Sri Lanka’s Economic Crisis Deepens and the Rupee Depreciates

April 18th, 2022

Sri Lanka is in the midst of an economic crisis, reflected, in part, by the rate of the Sri Lankan rupee against the US dollar. On Tuesday, April 5, the selling rate of 1 USD was over 300 Sri Lankan rupees, for the first time in history. The news agency Xinhua reports that some local banks were selling 1 USD for as high as 312 LKR.

While the deepening economic crisis and the devaluation of the LKR were predicted by many economists, it contradicts statements made by Sri Lankan government officials and Central Bank representatives made last month when the crisis started accelerating.

To provide a bit of background – Sri Lankan foreign currency reserves have been and still are rapidly shrinking – from $2.36 billion to $2.31 billion from January to February; Sri Lanka is losing the ability to import fuel and other necessities; consumer prices rose by 15% in February alone; the International Monetary Fund called Sri Lanka’s debt situation “unsustainable”.

As a result, the Sri Lankan Central Bank changed its policy in early March and stated that “greater flexibility in the exchange rate will be allowed to the markets with immediate effect.” The statement also contained advice that transactions should be capped at 230 LKR per 1 USD.

After the new monetary policy was introduced, the Central Bank of Sri Lanka further added that the LKR would stabilize soon. While 230 LKR per 1 USD would have been approximately 12% lower than the then-market level, it would still have been a far way off from the current over-300 LKR per 1 USD.

Anil Perera, director of the Department of Economic Research, stated:

“While there may be turbulence in exchange rates after the government relaxed exchange controls, the exchange rate will be stabilized soon with the improvement of market activities,” per Xinhua news agency. “We expect the price volatility caused by the depreciation to stabilize over the next few days,” Perera added.

By now, it is demonstrable that none of the reassurances by government and Central Bank officials have proven true. Thus, what is the current situation in Sri Lanka? As it regards the Sri Lankan rupee, it has reached its lowest historical level against the US dollar and continues to depreciate.

The foreign currency reserve is shrinking and the price of consumer goods is rising. Country-wide protests are being held due to the economic crisis. President Gotabaya Rajapaksa declared a state of emergency on Friday, April 1.

The purpose of the state of emergency was, in part, to continue the maintenance of essential supplies and services. After the state of emergency was announced, an island-wide curfew was instituted from 6 p.m. Saturday to 6 a.m. Monday. The state of emergency was revoked at midnight of April 5.

Sri Lanka is facing a food and fuel shortage, and an emergency health situation has been declared on April 6, as a result of dwindling medical supplies. The fuel shortage is also resulting in regular power cuts throughout the country.

26 Cabinet Ministers resigned on Sunday, April 2. Another 40 Ministers belonging to the governing coalition stated on Tuesday, April 5, that they would not be following the coalition’s voting instructions. Protests are continuing to spread, but President Gotabaya Rajapaksa has not resigned as of yet, nor has his older brother, Prime Minister Mahinda Rajapaksa.

In the midst of this political instability, the Sri Lankan rupee continues to be volatile and the economic crisis is deepening. We will continue to inform you as the situation changes.

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