Analysis of interest rate and monetary policy in Sri Lanka (1977 to up-to-date)

Introduction

Monetary policy is controlling of the availability and cost of liquidity in the economy with the intention of achieving certain macroeconomic goals including faster economic growth, higher level of employment, low inflation and balance of payment equilibrium.(Colombage, 1993)
The responsibility of operating monetary policy is held with monetary board in central bank of Sri Lanka by the monetary law act. Since establishment of central bank up to 2002 the monetary policy was operated with the objectives of stability of domestic value of money, stability of external value of money, to promote & maintain high level of production, high employment, real income & promote full development of the productive resources.(CBSL, 1990). Since those previous objectives made a conflict in monetary management in 2002 objectives of central bank has been reformulate as stability in price and economy, stability in financial system. Monetary policy of central bank is mainly focused on achieving price stability.
Monetary policy instruments.
Central bank of Sri Lanka uses different instruments to control the money supply of the economy. Those can be classified as,

1.Market intervention
a.Open market operations
b.Bank rate
2.Portfolio limits
a.Reserve requirements
b.Credit ceilings
3.Other instruments
a.Prior import deposits
b.Moral suasion

Open market operation, bank rate and reserve requirement are indirect type of control while credit ceilings, prior import deposits and moral suasion are direct type of controls. Though traditional central banks in developing countries used direct controls since lack of having a developed financial market, now many central banks including Sri Lanka using indirect instruments as monetary economists Argive that direct control instruments create market distortions and they are less effective compared to indirect ones.(Colombage, 1993)
After 1977 the Quasi money hold by people began to rise hugely. Quasi money consist mainly savings and time deposits. This mainly happen because of the positive real interest rate and liberalization of financial sector. In 1970 the M1 was 63.15% of M2. But when it comes to 1985 the percentage has been reduced up to 38.79%. And after introducing electronic payment systems the money in circulation of Sri Lanka become smaller portion in M2. In 2016 the money in circulation was 15.79% of M2 [Table1].(Colombage, 1993)
In closed economy model handling monetary policy is less complex compared to a liberalized one. Due to fixed exchange rate system and restrictive financial systems the control of money supply was less complex. So previous monetary authorities used interest rate, reserve requirement and credit control as main monetary policy instruments. And prior to 1977 the intermediate target of monetary policy framework was narrow money. After liberalized economy that lead to liberalized financial sector and relatively flexible exchange rate system, made monetary policy much more complex with previous policy instruments. So in 1984 CB shifted towards open market operation from interest bank rates & statutory reserve ratio in controlling money supply since those instruments failed to achieve desired outcomes. They were able to mop up the excess liquidity in the economy which had arisen from high tea prices & excessive government expenditure. Also in 1988 because of the savings and time deposits considered as much liquidity asset that directly affect money supply of economy, the intermediate target of monetary policy rearrange as broad money from narrow money.
In 1981 central bank introduced national credit plan (NCP) in the objective of setting monetary and credit targets with forecasting monetary bases. The NCP has prepared annually to guide monetary management of CB. Same year secondary market for treasury bills has been introduced that led to development of TB market.(Karunathilake, 2000)
In order to widening open market operations repurchase agreement system has been introduced in 1993. In reverse repo agreements central bank can sell treasury bills that in position with them to public with the agreement to buy back after a specified duration. In 1995 central bank introduced reverse repurchase agreement system in OMO.
Monetary board of CBSL is having the responsibility to handle monetary policy and in 2001 monetary policy committee (MPC) was appointed to advised monetary board by studying monetary aggregates within the economy. They meet monthly & evaluate economy & recommend suitable policies.
In 2003 active open market operation system introduces with many attractive functions. Establishing daily auction system, maintaining interest rate corridor with repo and reverse repo rates & Outright Sales/Purchases of government securities to address long term (structural) liquidity imbalances.(Wijesinghe, 2005)
In 2009 with the intension of accelerating economic activities the penal rate charged on reverse repo transactions when participating institution exceeded the maximum no of times that could access to reverse repo window in a month has been removed and the 100% margin deposit requirement  for opening letters of credit imposed in 2004 which later in 2008 raised up to 200%, is removed in 2009.

