- Cites external pressures
The Sri Lankan Rupee is projected to depreciate by 5% this year, with the possibility of further declining if external pressures and strain on the current account intensifies, as a consequence of ongoing global tensions, First Capital Research said in an economic outlook report released this week on the now protracted conflict unravelling in Iran.
“First Capital currently forecasts a 5% depreciation in the rupee for the year. However, given the increased external pressure and strain on the current account, there is a clear risk that the depreciation could exceed initial projections,” the report stated, citing concerns that Sri Lanka’s import bill may rise as global oil prices inch upward due to the conflict.
Since the escalation of tensions in the Middle East last week, the dollar index crossed 99 yesterday (5), reversing losses from the previous session.
According to a CNBC report, the climb followed a brief retreat from three-month highs, as “the fallout from the Middle East conflict kept investors on edge and prompted a flight to the safe-haven currency.”
CNBC noted that earlier expectations of de-escalation had been overtaken by a “fresh bout of uncertainty” yesterday, after Iran issued a warning to Washington over the reported sinking of an Iranian warship off the coast of Sri Lanka.
Yesterday, the Sri Lankan Rupee was quoted weaker to the US Dollar on the spot market at 310.70/85.
Commenting on the currency’s movement, CBSL Governor Dr. Nandalal Weerasinghe, speaking to CNBC yesterday in Bangkok said that the depreciation in his view acts as a shock absorber.
“When you look at the currency in our monetary policy framework, what we call a flexible inflation targeting framework, where the exchange rate is determined by market demand supply in the market, and also based on the medium-, long-term fundamentals, obviously our policy is to let the flexible exchange rate regime reflect the demand supply situation. That acts as a shock absorber to absorb any kind of shock that comes from, externally,” Dr. Weerasinghe said.
Commenting on Sri Lanka’s foreign reserved buffers he said: “When you look at where Sri Lanka is now compared to where we were 3 years ago, during the crisis, we have much stronger buffers, in terms of building foreign exchange [reserves]. Obviously, this is not sufficient. But, still in terms of buffers we have built up, we have a much better position in terms of reserves, compared to short-term liabilities in the next twelve months, or our debt service obligations.”
The research unit in its report released on Tuesday (3) further noted that as global safe-haven flows move toward the US Treasuries, emerging markets like Sri Lanka experience similar capital movements, with rising oil prices linked to the conflict lifting inflation expectations and reducing the likelihood of further rate cuts by the Central Bank.
“At the same time, disruptions to key trade routes are heightening concerns over weaker external balances, wider current‑account pressures, and increased sovereign‑funding needs, all of which add to the upward pressure on long‑term Sri Lankan bond yields,” the unit added.
Highlighting the risks to Sri Lanka’s balance of trade and exports, the unit cautioned on the downside risks extending from key export destinations that lie within conflict-affected regions.
“Nearly a quarter of Sri Lanka’s coffee, tea, and spice exports are directed to markets currently affected by geopolitical tensions, which include the United States, Iran, Iraq, and the Gulf region, leaving this key export segment exposed to elevated external risks.”
Since Tuesday, local reports have indicated that Ceylon tea exports have faced disruptions due to the escalation of the conflict and its impact on shipments passing through the Mediterranean and Gulf seas.
“Combined with potential increases in freight and insurance costs, the overall impact is negative for Sri Lanka’s balance of trade and could place further downward pressure on the rupee,” the report said.