Rupee gains exert double-edged sword impact on economy
The continuous appreciation of the Sri Lankan rupee following Anura Kumara Dissanayake’s assumption of the presidency has brought both positive and negative effects on the nation’s economy, prompting intervention from the Central Bank (CB).
Economists believe that while the stronger rupee has benefits, it also presents significant challenges for several sectors, necessitating a balanced approach by the CB to ensure economic stability. The rise in the rupee’s value against the dollar has led to a reduction in inflation, lower import costs, and a decrease in the burden of foreign debt for Sri Lanka.
These factors help stabilise the economy by making imported goods more affordable, thereby reducing production costs for local businesses. This can translate into lower consumer prices, enhancing purchasing power and overall economic stability.
Additionally, a stronger rupee boosts investor confidence, as it signals a stable economic environment.
Despite these advantages, the appreciation of the rupee poses significant hurdles for exporters, the tourism sector, and households dependent on remittances.
A stronger rupee makes Sri Lankan exports, like garments, tea, and rubber, more expensive in international markets, reducing their competitiveness.
A stronger currency makes Sri Lanka a more expensive destination for foreign tourists, which could deter visitor numbers, particularly impacting small and medium-sized businesses such as hotels, villas, and local tourism operators.
Economic analyst and former high ranking state official Sena Suriyapperuma highlighted that if businesses do not receive a competitive rate of Rs. 295 to Rs. 302 per dollar, they might struggle to sustain their operations without raising service charges, which could further reduce tourist arrivals.
The CB is also tasked with ensuring that foreign exchange reserves are managed in such a way that a balanced exchange rate is maintained avoiding significant losses for exporters and other stakeholders, he said.
Large-scale export companies, especially those in the garment sector, may face substantial financial challenges if forced to sell dollars at unfavorable rates.
To manage these challenges, the CB has to intervene to stabilise the rupee’s value, including bolstering foreign reserves through strategic US dollar purchases, he emphasised.
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