Future development
Since in 1980s central bank has adopted a monetary targeting framework to address the defined objective of enabling price stability by influencing monetary aggregates by addressing reserve money. But recent years with the weakening relationship between money and inflation several central banks whole around the world has adopted flexible inflation targeting policy instead of monetary targeting framework. Central bank of Sri Lanka now working to meet requirement of such framework that enable to shift at inflation targeting framework.(CBSL, 2010)

Prerequisites that needed for adapt Inflation targeting monetary policy.(Perera, 2007)
•CB should have independence specially in legally.( specially mandated to achieve price ability)
•Low and stable fiscal deficit with freedom from fiscal dominance.
•Well understood channels between policy instruments and inflation.
•Flexible exchange rate system.
•Effective inflation forecasting models.
•Developed financial system with policies that enhance transparency of central bank.

Interest rate
Interest rate liberalization
Before 1977 the interest rates were kept low in formal sector than organized sector by interest rate ceilings, subsidized credit allocation and high reserve ratio. This lead to have a negative real interest rate throughout the years before 1977. These financial repressions undertaken by central bank are removed through interest rate liberalization. This created a chance to formal financial sector to attract more deposits as well as could lend more to public. This reduced the effectiveness of interest rate as a policy instrument. (Colombage, 1993)
Since interest rate not allowed to adjust for inflation real interest were negative before 1977.with the raise of bank rate from 6.5% to 10% all commercial banks rose their deposit rate together. The 12 month fixed deposit rate was doubled from 7% to 14%. [Table 2]
Policy interest rates
Central bank uses bank rate, repurchase rate, reverse repurchase rate as policy interest rate which help to affect all other interest rate in market. Bank is not very active today since the penalty rate is high. Repo rate and reverse repo rate is the main policy rates CB used to affect to all other interest rates and ultimately on money supply by affecting interbank call money market liquidity.
Interest rate corridor
Central bank operates repo and reverses repo agreements to control the liquidity in call money market. The call money market rate adjusts according to the liquidity in the call money market. Repo and reverse repo rate act as a corridor to AWCMR. Before 2014 repo & reverse repo rate was determine by the auction bids. Later it was named as standard deposit facility rate & standard credit facility rate and rates have been determined by CB. [Figure2]
Limitations in monetary policy of Sri Lanka
•Less sensitivity of people to interest rates. [Figure 5]
•Commercial banks keeping excess reserves.
•Financial cost of statutory reserve.
oStatutory reserves held in CB does not creating any profit to commercial banks though the money raise by interest bearing sources.
•Continuous budget deficit of government.
•Underdeveloped money & capital markets.
•High volatility in exchange rate in Sri Lanka.
•External effects.(political influence)

 

Unemployment and causes in Sri Lanka Economy (1977 to up to date)

Background of unemployment in Sri Lanka after 1977

After 1977, Sri Lanka has moved towards liberalization and reformed the economy into a
country which will gain maximum benefits from globalization. This reformation has profoundly
affected Sri Lankan employment, unemployment, and underemployment. According to
A.G.W. Nanayakkara, unemployment consists of persons who are without work, currently
available for work, actively seeking for work for pay or self-employment. As another definition,
according to the Central bank’s series of Consumer Finance Survey (CFS), persons in
unemployment contains those who had no work during the reference period but are
actively seeking employment or available for work, if action is found. (L.L.Gunaratne, 1993).
After the reformation in 1977, until 1990s unemployment among male was higher than 50%
(Table 1). But after 1990 this has changed, and around 50% of unemployed were females
(Figure 1). The main reason for this higher unemployment among female may be because many females refuse to work far away from their residences (Nanayakkara, 2004).
Many research findings say that many females are not very flexible with the number of hours
they have to work in the workplace; especially overtime activities. And many organizations
still refuse to hire female as employees due to the child baring role and the endless chores
she has to perform due to the patriarchal role in the family. The unemployment rate among
females who have G.C.E (O/L) and above educational qualifications is about 11.25%
(Statistics, 2015). Which means many unemployed females are educated. Due to that, they are
very selective of the job and waiting for the right position, and that takes a lot of time. Due to
these reasons unemployment of female is high in the country.

