An empirical analysis of industrial exports and exchange rates in Sri Lanka

Abstract

Introduction

Industrial exports have earned 74.2% from total exports in 2014 with the consistence of textiles and garments, diamonds, gems and jewelry, petroleum products (Central Bank of Sri Lanka (CBSL) Annual Report, 2014). One of the major policy which is implemented by Sri Lankan government is devaluation of rupee against US dollar to increase competitiveness of exports in international markets (CBSL Annual Report, 2011). International agencies like World Bank and IMF also recommended devaluation of local currency to promote exports in developing countries related to the theory (Fischer, 1998). For example, Marshall Lerner condition supports devaluation of currency under some specific conditions (Kulkarni and Clarke, 2009). Empirical research also supports this view (Aziz, 2012; Boy and Caporale, 2001). The existing literature provides evidence of not only the mean exchange rate but also the volatility of exchange rate creates adverse effects on exports of developing countries like Sri Lanka (Arize, Osang and Slottje 2000).

However, there is no sufficient empirical evidence that examines the impact of exchange rate in Sri Lanka particularly on industrial exports. Also the previous studies (Ekanayake and Chatrna ,2010; Hooy and Choong, 2010) identified inconsistent results. Thus, this paper attempts to fulfill the above research gap by empirically investigating the effect of exchange rate on real industrial exports in Sri Lanka.