By Madhusha Thavapalakumar
Many a time, we may have heard our parents and grandparents reminiscing about the past saying that just over 50 years ago in Sri Lanka, a rupee was sufficient to buy a loaf of bread, milk, and eggs.
Today, let alone a loaf of bread, a rupee cannot even buy you a toffee. In fact, Rs. 1 might soon become the new cent that is not used in financial transactions as it is rapidly losing its value.
Last week, the Sri Lankan rupee fell to Rs. 200 against the US dollar for the first time in the country’s history. This was a rapid fall from Rs. 180 a month ago, providing a glimpse of possible further depreciation over the coming weeks. In 2020 alone, the rupee has depreciated by over 9% and we are only four months in.
The figure reached last week was also a dubious milestone, as it came just 15 years since the rupee “scored its century”, in cricket parlance. Since 2005, the rate of depreciation of the rupee against the US dollar is over 100% as it fell to Rs. 200 from Rs. 100.
This has been mainly due to the considerable drop in the rupee’s value in 2013, 2015, 2016, 2017, 2018, and during the first four months of 2020.
In light of this, The Sunday Morning Business decided to delve into this 15-year-old downward spiral of the rupee’s value and the factors that influenced it. But firstly, why is the rupee’s value against the dollar so important? Why not measure its value against any other currency?
Simply put, it is because the US dollar is the reserve currency of the world. During World War II, the US supplied the Allied forces of Europe and the Commonwealth weapons, supplies, and other goods. It collected much of its payment for these in gold, and by the end of the war, the US owned a vast majority of the world’s gold reserves.
In 1944, delegates from 44 Allied countries came up with a system to manage foreign exchange called the Bretton Woods Agreement that would not put any country at an unfair disadvantage. This was a time when the US economy was strong while the European economies were in ruins due to the war, thus giving the US increased bargaining power.
It was decided that while the world’s currencies could not be linked to gold, they could be linked to the US dollar, which was linked to gold. According to the Bretton Woods Agreement, central banks around the world would maintain fixed exchange rates between their currencies and the dollar. Today, more than 61% of all foreign bank reserves are denominated in US dollars and nearly 40% of the world’s debt is in dollars, according to the International Monetary Fund (IMF).
2005-2008
During the period from 2005 to 2008, the average annual exchange rate went up to Rs. 108.33 in 2008 from Rs. 100.50 in 2005. The Central Bank of Sri Lanka (CBSL) undertook some measures in between this period to cushion the impact of the exchange rate shooting up. Depreciation of the rate of exchange in 2007 was moderated in 2007 due to an influx of a loan of $ 500 million and increased worker remittances.
2009
The annual average exchange rate of a US dollar rose to Rs. 114.94 in 2009, the year when Sri Lanka ended its 26-year-long war. It was a depreciation of Rs. 6.61 compared to the previous year. According to the CBSL, this was due to the heavy demand for foreign exchange within Sri Lanka, driven by the repatriation of foreign investments in government securities, settlement of outstanding petroleum bills, and the severe drying of commercial financing sources in the first four months of 2009. As a result, the rupee depreciated gradually during the first four months of 2009 and it even hit its then lowest level of Rs. 120.25 against the US dollar, a few days after the Sinhala and Tamil New Year.
However, as the civil war came to an end in May 2009, capital inflows to the country rose along with increased investor confidence, and the rupee appreciated to Rs. 114.93 against the US dollar by end-May.
The exchange rate continued to hover around Rs. 114.80 until the end of October 2009, but strong external sector performance during the latter part of the fourth quarter, including investments in Treasury bills and bonds and the issuance of the second sovereign bond of $ 500 million, further appreciated the rupee.
However, by the end of 2009, the rupee was Rs. 114.38 and it recorded an overall depreciation of 1.09% that year.
2010
The annual average exchange rate in the year 2010 was Rs. 113.06, a reduction of Rs. 1.88 compared to the previous year. The rupee continued to appreciate gradually against the US dollar in the face of significant inflows during the first nine months of the year. However, the recovery of commodity prices in the international markets resulted in the US dollar losing its value during the second half of 2010.
An appreciating currency makes imports cheaper, leading to more imports coming into the country while hampering exports. To ensure competitiveness of the export sector, the CBSL purchased foreign exchange from the domestic foreign exchange market. However, in the last quarter of 2010, the CBSL supplied foreign exchange to the domestic foreign exchange market in order to ensure adequate foreign exchange liquidity in the face of large outflows arising from the settlement of petroleum bills.
Accordingly, during 2010, the CBSL purchased $ 753 million from the domestic foreign exchange market while supplying $ 820 million, leading to a net supply of $ 67 million. The rupee appreciated at a relatively higher rate against some other major currencies during 2010. It appreciated against the euro by 10.95% and pound sterling by 6.03%.