Underemployment of different age groups takes different significance. In the year the 1990s, the
highest unemployment rate was reported among the age group of 15-19 (Table 2). But the
unemployment percentage of the age group of 15-19 has been gradually decreasing since
2000. At the age of 15-19, many people are students and sit for the G.C.E. (O/L) and G.C.E.
(A/L) Examinations. Therefore, many of them are considered economically inactive. Out of
all the students who sit for the G.C.E (O/L) examination, only about 40% will get qualified to
sit for the G.C.E (A/L). This means most of the people who are in the age group of 15-19 will
enter into the labor market to find jobs. But due to their lack of education, lack of skills and
practical knowledge, many of them fail to find a job. Because of that, the unemployment rate
in this age group is high. Even after the age of 19, there is a high unemployment rate recorded
in the 1990s (Table 2). It is around 30%. In the 1990s the reason for this issue was, even many
students fail to gain university entrance after G.C.E. (A/L) they somehow continued their
higher studies in various streams and did not consider in entering into the labor force until
the age of around 24. Since 2000, the same reason can be applied. But the percentage rates
are slightly lower than that of in the 1990s, and it is around 15% (Table 2). Since 2000 the
education and employment trend had a different direction. Students who have not gained
university entrance have started gaining many other professional qualifications while being
an employee. This is why the unemployment rate has decreased since 2000 for the age group
of 20-29. The primary reason for youth unemployment also lies with this age group. People
who enter higher education at the age of 20-24, enter into the labor market, after
completing higher studies, at the age of 25-29. In the current era, many job opportunities’
Required period is below 25year. While companies are hiring employees, many suitable
candidates are still studying. This has become one of the crucial reasons why they were
unable to gain employment, especially in private companies (Nanayakkara 2004). According to
many surveys, another reason for this youth unemployment in the private sector is the lack of
knowledge in English communication. Many private companies require English as an essential
requirement.

As shown in table 4, the highest unemployment rate is recorded under the G.C.E (A/L &
Above) category. As Guaratne and Herath (1993) say, the unemployment in the 1980s was very
lower among those who had a deficient level of education and a higher level of education. The
reason is at that time, people who had a more moderate level of education were not able to be very
selective about the job, and grabbed the very first opportunity they had to earn
money. The primary issue of unemployment by education that is discussed by Guarantee and
Herath (1993) is that a large number of dropouts with secondary or post-secondary levels
of education and the difficulties faced by these individuals in obtaining employment. By that
time, the number of dropouts has been increased due to the increase in educational
opportunities. Those students were with some academic training but with less practical
training. That has become a barrier, and due to that, they were unable to be employed.
Table 4 shows the unemployment rate by education level from the year 1990-2015. The highest
unemployment rate is reported under the highest level of education. However, out of all the
unemployed persons, more than 40% are people who were only educated up to grade 10
(Nanayakkara 2004). Therefore, the policymakers should not only pay attention to the job
creation targeting the youth with higher education qualities but also the child who does not
have the G.C.E (O/L) qualification.

Overall Unemployment Trend in Sri Lanka After liberalization, and the reasons for the
reduction of unemployment

