The rising Rupee

The external value of the Sri Lankan Rupee has dominated the local news over the recent weeks, giving rise to various interpretations and commentaries. President Ranil Wickremesinghe a few weeks ago at an interaction with youth activists stressed that the Government would not allow the domestic currency to decline beyond 280 against the dollar, as it would adversely affect exporters. The movement of the currency against the dollar is in stark contrast to the projection made by Fitch Ratings almost a year ago that the Rupee would shoot up to 390 against the greenback by end-2023.

Eternal pessimists are attributing the Rupee’s appreciation to non-servicing of the sovereign foreign debt since the Government declared bankruptcy in April 2022. However, the truth of the matter is the Government still continues to honour its debt commitments to multilateral institutions such as the ADB, and it is the debt owed to bilateral and commercial creditors which has been defaulted. The increase in gross official reserves to $ 4.5 billion has helped the upward movement of the currency, and the Rupee has appreciated by around 6.45% so far during the year. According to analysts, a combination of reduced festive season demand for imports due to lack of disposable incomes, surging remittances together with rising receipts from tourist arrivals to the Island have contributed towards the upward movement of the Rupee. 

As importers advanced their shipments last December prior to the rise in the VAT rate, the typical urgency to pile up stocks before the festive season is not observed during this year. The elevated cost of living in the country due to the galloping inflation experienced in 2022 has compelled customers to cut down on discretionary spending, thereby reducing the demand for imported durable consumer goods such as mobile phones that are subject to VAT from last January.

The appreciating trend of the Rupee would no doubt be a huge relief to the parents whose children are pursuing higher education in overseas universities as well as those who are following professional qualifications of predominantly UK-based institutions locally. The rise in the external value of the currency would also benefit importing firms apart from corporates who have borrowed dollar-denominated debt. Nevertheless, the upward trajectory of the monetary unit would not be favoured by the exporters, particularly those in the manufacturing sector who have been battered by the rise in electricity tariffs. But it must be recalled that exporting businesses experienced a windfall in their profits when the Rupee was depreciating considerably in 2022 (the rupee value of the dollar climbed from 202 in March 2022 to almost 360 in May that year).

The general public would be reasonable to expect a reduction in the prices of imported commodities with the current development in the exchange rate. But it is alleged that although traders were quick to increase the prices when the Rupee was going down, the same approach is not followed when the exchange rate moves in the opposite direction. Already, the price of imported milk powder has declined and consumers might also want to see similar reductions in respect of other imported essentials as well. A transparent price formula with regard to basic commodities is absolutely necessary to ensure a win-win deal for both traders and consumers. In the absence of such a mechanism, businesses would exploit consumers unfairly to earn supernormal profits.

A rising local currency is not a universally beneficial scenario, as it creates both winners as well as losers. The benefit of the Rupee appreciation can only be realised if the resultant cost reductions are appropriately passed down to the consumers by those who are involved in wholesale and retail trade. Importantly, what the business community, both importers and exporters, by and large anticipates is an exchange rate system without excess volatility in order to make sound business decisions.