The Central Bank said it would allow the rupee to respond to the dollar with greater flexibility after months of propping up the rupee against the dollar in a bid to curtail extreme volatility of the exchange rate to the annoyance of exporters.

With export prices expected to decline along with export demand due to the global economic downturn the Central Bank has decided to allow the exchange rate to respond to market rates more freely, particularly because the dollar has appreciated sharply against other major currencies.

The currencies of some of Sri Lanka’s major trading partners and competitors have, depreciated sharply against the US dollar leading to some pressure on the competiveness of Sri Lanka’s exports.

"While Sri Lanka’s export sector has been growing well above 12 per cent during the first eight months of 2008, and has shown commendable resilience in the light of the current unfavourable global conditions, it is now considered desirable that added support be granted in order to provide the impetus for exports to remain competitive in the months ahead," the Central Bank said said.

Exporters are suffering with a rupee that has held against the dollar as margins continue to shrink further with expanding production costs.

"We think the rupee should be around Rs.130 to a dollar but we are not sure how practical it would be to expect the rupee to depreciate and find its true value against the dollar.

"Propping up the rupee can not continue for ever and it will be interesting to see how authorities would bring it to a more workable level," Rohan Fernando, President of the National Chamber of Exporters, told the Island Financial Review the day before the Central Bank issued its statement.

He said that India and Russia have both allowed their currencies to devalue to reflect their true value against the dollar but said the impact of Sri Lanka not having taken this step would only manifest it self in months to come.

Some economists were critical of the Central Bank for guarding the rupee at the expense of dollar reserves held with the bank. They say it was good to defend the rupee for a short time and questioned how long the Central Bank hoped to engage in selling dollars to the market in order to stabilize the rupee at 107/108.

"Sri Lanka’s exports amount to about US$ 8 billion so there is some hope that authorities would do some thing about the exchange rate. But it is too early to see what kind of impact the present rate will have on exports," Fernando said.

He suggests that businesses take necessary precautions because a conducive exchange rate alone is not going to help exporters deal with constricting demand of foreign buyers.

The crisis that hit the tea market was caused partly because foreign buyers are reacting to premium prices hitherto enjoyed by Sri Lanka’s tea in the face of global economic upheavals.

"Sri Lanka could command premium prices for its tea from the Middle East and Russia, who could afford to pay when high oil prices boosted their economies earlier this year. But now, the situation is reversed," Fernando said.

With oil prices significantly reduced, Fernando believes the Middle East and Russia are experiencing constricting demand for premium priced bulk teas.

"Foreign buyers are adopting a wait and see approach and 20 to 30 percent of bulk teas are unsold. Also some buyers have delayed payments. The industry is in a pickle at the moment and it is difficult to predict what course the future will take," he said.

Fernando believes, however, that branded teas are insulated from the current crisis.

"Bulk teas account for 60 percent of all tea exports and enjoyed demand in the Middle East and Russia. However, branded teas are doing alright," he said.

This is probably why analysts believe that Sri Lanka has to move away from traditional forms of selling tea and develop brands and new markets in order to grow and sustain the industry in the future.

This is probably why, Rohantha Athukorala, the Economic Affairs Director of the Government Peace Secretariat, said the current tea crisis is a blessing in disguise.