Sri Lanka is once again watching the US dollar inch upwards against the rupee, and with it comes a familiar unease that has not fully faded since the economic crisis of 2022. The exchange rate may appear, on the surface, to be a matter for traders and policymakers alone, but its movement is felt far beyond the financial pages. 

At present, the rupee is under pressure from a combination of renewed import demand, external price shocks and the gradual return to a more flexible exchange rate regime. Officials at the Central Bank of Sri Lanka have repeatedly stressed that the currency is no longer being artificially held at a fixed level. Instead, it is being allowed to move in line with market conditions, with intervention reserved mainly for excessive volatility rather than day-to-day direction. In theory, this is a healthier system. In practice, it can feel uncomfortable for a population still scarred by rapid depreciation.

The immediate and most visible consequence of a rising dollar is imported inflation. Sri Lanka imports a large share of its essentials, from fuel and pharmaceuticals to wheat, milk powder and industrial inputs. When the dollar strengthens, importers pay more in rupees for the same goods. Those costs then filter down quickly into retail prices, transport fares and utility bills.

This is where the public feels the pressure most sharply. A slight adjustment in the exchange rate can translate into a chain reaction across the cost of living. Food inflation, which had only recently shown signs of moderation, risks becoming sticky again. Households that have already adjusted to higher price levels since the crisis find themselves asked to adjust once more, without a corresponding rise in incomes.

The Central Bank’s position is that such adjustments are necessary to maintain external stability. Sri Lanka cannot afford to defend an artificially strong rupee if it drains foreign reserves. That lesson was learnt painfully during the foreign exchange shortage that preceded the 2022 collapse. 

Also, a weaker rupee may help preserve reserves, but it also risks slowing the recovery in real incomes. Wage growth has not kept pace with inflationary shocks over the past few years, and any renewed cost push can deepen the gap between earnings and expenses. For middle and lower income households, this is not an abstract macroeconomic debate. It is a question of daily survival and choices about what can and cannot be afforded.

Businesses, too, are caught in the middle. Exporters often benefit from a weaker currency because their earnings in dollars translate into more rupees. But the reality is more complicated. Many exporters also rely on imported raw materials, which become more expensive as the dollar rises. For domestic manufacturers and small and medium enterprises, the squeeze can be particularly harsh. Higher input costs combined with cautious consumer demand leave little room for expansion.

There is also the question of debt. Sri Lanka’s external obligations remain significant, and every depreciation of the rupee increases the burden of repayment in local currency terms. Even if the country meets its dollar commitments, the rupee cost of servicing debt can place pressure on the national budget. That in turn affects public investment, infrastructure spending and social protection programmes.

In this environment, the role of policy becomes crucial. The Central Bank has consistently emphasised exchange rate flexibility, reserve accumulation and inflation targeting as its core framework. Economists broadly agree that these are necessary foundations for long-term stability. However, they also warn that monetary policy alone cannot carry the weight of adjustment.

Structural reforms remain essential. Sri Lanka must expand its export base, diversify foreign earnings and reduce its dependence on imports where possible. That includes strengthening manufacturing capacity, improving agricultural productivity and moving further into higher value services such as IT and professional outsourcing. Without these changes, the economy will remain vulnerable to external currency shocks regardless of monetary policy discipline.

At the same time, governance and investor confidence play a decisive role. Policy consistency, transparency and institutional credibility are not abstract ideals. They directly influence capital inflows, foreign investment and long-term growth prospects. Repeated policy reversals in the past have made investors cautious, and rebuilding that trust takes time.

The challenge ahead is therefore twofold. First, to manage the exchange rate in a way that avoids instability without repeating the distortions of the past. Second, to build an economy that earns enough foreign currency to reduce its sensitivity to global fluctuations. Until then, every upward tick in the dollar will be more than a market movement. It will be a signal that the recovery, while real, remains incomplete.