After the economic policy reformation, the trend of unemployment shows a downward
pattern (Figure 2) which indicates that unemployment has been reduced. Even though the rate
of unemployment has decreased in the 1990s, it was higher than 10%. Only after 1998, the country
was able to maintain the unemployment rate below 10% (Table 1). The reduction of this rate was
a result of many programs undertaken by the government after the liberalization.
The first program undertaken by the government to reduce unemployment is the Export
Processing Zone (EPZ) in 1978 in Katunayake, Biyagama, and Koggala. By the end of the year
1992 the total direct employment created by EPZ is more than 77,000 (Saravanandan, 2004).
In 1992, 200 export-oriented garment factories program was introduced. By that, well-organized factories were set up in the rural area. In that year the highest foreign exchange
earner was the garment industry, and out of all the employed people 33% of them were from
the textile and garment industry (Saravanandan, 2004).
In 1995 as a continuation of the EPZ a new step was taken, and that is called the ‘New
Industrialization strategy for Sri Lanka’. Under this step, five new export processing zones
and one industrial park was established. This has also highly contributed to the reduction of
unemployment.
Another main development program which contributed to the reduction of unemployment in
Sri Lanka is the Mahaweli Development Program. By achieving the primary purpose of the
whole program; make irrigation facilities for cultivation in the dry zone, the Mahaweli program
was able to increase the agricultural sector production. Due to that, many people who were
unemployed in the dry region became employed, and the overall unemployment of the country
decreased.
There are more reasons other than projects undertaken by the government, such as foreign
employment. Labor migration has started in the 1980s with the liberalization (Saravanandan,
2004). By the end of the year 2015 there, about 1 million people working in foreign countries and
foreign departures in that year is more than 260,000. Another reason for the decrease in
unemployment is recruitment into armed forces due to prolonged hostilities during the 1980s
(Saravanandan, 2004). Around 240,000 people were recruited to armed forces due to this
reason (Saravanandan, 2004).

Under-Employment
“Underemployment” exists when a person’s employment is inadequate, about
specified norms or alternative employment, account being taken of his occupational skill
(training and working experience)” (Statistics, 2006). Estimation of underemployment is
difficult due to the visibility issues. Visible underemployment can be determined by
comparing the number of days that a person actually worked, with the number of days that
the person was willing and able to work. If the number of days the person actually worked is
less than that of willing and able to work, visible underemployment exists (L.L.Gunaratne,
1993). According to Gunaratne & Herath (1993), in the 1980s out of all the people, who were
considered as employed, around 40% were underemployed. This means that at the 1980s around
50% of the labor force (10% unemployment and 40% underemployment) was not fully
contributing to the economy. In the 1990s the average underemployment rate is around 21.7%
and in 2000s it is around 21.6% (Karunaratne, [no date]). According to Karunaratne, the
behavior of underemployment is affected by many factors, and out of the 50% of the
reasons were the nature of work, reduction in economic activity, off-season activity.

Causes for unemployment
By considering all the factors, there are several reasons for unemployment in Sri Lanka. One
is that from the very beginning to up to date, the Sri Lankan education system has not been
modified according to the needs of the labor market. The skills that the person gain from the
system mismatches with what the market needs. Another one is that lack of job
opportunities for the educated youth, which can highly contribute to proper economic growth.
(Due to the age when they complete their university education, lack of skills in English
language, private sector reluctance to hire graduates over the misconception that they are very
radical, etc.).

Some suggestions to overcome the unemployment problem:
As for the youth unemployment due to age mismatch, universities should enroll students as
soon as the G.C.E (A/L) examination ends. Skill development education should be given to
the students from the very beginning, and the skill development strategies should be modified
according to the demand in the market. Industries that create a significant number of job
opportunities, such as the High-tech industry, should be encouraged. The youth who wish to be
self-employed in agriculture or non-agriculture sector should be supported by providing the
infrastructure facilities and providing them credit facilities which can be easily obtained.
As a conclusion, the Sri Lankan economy is gradually decreasing the unemployment rate after
the open economy policy adoption. But still, the frustration due to unemployment has not
been reduced but slightly increased. What Sri Lanka has is not the problem of lack of job
opportunities, but the lack of creation of candidates who are suitable to grab the opportunity.
What the economy should do is, to improve the skills and capabilities within the people while
creating job opportunities.

Sri Lankan export and import overview (1948 to 1977)

