Sri Lanka’s currency, the rupee, concluded the trading session at 319.75/320.00 per US dollar in the spot market, following transactions that occurred at 320, according to market participants. This development came shortly after macroeconomists acknowledged that inflation had returned to the central bank’s target range as of April 30. Inflation has now reached the midpoint of the central bank’s objective.
The rupee has faced a systematic decline, falling from 297.50 to 310 due to monetary expansion through buy-sell swaps and aggressive dollar purchases aimed at encouraging exporters to sell at increasingly lower prices. This approach reflects an explicit exchange rate policy that is expected to persist through 2025, even as private credit shows signs of recovery, which critics argue contradicts the narrative that the rupee’s value is determined by market dynamics.
In 2026, the rupee depreciated further, moving from 310 to 320 against the US dollar, despite a noticeable slowdown in credit growth. In February, the central bank’s excessive dollar purchases aimed to prevent an appreciation of the currency and restore market confidence. The rupee’s depreciation has contributed to rising costs for fuel and imports, exacerbated by escalating oil prices linked to conflicts in the Middle East.
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The weakening of the rupee has also driven up prices for both imported and exported food products. Interestingly, while some Indian food prices remain stable, this is primarily due to the Indian central bank’s rapid depreciation of the Indian rupee, which outpaces that of Sri Lanka. Additionally, costs for building materials have surged.
The central bank’s history of fostering high inflation can be traced back to the early 1980s, following the IMF’s Second Amendment to its articles, which restricted the bank to US inflation levels during the 1970s period of high inflation. This shift has led to significant social and political unrest in the country.
Currently, the central bank appears to evade accountability for its interest rate cuts, operating under an IMF-supported doctrine that prioritizes the exchange rate as a primary defense mechanism. Critics highlight that this approach involves a flawed operational framework that targets inflation without accommodating a floating exchange rate.
The ongoing depreciation affects not only traded goods—both imports and exports—but also services and housing costs, ultimately undermining wages and employee provident fund (EPF) balances. Prime Minister Goh Chok Tong articulated concerns regarding high inflation, stating that it diminishes workers’ purchasing power, depletes their Central Provident Fund savings, and discourages saving behavior. He contrasted Sri Lanka’s situation with Singapore, emphasizing how low inflation has helped maintain the real value of savings and protect purchasing power.
Analysts criticize the central bank of Sri Lanka for eroding the rupee’s value through questionable monetary policies that disregard foundational economic theories. They argue that the bank has historically damaged wages and EPF balances, while simultaneously rewarding its employees with high salaries and inflation-indexed pensions, which reflects a lack of accountability.
Furthermore, analysts have indicated that Sri Lanka’s central bank continues to implement inflationary rate cuts—now through foreign exchange swaps—behaving similarly to a rogue central bank as described by Adam Smith in “The Wealth of Nations.” In historical contexts, only banks that practiced prudent monetary policies survived, while those that excessively printed money faced failure. However, since the establishment of the IMF, countries with flawed central banking frameworks are often bailed out, leading to widespread crises as the same policy mistakes are repeated.
In the bond market, yields remained largely stable across the yield curve. A bond maturing on December 15, 2026, settled at 8.60/75 percent, while a bond maturing on December 15, 2028, closed slightly lower at 9.75/83 percent. A bond maturing on October 15, 2029, remained steady at 9.95/10.00 percent, and a bond maturing on July 1, 2030, increased slightly to 10.17/20 percent from 10.15/20 percent. Lastly, a bond maturing on November 1, 2033, closed at 10.95/11.00 percent.
