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Rupee continues downward spiral

12 Apr 2022

  • Depreciation exceeds 60%
  • USD selling rate at LCBs reaches Rs. 330
    BY Shenal Fernando  The collapse of the Sri Lankan exchange rate continued yesterday (11), as the buying rate of the US dollar for Telegraphic Transfers (TT) increased to Rs. 327.5 per dollar. Consequently, the depreciation of the Sri Lankan rupee since 7 March 2022, when the Central Bank of Sri Lanka (CBSL) decided to float the exchange rate, has reached 62.5%.  According to the average buying and selling TT exchange rates published by the CBSL yesterday, based on quotes provided at 9.30 a.m. by selected licensed commercial banks (LCBs), the selling rate of the US dollar was at Rs. 327.5 and the buying rate of the US dollar was at Rs. 316.8. However, by midday, most licensed banks were quoting a selling rate of the US dollar for TT at Rs. 330, and the buying rate of the US dollar of around Rs. 310-320. Prior to the 7 March decision by the CBSL to float the exchange rate, the rate was fixed at Rs. 230-200 for over six months, which led to the rise of a flourishing black market for foreign currency within the country. Consequently, foreign worker remittances fell by 22.7% year-on-year (YoY) in 2021 to $ 5.5 billion, from $ 7.1 billion in 2020. Furthermore, in January 2022, foreign worker remittances were down 61.6% YoY to $ 259 million, from $ 655 million in January 2021. Critics have pointed out that the failure of the CBSL to plan for the eventual floating of the exchange rate and the lack of an adequate strategy to address the foreign exchange black market are to blame for the drastic fall of the exchange rate over the past five weeks. Critics further pointed out that the failure to implement a parallel interest rate hike, to increase the cost of borrowing, allowed exporters and other foreign currency earners to speculate in the domestic foreign exchange market. This has resulted in a lack of liquidity within the foreign exchange market despite the floating of the exchange rate, pushing the exchange rate higher. Following Dr. Nandalal Weerasinghe’s appointment as the new Governor of the CBSL last week, he took steps to increase the Standing Deposit Facility Rate (SDFR) and the Standing Lending Facility Rate (SLFR) of the CBSL by 700 basis points, to 13.50% and 14.50%, respectively.  However, the new Governor was quick to warn the public that the effects of the new policies will not be felt overnight, and that there might be a lag of around three months during which the economic conditions of the country will deteriorate further, and he particularly stated that he expected inflation to reach 28-30% during this month. Sri Lanka’s inflation on a year-on-year basis reached 18.8% in March 2022 as per the Colombo Consumers’ Price Index (CCPI), increasing from 15.1% in February 2022. Similarly, food inflation reached 30.1%, increasing from 25.7% in February. The CCPI had increased by 4.8 index points during the month of March compared to February, reaching 164.9.

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