Sunil Mendis: Is it time for a common currency in the SAARC region?
Inauguration speech by Mr Sunil Mendis, Governor of the Central Bank of Sri Lanka, at the 15th Forex
Conference of the Forex Association of India, Colombo, 20 August 2004.
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It is with great pleasure that I accepted the invitation from the Forex Association of India to inaugurate
its 15th Annual Forex Conference here in Colombo. I would like to extend a warm welcome to this
distinguished gathering of forex professionals from Sri Lanka as well as from many of our neighboring
countries. I am sure that this is an excellent opportunity for all of us to promote goodwill among
ourselves. It also gives us an opportunity for sharing our thoughts on the way forward for South Asia's
currency and financial markets, which is the theme of this year's conference.
Forex, as you very well know, is the largest financial market in the world. Unlike many other markets,
the international forex market is open 24 hours a day. Its daily turnover is well over US$ 1.2 trillion.
This turnover is more than the combined turnover of the world's major stock markets on any given day.
Hence, the international forex market is a very liquid, and thus, a desirable market for trading. As with
any other market, technology has also contributed immensely towards its expansion. Now trades are
executed increasingly through the internet. It has allowed even smaller investors the access to the
market.
As conservative central banks, our involvement in the forex markets is limited to strategic investments
and stabilising the exchange rate. Following this role, the Central Bank of Sri Lanka does not get
involved in speculative type of trading. However, it plays a major role in the development of the
country's forex as well as other financial markets. We know that in a market-oriented economy, all
financial market segments, namely, the foreign exchange market, money market, government debt
securities market and the stock market are inter-linked. The Central Bank, while watching the
operations of each market segment individually, needs to take a macro view of all the market
segments to ensure financial market stability. The focus today, however, should be on the foreign
exchange market.
In the exchange rate area, it is appropriate to mention at this juncture, Sri Lankan authorities made a
fundamental change to its policy on 23rd January, 2001 by moving to a freely floating exchange rate
arrangement. This was necessitated by the inability of the then prevailing exchange rate system and
the crawling band regime to sustain themselves. Immediately after the float, the market experienced
some volatility as is usually expected. However, this volatility has been contained overall since then.
This, not only brought confidence to the market, as evidenced by increased foreign exchange inflows,
but also allowed greater flexibility and market opportunities to foreign exchange dealers of commercial
banks. Subsequent to the float, the Central Bank became a net buyer of foreign exchange from the
market, in sharp contrast to its experience in the period prior to that.
Our objective with regard to the foreign exchange market is to ensure an orderly adjustment of the
exchange rate, without excessive volatility. Such adjustment should reflect the emerging economic
fundamentals of the country. We should ensure that demand and supply mismatches are addressed
on time so that there is no excessive volatility in the exchange rate.
Turning to the theme of this year's conference, i.e. "Is it time for a common currency in the SAARC
region?", I believe that it would give rise to much interesting and thought provoking discussion and
debate. We know that the SAARC was established in 1985, with the objective to provide a platform for
the peoples of South Asia to work together in a spirit of solidarity, trust and understanding. It aims at
accelerating the process of economic and social development of member countries. I believe the
considerations of the timeliness to introduce a common currency for the region will be supportive
towards the objectives and aims of SAARC as well.
While taking note that deliberations such as these would definitely lay the foundation for future
developments in the SAARC region, I take great pleasure in inaugurating this conference today and
wish you all success with the conference. And I would also like to urge you to take a little time off to
visit some places of interest, while you are in this beautiful country, Sri Lanka.
Thank you.