Introduction

During the first decade after independence in 1948, Sri Lanka (commonly called Ceylon until
1972) continued to remain an open trading nation with only relatively minor trade or exchange
Rate restrictions and liberal domestic policies. In 1977 Sri Lanka started to open the economy
after following Import Substitution Industry (ISI) policies before 1977 with the expectations
of the rapid development of the country.
Sri Lanka’s economy is basically a primary one dominated by agriculture with the attainment
of political independence in 1948, government-initiated active step to develop the industrial
sector in the Sri Lankan economy. That period was identified as Industrialization. This has a six-year plan from 1948 to 1953. It indicates the industrial development and to diversify the
economy and to reduce the dependence of the country on imports. For that, a series of major
manufacturing industries were selected for investigation and development.
During the 1948-1955 period, Sri Lanka experienced the free trade era. Favorable balance of
payment appeared due to the Korean War boom in 1951/52 and tea boom in 1954/55 was the major
Reasons that lead Sri Lanka for liberalized trade policies. However the favorable balance of
payment situation was not continued until the end of the 1950s and country marked the beginning
of the closed economy in 1956.
Import Substitution Industrialization 1956 to 1965.
As a result of deterioration of the balance of payment situation and the new government in 1956,
Mr. S.W.R.D Bandaranayke’s Sri Lankan Freedom Party won power, then the country began
to import industrial substitution strategy (ISI) in 1956. Here government engaged in preparing a
comprehensive plan of development for the island’s economy covering both public and private
sectors. A long term perspective plan covering ten years was formulated, and the import
substitution strategy was included in the program. The government realized that, as in many developing
countries, the only viable strategy of economic development was “import substitution.” It
means the production of anything should develop domestically. It was a primary objective of this
plan. It had long term plan also. It was a possibility of the expansion of manufactured exports,
but this was an objective to be achieved as an outgrowth of import-substitution industrialization,
not as an integral part of an industrialization strategy.
Starting with the 1957/58 budget, a tendency towards using the tariff policy as a tool for
promoting import substitution, by imposing protective tariffs on selected industrial products
and lowering taxes on capital equipment. Also, this policy restricted quantitative imports. In
January 1961, for the first time, a system of import control with individual licensing and
allocation of quotas to importers was introduced for several- semi-essential consumer items. By
the end of 1964, for all practical purposes, Sri Lanka had turned into what can be called a “closed
economy.” Since limited trade liberalization attempts were taken place in the first half of the 1960s,
the period from 1965 to 1970 period is considered as a partial liberalization. However, this
strategy was reaching a crisis point by the mid-1960s.because of this crisis situation there was
a growing recognition by the policymakers that increased emphasis should be placed on export
development.

Export-Oriented Industrialization 1965-1989

The policy measures taken for the promotion of export included setting up of import duty rebate
scheme for manufactured goods export in December 1964, introduction of an import
entitlement scheme for selected minor exports, in 1966, devaluation of the rupee in 1967, and
the introduction of a Dual Exchange Rate System with a premium exchange rate for non-traditional exports in 1968. The white paper on foreign investment, issued in 1966, aimed at
attracting foreign investment to production for exports. However from 1965 to 1969
The Government placed a greater emphasis on the agricultural sector than the industrial sector. The policy
emphasis on export promotion continued well into the 1970s with the new government that
came to power in May 1970. In fact, the onset of the oil crisis in 1973 with its attendant balance of
payment pressure and the increasing debt- servicing burden.
The industrial policy of the new government of Mrs. Sirimawo Bandaranayke’s period
emphasis more support for export-oriented industries. The creation of new export sector based
on industrial production was a crucial element in the five-year plan of 1972-1977. Other than that
the five-year plan introduced promotion of export-oriented foreign direct investment was
reaffirmed and further production and tax incentives. This indicates an attempt to move away
from the earliest used policy called import substitution industrialization. To encourage exports
government was taken several steps. They were
• There were several newly introduced fiscal incentives, including an eight-year tax
holiday on export profits of approved exporting ventures. (Tax concession)
• Provide easy access to the foreign market
• Provide opportunities to bring experiences in many complex facts of product
development and international marketing.
• Relaxed foreign exchange restrictions on the remittance of dividends, interest, and profit
originating in such ventures.
The export promotion Secretariat was established in 1972 to function as an institute for directing
and coordinating the export development effort of the country. Here because of the rapid growth of
the export sector led to a severe foreign exchange crisis which restricted the availability of imported
raw materials and capital goods. By the mid-seventies, total earnings from manufactured
exports covered only 6 % of the requirements of the overall import of the industrial sector. As a result,
industrial growth had become increasingly dependent on the foreign exchange earnings of
traditional exports which were themselves suffering from both instability and stagnation.

