupee has depreciated against the same currencies.

It is now well known that the large scale foreign exchange inflows into the market with the improvement of investor confidence, has been creating intense pressure on the Sri Lanka rupee to appreciate. However, the Central Bank’s frequent intervention by way of absorbing foreign exchange in the forex market at a high cost of sterilization to the Bank has enabled Sri Lanka to maintain the current level of exchange rate and prevent a sharp appreciation, which could have negatively impacted exporters, the CB states.

Despite the vast majority of exporters being appreciative of the Central Bank’s strategy, a single exporter has been arguing that his company finds it difficult to continue its business and is hoping that the Sri Lanka rupee depreciates against the pound sterling to the level that prevailed in 2004! Another exporter is arguing that the depreciation of the Sri Lankan rupee against the euro or pound sterling does not provide his company sufficient support as its export items are priced in US dollars! These types of individualistic and contradictory arguments naturally create confusion among the general public, and it is in that context that the Central Bank wishes to reiterate, that in setting exchange rate policy, the Central Bank takes into consideration the overall macroeconomic factors, rather than the narrow preferences of individual firms, it further said.

It should also be noted that the following important factors impact the competitiveness of Sri Lankan products in the international markets: (a) domestic inflation & input costs (b) security and political stability (c) initiatives that should mainly be developed by individual firms, e.g., technological improvements, institutional arrangements and environmental initiatives etc. In this context, it is clear that the current regime of low inflation, lower inflation expectations and the falling interest rates provide a satisfactory support for the entire business environment, including exports.

It should be further noted that excessive reliance on temporary benefits, which are controlled by outside authorities or countries, results in a number of fundamental and structural problems for the recipient economy. The high "politicization" of such concessions by interested parties together with periodic threats of withdrawal of concessions often leads to negative vibrations in the economy. Such uncertainty saps economic momentum & also leads to delays by firms to introduce productivity improvements. These are, inter alia, some of the unhealthy outcomes of relying on "concession" regimes, which in the long-term, even inhibit sustained export promotion.

The Central Bank said that in setting its exchange rate policy, the Bank considers the currency's impact on overall economic conditions in terms of, interalia, exports, imports, inflation, cost of living, debt, investment and consumption, internal and external balances, and market movements of major currencies in international markets.