2011
In 2011, the annual average exchange rate was Rs. 110.57. The rupee appreciated by 1.23% against the US dollar in the first half of 2011, supported by substantial receipts on account of remittances, tourism, and inflows to the capital and financial account.
However, it saw a slight depreciation of 0.54% during the third quarter of 2011 due to demand pressure led by the sharp increase in import expenditure. The depreciating trend continued in November as the rupee depreciated by 3%. Accordingly, by the end of 2011, the rupee’s depreciation rate against the US dollar was 2.59% at Rs. 113.90. Meanwhile, the annual average exchange rate against the US dollar in 2011 was Rs. 110.57 compared to Rs. 113.06 in 2010.
2012
The annual average exchange rate in 2012 leapt by over Rs. 17, compared to the previous year, to Rs. 127.60. This was mainly due to the settling of a portion of petroleum import bills during the first few months of the year.
Following this, the CBSL adopted several measures to prevent any further excessive fluctuations in the exchange rate market. Accordingly, restrictions on forward contracts and tightening limits on net open positions (NOPs) of commercial banks were imposed; nevertheless, the rupee depreciated by 14.56% against the US dollar in the first half of 2012.
However, with increased foreign inflows to the country during the second half of 2012, the rupee gained value and appreciated by 4.83% against the US dollar. Overall, the rupee depreciated against the US dollar by 10.43% during 2012. Due to the rupee depreciation, expenditure on motor vehicle imports declined by 43.8% to $ 495 million in 2012.
2013
The annual average exchange rate of the rupee against the US dollar was Rs. 129.11 compared to Rs. 127.64 the previous year.
Since January 2013 through early June 2013, the rupee appreciated marginally by 0.55% against the US dollar, while it depreciated by 5.01% during the second week of June through end-August mainly due to an increase in import demand and the expectation of unwinding by foreign investors from the government securities market in anticipation of the possible tapering of the US bond buying programme.
However, from early September, the Sri Lankan rupee began to appreciate against the US dollar supported by an increase in inflows to the banking sector and bond issuances by NSB (National Savings Bank) and DFCC Bank, strengthening market expectations further.
The Sri Lankan rupee remained relatively stable compared to many other currencies in the region, which suffered sharp depreciation amidst concerns regarding the scaling back of the US quantitative easing (QE) programme. The rupee depreciated only at a moderate rate against the US dollar that year as by end 2013, it depreciated by 2.75%.
2014
In 2014, the annual average exchange rate of the rupee was Rs. 130.56, an increase of Rs. 1.55, compared to that of 2013.
The Sri Lankan rupee appreciated against the US dollar during the first three quarters of the year, resulting in intervention by the CBSL in order to avoid over-appreciation.
The appreciation was mainly due to the increase in foreign exchange inflows in the form of export earnings, workers’ remittances, and other financial inflows on account of international sovereign bonds, government securities, foreign loans to the government, and also private sector and foreign investment in the Colombo Stock Exchange (CSE).
Accordingly, the rupee appreciated by 0.29% against the US dollar by the end of the third quarter of 2014. However, increased import demand and net outflows associated with the government securities market exerted pressure on the Sri Lankan rupee in the last quarter of 2014 to depreciate by 0.47% against the US dollar, resulting in an overall annual depreciation of 0.23%.
Accordingly, the year-end and annual average exchange rates against the US dollar stood at Rs. 131.05 and Rs. 130.56, respectively. The Sri Lankan rupee appreciated against all other major currencies in 2014. The rupee appreciated against the Japanese yen by 13.48%, the euro by 13.19%, the pound sterling by 5.65%, and against the Indian rupee by 2.13%.
2015
This year, the annual average exchange rate of the rupee was Rs. 135.94, an increase of over Rs. 5 compared to the previous year’s rate.
The rupee remained broadly stable during the first eight months of 2015, but depreciated substantially thereafter as a result of CBSL’s decision to allow greater flexibility in the determination of the exchange rate.
The lower-than-expected foreign exchange inflows, coupled with high levels of outflows, exerted significant pressure on the exchange rate during the year. This was mainly due to the reversal of foreign investments in the government rupee securities market in anticipation of and the subsequent hike in interest rates in the US, and the high level of demand for foreign exchange due to increased expenditure on non-oil imports and foreign debt service payments.
This resulted in persistent depreciation pressure on the rupee, thereby necessitating continuous intervention of the CBSL in the domestic foreign exchange market in order to reduce volatility. Supported by the supply of $ 1.9 billion by the CBSL on a net basis, the rupee recorded marginal depreciation of 2.42% during the first eight months of 2015.
However, on 3 September 2015, the CBSL decided to limit its intervention in the domestic foreign exchange market and allowed the exchange rate to be largely determined by the demand and supply conditions of the market. This resulted in the Sri Lankan rupee depreciating by 6.64% during the period from 4 September to end-2015.
