The appreciation of the Sri Lankan rupee (LKR) that has taken place over the last few days is temporary, say local economists emphatically.
Speaking to The Daily Morning Business, former Central Bank Deputy Governor Dr. W.A. Wijewardena stated: “The factors that will contribute to a permanent stabilisation of the rupee-dollar rate aren’t present in the economy as yet. They consist of a surplus in the current account of the balance of payments,” adding that the reason behind the rupee depreciation is likely to be temporary despite the measures taken by the Central Bank of Sri Lanka (CBSL).
Expressing the circumstances that have been created for the rupee’s appreciation against the dollar (USD), Dr. Wijewardena said that it is due to a “temporary” oversupply of the forex market of Sri Lanka which is thin as a result of the forex crisis.
He added: “The daily transactions are even less than $ 10 million. Hence, it cannot be used to gauge the development of the forex market.”
Therefore, he noted that the current appreciation is “not supported by existing macroeconomic developments”, while forecasting rupee appreciation will reverse within about a one-to-two-month period.
The Daily Morning Business also contacted University of Peradeniya Professor in Economics Prof. J.M. Ananda Jayawickrama in this regard who had a similar opinion on the rupee appreciation.
The International Monetary Fund (IMF) has given a green light on the Extended Fund Facility (EFF) and created a market expectation of receiving dollars to the market.
Prof. Jayawickrema further said: “The increase of dollar supply/earning would increase at a similar or beyond the spending rate,” once people start spending dollars such as by travelling abroad.
The cause for the rupee appreciation is that there is a dollar (USD) inflow due to tourism picking up and dollars being brought to the forex market to be converted to rupees, expecting further devaluation of the USD while the Government of Sri Lanka is receiving millions of dollars in aid or assurances of such. Thus, due to the supply of dollars, the LKR has been subjected to an appreciation, Prof. Jayawickrama elaborated.
Further, he noted that the country has not been importing goods as in previous times such as vehicles and food items (apple, grapes), and as the price of imported commodities are higher, the demand has come down even though certain bans have been removed. He also highlighted that Sri Lankans have not been spending much dollars despite the improved forex inflows. Simultaneously, the CBSL announced that foreign exchange reserves had increased.
University of Peradeniya Professor in Economics Prof. W.L. Prasanna Perera commented: “In the exchange market, one cannot predict permanent changes as it is determined by market forces. This is temporary because we (Sri Lanka) are not currently serving foreign debt. We (GoSL) are restricting imports, but when it is gradually allowed, the demand for dollars will increase. That will result in the depreciation of the currency in the future. That is the theory.”
For the time being, supply has increased which has resulted in the appreciation of the rupee, Prof. Perera highlighted.
Meanwhile, a tweet on the verified account of Minister of Tourism and Lands Harin Fernando with the caption “LKR best-performing currency in the world!” was subjected to both criticism and applause from netizens. The tweet referenced a graph on YTD Best Spot Returns indicating the LKR topping the charts with a 13.45% improvement from among a few appreciated currencies in the world by Wednesday (8).