FINANCIAL CHRONICLE – Anil Jayantha Fernando, Deputy Finance Minister, attributed the recent decline of the Sri Lankan rupee primarily to rampant speculation and anxiety fueled by misinformation. Despite the Central Bank’s efforts to tighten monetary policy and enforce a mandatory conversion rule, the rupee continues to face downward pressure due to a robust demand for imports.
This year, the currency has shown significant volatility, complicating the country’s fragile economic recovery following a default. During a media briefing on Wednesday, Fernando stated, “The main driver of this instability is the unexpected demand for dollars, which is largely influenced by speculative activities.” He emphasized that misinformation has also played a role, creating fear within the foreign exchange market.
Fernando elaborated that importers, driven by anxiety rather than a thorough analysis of the market’s stability, have increased their demand for dollars. This behavior contributed to the import bill exceeding $2 billion each month in April and May. The rupee has depreciated by 7 percent this year, with around 4 percent of that occurring in May alone, hitting a four-year low of 354 rupees on May 21, as recorded by the Central Bank.
Submit Your Press Release
Get your company news, announcements, launches, appointments and events in front of a wider audience.
The depreciation has prompted exporters to adopt a conservative stance regarding dollar conversions, further tightening dollar liquidity in the market. In response to the ongoing pressure on the currency, the Central Bank mandated on June 10 that exporters convert their foreign earnings within one month, a reduction from the previous three-month period. While this action led to a temporary appreciation of the rupee, it still remains under pressure due to heavy import demands, according to currency dealers.
To mitigate the dollar drain, the government has already restricted vehicle imports and implemented fuel rationing. Fernando cautioned that those who acted on erroneous information will face consequences, but he reassured that the current fluctuations are temporary, acknowledging the reality of increased fuel demand. He noted that the Ceylon Petroleum Corporation’s fuel expenditure in May surged to $526 million, significantly higher than the usual monthly average of $170 million.
Fernando pointed out that the decline of the rupee is significantly influenced by the disparity in interest rates between local and foreign loans. He projected a potential decline similar to last year’s 5.6 percent, suggesting that the situation, while concerning, is manageable for those familiar with market dynamics. “We are confident in our ability to stabilize the currency,” he declared, highlighting that the Central Bank is strategically employing its tools in a phased manner rather than all at once.
Following a period of relative stability at the beginning of the year, the rupee encountered severe downward pressure by mid-year, with the US dollar exchange rate swiftly surpassing 342 LKR and momentarily exceeding 350 LKR in the open market, reflecting an over 8% year-on-year depreciation as of May 21. This volatility was exacerbated by a persistent trade deficit, driven by high import costs for refined petroleum amid geopolitical tensions in the Middle East and a surge in consumer demand for newly permitted vehicle imports.
In addition to these external factors, critics have pointed to domestic liquidity injections and speculative behavior, which led to a crisis of confidence as exporters hoarded foreign currency in anticipation of further declines. To combat the currency’s depreciation and control imported inflation, the Central Bank shifted from a passive approach to a more interventionist stance.
In a series of decisive actions, the Central Bank expended a net $211.3 million in foreign reserves in May, raised the Overnight Policy Rate by 100 basis points to 8.75%, and enforced a strict emergency mandate shortening the exporter dollar-conversion window to 30 days. While these substantial measures effectively curtailed panic buying and stabilized the rupee closer to a 333 LKR baseline by mid-June, the turbulence highlighted the ongoing vulnerability of Sri Lanka’s external accounts to international energy market fluctuations and domestic speculative activities.