Overall, the rupee depreciated against the US dollar by 9.03% to Rs. 144.06 as of end-2015. The annual average exchange rate of the rupee against the US dollar also depreciated to Rs. 135.94 in 2015 from Rs. 130.56 in 2014.
2016
In 2016, the annual average exchange rate of the rupee against the US dollar was Rs. 145.60 compared to Rs. 135.94 the previous year.
The external value of the rupee continued to depreciate in 2016. The rupee, which depreciated by 0.82% in the first half of the year, depreciated at a higher rate of 3.04% in the second half.
The relatively low depreciation of the rupee in the first half was supported by the supply of foreign exchange liquidity by the CBSL, amounting to $ 1. 93 billion, on a net basis. However, the rupee depreciated at a higher rate with the curtailment of intervention by the CBSL with a net absorption of $ 325 million during the second half of the year.
A substantial amount of the foreign exchange supplied during the second half of the year was to partially ease the pressure arising due to the disinvestment by non-resident investors in the government securities market, particularly during the last quarter of the year.
This outflow from the government securities market was driven by the expectation and the subsequent increase in interest rates by the US Federal Reserve Bank. Throughout the year, with these developments, the rupee depreciated by 3.83% against the dollar from Rs. 144.06 as at end-2015 to Rs. 149.80 as at end-2016.
2017
The rupee continued its increasing average annual exchange rate of Rs. 152.46 against the US dollar, with it dropping in 2017 too.
The significant depreciation pressure on the rupee that prevailed, particularly during the first two months of 2017 due to continued outflows stemming from import expenditure, debt service payments, and unwinding of foreign investments in the government securities market, necessitated the CBSL to supply foreign currency liquidity to the domestic foreign exchange market to defend the external value of the Sri Lankan rupee.
However, this situation turned around from March 2017, particularly with higher foreign investments in the CSE and the government securities market and the increased conversion of export proceeds, which provided an opportunity for CBSL to absorb foreign exchange liquidity from the market.
The depreciation pressure on the rupee further eased gradually from May onwards, with International Sovereign Bond (ISB) issuances, the receipt of the foreign currency term financing facility, and disbursement of the third and the fourth tranches of the International Monetary Fund’s Extended Fund Facility (EFF) which helped improve investor confidence.
This situation contributed towards the stability of the rupee against the US dollar during the period from end-March to end-December 2017, even amongst some periods of gradual appreciation of the rupee amidst substantial absorption of foreign exchange liquidity by the CBSL.
With these developments, the rupee, which depreciated by 1.28% in the first quarter of 2017, recorded an overall depreciation of 2% against the US dollar during the year from Rs. 149.80 at end-2016 to Rs. 152.85 at end-2017. In addition, the annual average exchange rate depreciated by 4.50% to Rs. 152.46 against the US dollar in 2017.
2018
The average annual exchange rate increased by almost Rs. 10 to Rs. 162.54, compared to 2017. During the first four months, the influx of foreign exchange to the domestic foreign exchange market enabled the CBSL to absorb foreign exchange amounting to $ 459 million on a net basis.
However, this favourable condition was reversed since May 2018 onwards, as a result of both external and domestic factors. On the external front, the strengthening of the US economy prompted an increase in the policy rate of the Federal Reserve Bank, accompanied by the expectation of a number of possible interest rate hikes for 2018 and 2019.
The exchange rate was permitted to depreciate in line with market fundamentals, while intervening in the domestic foreign exchange market by providing liquidity only to mitigate excessive volatility of the exchange rate. This resulted in the CBSL supplying $ 1,120 million on a net basis to the foreign exchange market during 2018, while the Sri Lankan rupee depreciated against the US dollar by 16.4% during the year.
2019
While the annual report of the CBSL for the year of 2019 is yet to be released, the selling rate of the US dollar was Rs. 183.33 at the end of 2019.
The selling rate of the US dollar was Rs. 184.63 in the beginning of the year, and it reported a considerable drop to Rs. 176 in April, before the Easter Sunday attacks. Since then, it remained well below the Rs. 180 level until mid-August and picked up to the Rs. 181-183 range during the latter part of the year.
Following double-digit depreciation a year ago, the Sri Lankan rupee appreciated by 0.6% against the US dollar in 2019, outperforming several Asian currencies including the Pakistani rupee, Vietnamese dong, and Indian rupee.
So far in 2020
The rupee has depreciated so far by over 9.4% with the selling rate of the US dollar passing Rs. 200 last week for the first time. The rupee opened the year at Rs. 183.15 against the US dollar, which hovered around the same level until mid-March.
