Rupee outperforms regional currencies in 1Q

By Madhusha Thavapalakumar

Following a sustained plunge in 2018, the Sri Lankan rupee (LKR) strengthened considerably against the US dollar in the quarter ended 31 March, faster than eight major currencies in the Asian region in terms of appreciation.

According to Central Bank of Sri Lanka data, in the first quarter of 2019, the LKR appreciated by 3.7%, indicating positive signs for the economy.

Despite importer dollar demand, greenback inflows from remittance ahead of the Sinhala and Tamil New Year prevented a decline of the rupee. In addition, conversion of dollars by exporters and purchasing of government securities by foreign investors, amidst increased investor confidence following Sri Lanka’s repayment of $ 1 billion sovereign bond in January, has also catalysed the significant appreciation of the rupee.

Research carried out by The Sunday Morning Business on currency movements in regional economies shows that the rate of appreciation of the LKR is well above that of other appreciating currencies in the region. The other currencies taken into account for the purpose of comparison were the Indian rupee, the Bangladeshi taka, the Pakistani rupee from South Asia, and the Japanese Yen, the Singaporean dollar, the Malaysian ringgit, the Thai baht, and the Vietnamese dong from Asia.

During this period, the Indian rupee, the Malaysian ringgit, the Singaporean dollar, and the Thai baht appreciated by 0.8%, 1.2%, 0.7%, and 1.7%, respectively – far below the LKR – while the Pakistani rupee, the Vietnamese dong, the Japanese yen, and the Bangladeshi taka depreciated by 1.3%, 0.7%, 3%, and 0.4%, respectively.

Measured by the Dollar Index movements, the dollar has strengthened by 1.2% during this period. The Dollar Index is an indicator of the value of the US dollar in relation to a basket of foreign currencies which comprises the euro (EUR), the Japanese yen (JPY), the pound sterling (GBP), the Canadian dollar (CAD), the Swedish krona (SEK), and the Swiss franc.

Tweeting on the appreciation of the rupee towards the end of the quarter, Non-Cabinet Minister of Economic Reforms and Public Distribution Dr. Harsha de Silva stated: “Slowly but surely, the LKR will find its correct value. In fact, I said earlier that the recent LKR depreciation was driven by Sri Lanka’s political crisis and not economic fundamentals.”

Recently, former Stock Brokers Association of Sri Lanka President Ravi Abeysuriya has stated: “The over depreciation of the rupee compared with the index has come to an end and this is a positive sign for the economy.”

Amidst the impact of global issues on Asian currencies, political uncertainty in the country which erupted in late October and lasted for over 50 days spurred the depreciation of the LKR. As a result, LKR depreciated over 19% in 2018, making it one of the largest declines recorded in a year in Sri Lanka’s history. During the 51-day crisis period alone, the LKR depreciated by 3.8%.
Strengthening of the dollar had also played a considerable role in the rupee depreciation in 2018. Throughout the year, the US dollar was performing well due to American President Donald Trump’s trade wars, rising interest rates of US Federal Reserves, and lower growth in China and Europe.
As at 5 April, LKR has appreciated by 4.4% against the US dollar in 2019, according to Central Bank of Sri Lanka data.