Sri Lankan rupee weakening steadily; ‘economic reforms urgently needed’

by Hiran H.Senewiratne

Professor of Economics University of Colombo Sirimal Abeyratne said the Sri Lankan rupee is expected to weaken further; it would touch more than Rs 160 to the US dollar level next year, if the government fails to undertake fundamental economic reforms.

"The government has failed to undertake proper economic reforms. Sluggish export growth and the absence of a stable foreign exchange earnings mechanism are among reasons for this plight, Prof Abeyratne told The Island Financial Review.

The rupee, which has depreciated sharply this year, down 8.7 percent against the US dollar, hit a record low of a 150 per dollar selling rate on Monday. "The depreciation of the rupee against the US dollar reflects the production trends in the country's global competency. This is going to be a serious financial issue, Abeyratne said.

He said the government barely manages the economy by adopting temporary measures without providing concrete solutions. Therefore, he expects the rupee to continue to weaken this year and we are likely to see more economic uncertainty.

The local currency could fall to 148 and as much as 160 rupees to the dollar in 2016 because a lot of foreign exchange is flowing out of the country but the state does not have a proper method to earn foreign exchange, besides being saddled with loans as well, he said.

"We depreciate about a rupee a month against the dollar.This is what we’re seeing now and no action is taken on it."

Abeyratne said he expects more volatility in the rupee and a sharp rise in interest rates in 2016 in the country. This would lead to increase the cost of living in the country, he said. . "A lot of the depreciation has already happened without Central Bank intervention,he said.

Countries where monetary policy is more prudent and the exchange rate does not move, including Hong Kong and Dubai, raised their indicative policy rate by 25 basis points this month soon after the US Fed Reserve raised its rate.

Weak global demand and uncertainty over policy rates will continue to hold down Sri Lanka's economic performance in 2016, the Asian Development Bank's flagship annual economic publication, Asian Development Outlook 2016 (ADO), released recently says.


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