Real Effective Exchange Rate and Export Performance: The Case of Sri Lanka

Abstract

This study examines the determinants of manufacturing exports of Sri Lanka with specific emphasis on the impact of the real effective exchange rate (REER). The hypothesis that persistent appreciation of the REER has negative implications on exports, when other determinants of manufacturing exports remain constant, is tested using the reduced form of the export equation with annual data for the period 1970-2014.The export equation is estimated using the Autoregressive Distributed Lag (ARDL) method. The results suggest that the REER is a key determinant of export performance of Sri Lanka. The world demand is also a contributory factor. If Sri Lanka takes corrective macroeconomic policy measures to maintain the REER at a realistic (market consistent) level and to cater to the upper income markets by improving the quality of products and linking with global supply chain networks, it would enable Sri Lanka to secure international competitiveness.