• Experts predict 5% LKR depreciation due to increased consumer spending, economic activity
• Higher demand for imports, capital expenditure, foreign debt repayments to drive depreciation
• Tourism offseason, credit growth, rising public sector wages expected to put pressure  

The Sri Lankan Rupee (LKR) is expected to depreciate during 2025 as a result of the increased consumer demand and economic activity that is expected to flow from the proposals in the 2025 Budget.

Speaking to The Sunday Morning Business, First Capital Holdings Chief Research and Strategy Officer Dimantha Mathew stated that he expected consumer demand in the economy to increase sharply in 2025 as a result of the various handouts and salary increments proposed in the 2025 Budget.  

He said: “When consumer demand increases, imports will also invariably increase. As a result, the demand for foreign exchange will increase as well, which will lead to the drying up of liquidity in the local system. Therefore, I expect a certain amount of depreciation because of the higher demand for US Dollars.” 

He further pointed out that the 2025 Budget had allocated around Rs. 1.3 trillion in capital expenditure for infrastructure projects, which would lead to increased economic activity. 

“Increased capital expenditure will lead to increased business activity. The construction industry amounts to 10% of the GDP,” stated Mathew.

Considering these reasons, he revealed that they were forecasting the rupee to depreciate by around 5%, which is the 30-year average, considering that the currency is broadly floated.

Similarly, speaking to The Sunday Morning Business, Advocata Institute Chairman Murtaza Jafferjee pointed out that the impending tourist offseason, increased demand for thermal generation during the dry weather, increased consumer demand during the New Year season, credit growth, removal of the import ban on vehicles, and the commencement of foreign debt payments all pointed to the depreciation of the rupee during 2025. 

“The peak tourism season which coincides with winter in the northern hemisphere is drawing to an end and we are moving towards the offseason when arrivals as well as the average length of stay and spending all decline, which implies a reduction in inflows. We are also moving towards a drier time of the year, hence the electricity generation mix tends to be more from thermal sources, which are imported,” he stated. 

“The traditional New Year holiday is a post-harvest period during which rural households purchase durable items like white goods and imported appliances. Credit growth is also increasing Month-over-Month (M/M) with greater economic momentum, which will increase import demand. 

“Both public and private sector salaries have been increased, increasing purchasing power. Vehicle imports which had previously been banned have been reopened, but volumes will be modest given the astronomical taxes, impacting affordability. 

“Foreign debt servicing post external debt restructuring started from December 2024. All these indicators point towards more outflows in 2025 than in 2024. In the absence of large financial inflows, I expect the rupee to start depreciating going forward,” Jafferjee added.

Commenting on the Government’s decision to remove the current tax exemption and subject service exporters to a 15% income tax, he noted: “Exempting foreign-sourced income from taxation was an outrage from its inception, since the basic principle of direct taxation is progressivity; those with higher income pay higher taxes, with the source of income having no bearing on the tax rate. 

“Such a policy had several implications. Firstly, it is hugely unfair to those who have to pay taxes, since they have to bear a larger tax burden to make up for lost revenue to the Government or there will be less spending on essential public services and redistribution of spending like ‘Aswesuma.’ 

“Secondly, it significantly distorts the wages in the labour market, because a domestic firm competing for the same skill set has to compensate an individual for taxes as well. I am disappointed that this concession was not fully removed. The 15% rate is a good start, but it should be taken out fully next year,” he noted.

Addressing the argument that people would avoid bringing back their income to Sri Lanka, Jafferjee stated that this would constitute an act of tax avoidance where they would be breaking the law.  

He further stated that the impact on foreign exchange flows into the country due to avoidance would be minimal, since perhaps only the savings component would be kept out of the country.