Liberalization
Because of the issues mentioned above, the new government which came to power in 1977 gave
way to a liberalized economic environment whose aim was to promote export orientation along
With efficient import substitution. Trade liberalization movement towards free trade through
the reduction of tariffs and non-tariffs barriers is a significant force behind the globalization.
Export and import sector
Sri Lanka has a long term history of foreign trade. According to the various historical
sources in Sri Lanka like chronicles, inscriptions, and other archaeological findings, Sri Lanka
was a leading trade center in the ancient world. Location of Sri Lankan island in the Indian Ocean was a critical reason for its high success in maritime trading activities, and Sri Lanka was situated at
the middle of the maritime Silk Road from China to Europe.

Export
Export is a function of international trade where goods and services produced in one country
are shipped to another state for the future sale or trade. Total exports can be classified as,
Agricultural production, industrial production, and mineral production and others. (See appendix
01)
In between 1950 to 1977 we can see a small decreasing trend in agricultural production and in
industrial production and mineral production both of that productions had an increasing trend. In
the export sector, the agrarian sector had the primary contributed industry for exports. From that
agricultural sector, Tea, Rubber, and Coconut are the main crops exported by dealers.
In Sri Lankan export composition there was no considerable change in between 1948 to
1977. In the period of independence, tea, rubber, and coconut gave a significant contribution to
the export income. It was about 89% of the total export income. After 25 years ago also Sri
Lanka gained a higher income from the three crops. It was about 76% of the total export income.
Therefore the composition of export in Sri Lankan economy has no considerable change in
between 1948 to 1977. (See Appendix 2)

Imports
Import is goods and services bought one country to another country. Both in 1948 and in-between period and also in 1977 the Necessary goods were imported in Sri Lanka. Rice,
Sugar, Wheat flour is the main imported necessary goods. In 1948 the contribution of these
three essential goods were 38% of the total amount of imports. In 1974 it was 39 %.
In between 1948 to 1977, consumer goods import amount was increased, and intermediate
goods also increased the import amount. In investment goods, there cannot identify any
increasing or decreasing trend. It had a slight change between 1948 to 1977. When
the contribution of the import mentioned above goods consider as a percentage change can see a,
there was a reduced rate in consumer good and investment goods although it had increased as
an amount. But in intermediate goods, the percentage change was increased relative to the
amount we considered earlier. (See Appendix 03)
Trade balance
The balance of trade compares the value of a country’s exports of goods and services against
its imports. When exports are higher than imports, that’s a trade surplus. Most nations view
that as a favorable trade balance. But Sri Lanka has trade deficit since an extended period. In
between considered periods, there was a trade balance surplus in the initial period. But in
later stages, although some periods had a trade surplus, the overall view was the trade deficit. (See
Appendix 04)
When considering overall performances of the export and import structure in Sri Lanka in between
1948 to 1977 period, there was no considerable change in the composition of exports
and imports. Although Sri Lanka used several policies in the period of 1948-1977
regarding the exports and imports, at last with the liberalization, Sri Lankan economy tried
to increase the performance of the export-oriented Industrialization to overcome the issues
related to the balance of trade.

Exchange Rate and Currency Depreciation with Reasons in Sri Lanka (1977 to up to date)

Introduction

The exchange rate is a rate of exchanging a unit of foreign currency with the domestic currency unit.  Depreciation and devaluation are two different concepts. Depreciation is the adjustment of the exchange rate so that more of yours currency is needed to exchange for a unit of foreign currency (Bandara, 2007) Devaluation is the different concept from depreciation. Devaluation is decreased the value of the particular currency under the fixed exchange rate. The Opposite side of the devaluation is considered as revaluation
Managed floating rate system
Managed floating is a concept that lies between fixed exchange rate system and floating exchange rate system. It avoids both appreciation and depreciation of the exchange rate by selling and buying the domestic currencies in foreign exchange market to control the fluctuations in the exchange rate. It is not the clean float and basically it is decided based on the control of the central bank in foreign market unless demand and supply of the market. It is a combination of favorable features of both fixed exchange rate system and free floating system. According to that, central bank intervenes to control the fluctuation of exchange rate in the short run, while it is decided based on the demand and supply in the long run. It is implemented from 1977 to 2001.

