In recent times, the uctuations in the value of the Sri Lankan rupee have become a focal point of concern for citizens, policymakers, and investors alike. The volatility of the currency has profound implications for the nation's economic prospects, as it can signi cantly impact various sectors and ultimately shape the trajectory of Sri Lanka's development. As a result of ine cient and unwise policies, rules, regulation, investments and corruption by the Sri Lankan government in addition the failure of the tourist due to the infamous Easter Attack and impact of the COVID-19 pandemic, The rupee has experienced signi cant uctuations in value over the past few years. In 2018, the rupee rst experienced a sharp decline in value, leading to concerns about the country's economic stability. More recently, the rupee has depreciated by 10% over the past year according to the Central bank, and is predicted to reach an all time low of Rs. 360 per dollar by the end of the year 2023. As of the 12th August 2023 the Sri Lankan rupee has dropped to an exchange rate of 321.02 rupees per dollar leaving the nation in a position of economic and nancial vulnerability. The volatility of the rupee has sparked economic uncertainty and hindering growth prospects, with the weaker currency in uencing the country’s trade and commercial activity by increasing the cost of imports on goods and raw material essential for the Sri Lanka’s secondary sector, in turn leading to a potential in ationary pressures and has increased costs for businesses and consumers alike. The rupee depreciated in Sri Lanka has also had a negative impact on the country’s exports as an unpredictable exchange rate for local exporters to plan and produce goods for international trade. Additionally the rupee volatility also a ects and can potentially stunt foreign investment in Sri Lanka, as investors and international companies are hesitant and cautious to invest in a country lacking a stable and reliable currency as it introduces uncertainty and poses a threat their investment. These combined e ects could impede economic growth and job creation in the nation. "The volatility of the Sri Lankan rupee not only undermines economic stability but also casts a shadow over long-term investment plans. Investors are wary of committing to projects when the currency's future trajectory is uncertain,” says Economist Dr Aisha Ranasighe. fl ff fl fl fi ffi fl fi fi If the rupee continues to remain volatile, it can lead to increased borrowing costs to the government and private sector, resulting in a higher debt burden which ff fi Sri Lankan Rupee's Roller-Coaster Ride: A Harbinger of Economic Uncertainty could intervene with the government’s ability to invest in infrastructure, eduction and other sectors crucial for the country’s development. Dealers expect the rupee to gradually weaken and face higher volatility this year to debt repayment by the Sri Lankan government. Although Sri Lanka has shown signs of stabilising, the long-term implications of these uctuations remain unclear. Why the Sri Lankan rupee given up on its people: Culprits and Catalysts According to Sri Lanka’s Finance Minister Ravi Karunanayake “Turbulent Times” were to blame for the rupee volatility, driven by “importer dollar demand.” However, the Sri Lankan rupee's instability can be attributed to a con uence of domestic and global factors. Increased global market uncertainty, shifts in international trade dynamics, and changes in global interest rates have all contributed to the vulnerability of the currency. Additionally, political uncertainties, inconsistent scal policies, and external debt levels have created an environment of heightened risk. According to recent data from the Central Bank of Sri Lanka, the rupee experienced a depreciation of around 10% against the US dollar over the past year, illustrating the extent of its volatility. Devaluation: A gamble at what cost Although the Sri Lankan rupee has been steadily depreciating over the past half decade for a magnitude of causes, Sri Lanka’s central bank has devalued the rupee by up to 15%, taking one of the several steps analysts said are necessary for obtaining an IMF (International Monetary Fund) loan programme that could boost currency reserves and help negotiate debt restructuring. The devaluation of the rupee can also encourage remittance which has covered 80% of Sri Lanka’s annual trade de cit over the past two years, which can help improve the country’s balance of payments and reduce the pressure on the rupee. What does the IMF think about the ongoing rupee devaluation in Sri Lanka In a statement released on September 1, 2022, the IMF (International Monetary Fund) sta reached a sta -levelled agreement on an extended fund facility arrangement with Sri Lanka, acknowledging the country’s economic crisis as a result of inadequate external bu ers and unsustainable public debt dynamic. According the Ministry of Finance’s Fiscal Report 2023, Sri Lanka has accumulated a total outstanding foreign debt of Rs. 11,525.9 billion from various creditors in an e ort to stabilise their economy. According the IMF, Debt relief from Sri Lanka’s creditors and additional partners will be required to help ensure debt sustainability and close the nancial gap. fl fl fi ff ff fi fi fi fi ff ff Sri Lanka is currently receiving money from the IMF as approved by the executive board on March 20, 2023 according to a 48 month Extended Fund Facility (EFF) arrangement of $3 billion to support Sri Lanka’s economic policies and reforms, designed to provide nancial assistance to struggling countries. The EFF arrangement is expected to catalyse new external nancial support including from the asian Development bank and the word bank. The loan comes with conditions Charting a Path Towards Economic Stability: The next steps forward “Given the relatively unsustainable level of debt as outlined by the IMF during its recent article IV assessment, we need to take steps to address the issue of debt and restore macroeconomic stability” says Finance Minster Ravi Karunanayake. Addressing the volatility of the Sri Lankan rupee requires a multi-faceted approach that encompasses prudent scal and monetary policies, as well as structural reforms as suggested by the IMF. The government must focus on maintaining a stable macroeconomic environment by controlling budget de cits and managing external debt. Additionally, enhancing export diversi cation and promoting domestic industries can help reduce reliance on imports and alleviate pressure on the currency. The Sri Lankan government has already taken measures such as imposing taxes to curb imports by $500 million to $1 billion thereby ful lling ful lling prerequisites of the IMF programme. Moreover, in order to foster long-term economic resilience, investing in human capital and innovation is essential. Education and skills development initiatives such as an increase in tertiary education can enhance workforce productivity and competitiveness, driving economic growth even in the face of currency uctuations. Encouraging innovation and entrepreneurship can also help create new avenues and open up job opportunities for economic diversi cation and reduce the nation's susceptibility to external shocks. fi fi fi fi fi In the words of Finance Specialist Rajan Silva, "Our resolve is unwavering in bolstering the rupee's spine. We're forging a business-friendly ecosystem, untangling bureaucratic knots, and championing sectors laden with export potential." fi fl and requirements for economic reforms and addressing governance issues, which can contribute to stabilising the economy and rupee.
