Budget 2014: No Rupee Devaluation Shocks

By Hema Senanayake - November 28, 2013

Hema Senanayake

If I have any kind of expertise, it is in the subject of economics, especially in macroeconomics. Perhaps some CT readers might want to know my views on the budget 2014. Let me begin with the budget of 2013.  When the 2013 budget was presented, the Central Bank of Sri Lanka (CBSL) forecasted to achieve 7.5% GDP growth. Instead, I suggested that “Sri Lanka will never achieve 7.5% GDP growth” for the year 2013. My claim is on record. Why did I say that?  In the budget for 2013, it was proposed to reduce foreign borrowings dramatically in compared to the previous year. Pointing it out, I categorically said that if the government stick to the limit of foreign borrowings proposed in the budget, the government has to contain the private sector credit growth severely in order to avoid significant rupee depreciation and as a result it would not be able to achieve 7.5% GDP growth in the year 2013. My prediction was well backed by a reason.

The economy is a system; you can’t do whatever you want in one area without having impact in another area. The stability of rupee depends on the balance between the inflow of dollars (or foreign currencies) into the country and the outflow of dollars. And private sector credit growth is important to achieve higher GDP growth; ensuring private sector credit growth is not possible if the balance between inflow and outflow of dollars breaks negatively which means inflow of dollars reduced in compared to outflow. The proposed dramatic reduction of foreign borrowings in the budget of 2013 should have definitely broken the said balance negatively. This was a great mistake and as a result finally the government desperately pushed the National Savings Bank to borrow in dollars.                                            

The said mistake has been avoided in 2014 budget. In this budget it has been proposed to increase foreign borrowings by 34.15% to Rs.331.5 billion; this will roughly amounted to USD 2.5 billion. Quickly you will guess that in the year 2014 there won’t be currency devaluation shocks. That is right. Another positive point is the proposal to reduce domestic borrowings by 22%. The combined effect of both proposals is that it provides a better chance to expand private credit issuances. If credit issuances (or credit growth) are not significant then there are chances to appreciate the value of rupee which is an indication that CBSL has to bring down the interest rates. This means in 2014 we will be able to see more stable currency, low interest rates and private sector credit expansion which combination helps to have a higher GDP.

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