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Last year the government said it would make available a US$ 150 million support scheme for exporters to the EU, if the EU withdraws the GSP plus duty free trade scheme, to cover the cost of added duties. However, at this point the Central Bank says a government support package is not required.

“Now there is no need to give anything to exporters. I believe the government’s offer still remains, but we have shown that the risk has been mitigated now,” said the Governor of the Central Bank, Ajith Nivard Cabraal, at a press briefing on Thursday, to discuss economic risks associated with the possible loss of the GSP plus. The Central Bank said a combination of factors, including rupee depreciation against the euro and the sterling pound, and lower domestic inflation and interest rates, will counter impacts from GSP plus withdrawal.

“Sri Lankan exporters’ competitiveness of exports to the EU has increased sharply since November 2008/Januray 2009, due to the Sri Lankan rupee depreciation,” said Mr Cabraal. The rupee depreciation, against the euro and the sterling pound, is expected to counter the added duty payments (about 7%) if the GSP plus is withdrawn.

“The rupee has depreciated from the recent peak levels against the euro and sterling by around 18.5% and 14%,” said Mr Cabraal. “Therefore, the potential loss of the preferential duty margin, of around 7%, if the GSP plus facility is withdrawn, will be well within the rupee depreciation range and hence will not deal a crippling blow to Sri Lanka’s exports,” said Mr Cabraal.

In comparison, currencies of India and Bangladesh, said Central Bank officials, have not depreciated as much. “If you look at India and Bangladesh, their currencies have not depreciated as much as ours. So we are still in a better position,” said an Assistant Governor of the Central Bank, Dr. P.N. Weerasinghe.
However, the Central Bank said it will not depreciate the rupee to maintain the advantage, and refused to comment on whether it would prevent the rupee from appreciating against the euro and the sterling pound.

“We are not saying that if the GSP plus is withdrawn we will depreciate the currency to compensate. There is no need for added support like that,” said Dr Weerasinghe. The Central Banks said the rate of inflation will be contained and interest rates are on the way down. These factors are expected to support local exporters by helping to keep their operating costs down.