- LKR dips by 3.4% since March
- Import prices surge while quantities remain stable
- Decrease in foreign holding of Govt. debt
- CBSL dollar purchases may have added pressure on currency
Experts have attributed the recent depreciation of the Sri Lankan Rupee to a contraction in external account surpluses, driven by higher import costs and capital outflows amid shifting global financial conditions.
Speaking to The Sunday Morning Business, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe stated that while the financial indicators were still not available to pinpoint the exact causes, the depreciation was most likely linked to a contraction in the current account surplus alongside capital outflows, particularly in the context of ongoing instability in the Middle East.
He noted that although Sri Lanka had historically recorded current account deficits, with only limited exceptions, the country had maintained a current account surplus from 2022 until around March this year.
The subsequent depreciation of the rupee since March suggests that this surplus has since contracted.
Despite this, key inflows such as worker remittances have not declined on a Year-on-Year (YoY) basis and have, in fact, increased. Export earnings have also remained broadly stable.
Damsinghe pointed out that Sri Lanka’s external account structure was now more diversified compared to a decade ago, with outflows no longer concentrated primarily in the Middle East.
Accordingly, he identified rising import costs as a key factor behind the contraction. He further clarified that the increase in import expenditure was not due to higher volumes, but rather elevated global prices, largely linked to the ongoing Middle East crisis.
“The quantity of imports in March this year compared to the previous year is broadly flat. However, there is approximately a 30% YoY increase in import prices,” he explained.
Damsinghe also observed that recent net US Dollar purchases by the Central Bank of Sri Lanka (CBSL) may have aggravated the depreciation.
He pointed out that contrary to historical trends, where the central bank typically sold US Dollars to stabilise the currency during periods of depreciation, the CBSL had been a net purchaser of dollars in recent months.
According to CBSL data, the bank purchased $ 209.8 million and sold $ 9.5 million in January, purchased $ 461 million with no sales in February, and purchased $ 120.3 million while selling $ 71.5 million in March.
In addition, Damsinghe highlighted that since March, there had been a broader trend of capital outflows from emerging markets, including Sri Lanka. This has led to a decline in foreign holdings of Sri Lankan Government securities.
“We are seeing some outflows from foreign holdings of GGovernment debt in March and April. This is not unique to Sri Lanka but is happening across Asia,” he said, emphasising that the trend reflected global portfolio adjustments rather than country-specific concerns.
Data from the CBSL indicates that the average Telegraphic Transfer (TT) selling rate of the US Dollar rose to Rs. 324 by 6 May, up from Rs. 313.4 on 3 March, representing a depreciation of approximately 3.4% over the period.