Free-floating rate system

On 23 of January 2001, Sri Lanka shifted from managed floating system to free-floating exchange system. According to this central bank avoids from preannouncing the exchange rate. Instead of that CB intervenes in foreign exchange market by selling and buying foreign currency at or near market prices due to the strong need of maintaining a large stock of foreign reserves.

Evaluation of Sri Lankan Foreign Exchange rates after 1977

Managed floating exchange regime (1977-2000)

The dual exchange rate system was abolished in November 1977, and both rates, namely the official rate and premium rate, were unified at Rs 16 per US dollar. Unification of the exchange rate on November 16, 1977, resulted in a devaluation of the rupee by 44.6% against the US dollar and 45.5% against the pound with the purpose of export competitiveness. The rupee was devalued from 8.41 rupees per US dollar in 1977 to 15.61 rupees per US dollar in 1978. The massive devaluation of the rupee resulted in a sharp increase in the remittances sent by Sri Lankans living abroad. (Athukorala and Jayasuriya, 1994).The worker remittances increased from 190 million rupees in 1977 to 610 million rupees in 1978.
1977 introduced a managed floating system, and Central bank made a discussion with all other commercial banks and determines the future buying and selling rate based on the demand and supply of the foreign exchange rate. According to that decision, the exchange rates of six main currencies (Dollar, Pound, Mark, Frank, and Indian Rupees) and commercial bank have right to decide the exchange rate of other currencies based on the cross exchange rate. In November 1982, the Central bank made significant changes regarding the exchange rate. Such as cancelling the meeting which decided the buying and selling rate of exchange rate at the central bank and determined the buying and selling rate of only Dollars, Central bank limited the use of Dollar when in foreign transactions with the Commercial bank, commercial bank received right to determine the foreign exchange rate based on the demand and supply of the foreign currency. Purpose of the Central bank for the above changes is limited to intervention in the foreign exchange market. In 1990 Central bank of Sri Lanka stopped the preannouncing of buying and selling rate of US dollars. Instead of that, they introduced a daily system for deciding buying and selling rate at the beginning of transactions. Aims of presenting conventional operation are protecting the competitiveness of domestic export in the foreign market and giving a stable position for international trade. After July in 1997, there was some financial crisis, especially in the East Asian countries due that an unstable condition in foreign exchange market prevailed in those countries. Sri Lankan rupee is depreciated against US $ by   7.5% because of the impact to the price of the rubber production of Sri Lanka and industries like the garment industry and commodity export industries the revenue fell far below the expected targets. Also, financial hardship faced by South Korea, Malaysia, and Hong Kong a fall in foreign investment in Sri Lanka too, is expected. Depreciation of Sri Lankan rupee is relatively low when compared with the domestic currency of some of the countries in that region depreciated against the US Dollar. However as a south Asian country Sri Lanka was less affected during that period due to Capital transactions were limited since restrictions were imposed against the operations of capital account in balance of payment, favorable aspects of foreign assets, ability to bear the foreign debts and continuous depreciation of Sri Lankan Rupee under the managed floating rate system. Due to the above reasons, Sri Lanka was able to avoid the unfavorable effects from the decline of competitiveness of export and save a considerable amount of outflow of capital temporarily resulted for lower depreciation against US Dollar. In 2000, due to the rapid rises in petroleum prices and military expenditure resulted in increasing the deficit of the balance of payment and decline of foreign assets. (Appendix 1) Therefore Central bank had to amend the margin in exchange rate frequently. From 30 th June 2000, the margin of exchange rate extended from 2% to 5% and devalued the average amount by 4% to give flexibility to Sri Lankan rupee in the foreign exchange market. The margin of the exchange rate is extended in all time when depreciates the rupee value. It is difficult to maintain the managed floating exchange rate system since the continuous increase of the deficit of the balance of payment and further expectation of depreciation of Sri Lankan rupee. The balance of the payment problem of the country was not entirely solved by the rupee depreciation in 2000. Therefore there is a need for a new exchange rate system.

