FRIDAY, JUNE 03, 2005
India, SL plan no doosra currency
SUBHOMOY BHATTACHARJEE
TIMES NEWS NETWORK
NEW DELHI: In a move that could drastically alter the economic landscape of South Asia, Sri Lanka and India are exploring the possibility of a common currency. Prime Minister Manmohan Singh had recently broached the subject of a possible currency union in the region.
Top government sources said the offer has been made by Sri Lanka to expand the scope of the free trade agreement signed by the two countries. The proposal also involves allowing Indian scrips to be freely traded in Colombo and vice-versa.
The specific proposal involves supplanting the Sri Lankan rupee with the Indian rupee at an agreed upon exchange rate. At present, the exchange value of a Sri Lankan rupee is about 0.44 Indian rupee.
The sources termed the offer momentous but said long preparatory work would be involved before arriving at a decision. They said a common currency regime for the two nations would need a uniform monetary policy.
Pointing out the complexity of the process, they said one of the basic issues confronting the two governments will be the different pace of progress made by the two nations on the road to capital account convertibility. The Sri Lankan rupee has a managed float like India, but it has moved ahead on convertibility. The RBI would have to devise methods to harmonise all these factors. They cited the decade of preparatory work undertaken by the European Union, before it could roll out its common currency - the euro.
Saumitra Chaudhury, chief economist of ICRA and member of the Economic Advisory Council of the Prime Minister, said it would be beneficial for Sri Lanka to peg its currency to the Indian rupee.
Sri Lanka has a strong economy, though it has been buffeted by high inflation in recent years. Linking its currency with the Indian rupee could act as an anti-inflationary measure. In the three-year period from '00 to '03, its headline inflation averaged 8.9%.
The major export earners for Sri Lanka are tea, textiles, diamonds and tourism. Colombo port is one of the largest ports in Asia, and is a favoured transshipment destination for most cargo liners.
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