Floating exchange rate regime (2001- up to now)

With the introduced of the floating exchange rate system has led to minimization of the probability of outflow of official foreign reserves. If the central bank followed the crawling band system further, it would have led to an unstable situation in exchange and financial market by out flowing the official foreign reserves. Because of the introduced of the free-floating exchange rate rupee is depreciated by 11.3% against the US dollar, by 8.8% against the sterling pound and 6.7% against Euro. Due to the introduction of the free-floating exchange system, there was a huge fluctuation in the financial market of Sri Lanka. Within few hours buying price of Dollar has moved from Rs 84.75 to Rs 85 and selling price of dollar shifted from Rs 85.25 to Rs 89. As a result of  right of commercial bank to decide the exchange rate based on demand and supply there were a number of exchange rates for dollars and Sri Lankan Rupee at the same time. (Appendix 2).However Sri Lankan rupee has depreciated in few amounts when compare with the other countries. For Instance, in January 1999, there was a 40% of depreciation in Riyal on the first day of free-floating exchange. There was a 16% of depreciation in Indian rupees at the first day of floating exchange system. 31% for Korean won in 1997 and 28% for Sweden corner in 1992. (Ramasinghe, 2007). Even though there is depreciation in Sri Lankan Rupee in first two days after implementing the floating exchange system instantly it has appreciated in the third day. Reasons for the settlement of instability after introducing the floating exchange system are the following actions taken by the central bank. The beginning of the December in 2004, there was a huge fluctuation in exchange rate because of massive amount of deficit in the balance of payment. The exchange rate depreciated up to the rupee 105.47 per US dollar in 17th December. However due the expectation regarding the foreign aids receiving because of tsunami the exchange rate appreciate up to Rs 104.61 per US dollar in 31st December. In 2005 exchange rate is revalued up to the certain extent due to the foreign aids received because of tsunami. Country got the large no of foreign currency inflows and received the debt moratorium from the lenders. In 2010 the exchange rate was appreciated due the  .The budget 2012 proposed to devalue the exchange rate by 3% bypassing the mandate of the Central bank of Sri Lanka. Soon after the CBSL stopped intervention to foreign exchange market and subsequently depreciated by 12% during the year 2012.

Replacing the fixed exchange rate with a managed floating exchange rate with the purpose of export-led growth in 1977. But that did not happen due to the two main reasons namely reasons related with exports and reasons related with budget deficit. Excessive budget deficit contracted domestic saving and ultimately it is impact for the balance of payment. When compare the Sri Lankan export with few South Asian and East Asian countries it can be noticed that there is a significant improvement in Bangladesh and Vietnam. (Appendix 3). Sri Lankan export sector has continued to rely on low value-added exports mainly garments. However, when compared with East Asian countries, they have utilized the export-led growth with the high-income category including technology, innovation, and science. They have changed their export commodity from agricultural product to human-computer interaction product. Also Sri Lanka missed the opportunity to engage in global product sharing. The main export of the Sri Lanka is textile and garment. When compare the clothing exports from 1980 to 2010 from South Asian countries in 1980 clothing exports contribution from Bangladesh  and Sri Lanka was US $ 2 million  and  US $ 109 million respectively. However the Sri Lankan clothing exports in 2010 is lower than the Bangladesh. (Appendix4). When compare the textile export from 1980 to 2010 from south Asian countries it can be noticed that there is a considerable difference between Sri Lanka and Bangladesh.(Appendix 5). Bangladesh has become one of the leading exporters in the textile and garment industry shifting from non-value added (textile) to value-added exports (garment).these economic conditions resulted in expansion of trade deficits which necessitated continuous depreciation of the rupee.
Conclusion
There are two main exchanged regimes after 1977, namely managed floating exchange rate system and free-floating exchange rate system. Because of the various reasons most of the time rupee value is depreciated rather than appreciation. Even though there is a continuous depreciation of Sri Lankan rupee with the intention of export-led growth exports of Sri Lanka is still backward when compared with other South Asian and East Asian countries.