The rupee depreciated sharply since the third week of March, driven by the identification of the first Sri Lankan coronavirus (Covid-19) patient inside the country and the spread of the virus in several parts of the island.
However, given that the current Covid-19 global pandemic is taking over the world, currencies the world over are depreciating amidst economic slowdown driven by it.
Today, let alone a loaf of bread, a rupee cannot even buy you a toffee. In fact, Rs. 1 might soon become the new cent that is not used in financial transactions as it is rapidly losing its value.
Last week, the Sri Lankan rupee fell to Rs. 200 against the US dollar for the first time in the country’s history. This was a rapid fall from Rs. 180 a month ago, providing a glimpse of possible further depreciation over the coming weeks. In 2020 alone, the rupee has depreciated by over 9% and we are only four months in.
The figure reached last week was also a dubious milestone, as it came just 15 years since the rupee “scored its century”, in cricket parlance. Since 2005, the rate of depreciation of the rupee against the US dollar is over 100% as it fell to Rs. 200 from Rs. 100.
This has been mainly due to the considerable drop in the rupee’s value in 2013, 2015, 2016, 2017, 2018, and during the first four months of 2020.
In light of this, The Sunday Morning Business decided to delve into this 15-year-old downward spiral of the rupee’s value and the factors that influenced it. But firstly, why is the rupee’s value against the dollar so important? Why not measure its value against any other currency?
Simply put, it is because the US dollar is the reserve currency of the world. During World War II, the US supplied the Allied forces of Europe and the Commonwealth weapons, supplies, and other goods. It collected much of its payment for these in gold, and by the end of the war, the US owned a vast majority of the world’s gold reserves.
In 1944, delegates from 44 Allied countries came up with a system to manage foreign exchange called the Bretton Woods Agreement that would not put any country at an unfair disadvantage. This was a time when the US economy was strong while the European economies were in ruins due to the war, thus giving the US increased bargaining power.
It was decided that while the world’s currencies could not be linked to gold, they could be linked to the US dollar, which was linked to gold. According to the Bretton Woods Agreement, central banks around the world would maintain fixed exchange rates between their currencies and the dollar. Today, more than 61% of all foreign bank reserves are denominated in US dollars and nearly 40% of the world’s debt is in dollars, according to the International Monetary Fund (IMF).
2005-2008
During the period from 2005 to 2008, the average annual exchange rate went up to Rs. 108.33 in 2008 from Rs. 100.50 in 2005. The Central Bank of Sri Lanka (CBSL) undertook some measures in between this period to cushion the impact of the exchange rate shooting up. Depreciation of the rate of exchange in 2007 was moderated in 2007 due to an influx of a loan of $ 500 million and increased worker remittances.
2009
The annual average exchange rate of a US dollar rose to Rs. 114.94 in 2009, the year when Sri Lanka ended its 26-year-long war. It was a depreciation of Rs. 6.61 compared to the previous year. According to the CBSL, this was due to the heavy demand for foreign exchange within Sri Lanka, driven by the repatriation of foreign investments in government securities, settlement of outstanding petroleum bills, and the severe drying of commercial financing sources in the first four months of 2009. As a result, the rupee depreciated gradually during the first four months of 2009 and it even hit its then lowest level of Rs. 120.25 against the US dollar, a few days after the Sinhala and Tamil New Year.
However, as the civil war came to an end in May 2009, capital inflows to the country rose along with increased investor confidence, and the rupee appreciated to Rs. 114.93 against the US dollar by end-May.
The exchange rate continued to hover around Rs. 114.80 until the end of October 2009, but strong external sector performance during the latter part of the fourth quarter, including investments in Treasury bills and bonds and the issuance of the second sovereign bond of $ 500 million, further appreciated the rupee.
However, by the end of 2009, the rupee was Rs. 114.38 and it recorded an overall depreciation of 1.09% that year.
2010
The annual average exchange rate in the year 2010 was Rs. 113.06, a reduction of Rs. 1.88 compared to the previous year. The rupee continued to appreciate gradually against the US dollar in the face of significant inflows during the first nine months of the year. However, the recovery of commodity prices in the international markets resulted in the US dollar losing its value during the second half of 2010.
An appreciating currency makes imports cheaper, leading to more imports coming into the country while hampering exports. To ensure competitiveness of the export sector, the CBSL purchased foreign exchange from the domestic foreign exchange market. However, in the last quarter of 2010, the CBSL supplied foreign exchange to the domestic foreign exchange market in order to ensure adequate foreign exchange liquidity in the face of large outflows arising from the settlement of petroleum bills.
Accordingly, during 2010, the CBSL purchased $ 753 million from the domestic foreign exchange market while supplying $ 820 million, leading to a net supply of $ 67 million. The rupee appreciated at a relatively higher rate against some other major currencies during 2010. It appreciated against the euro by 10.95% and pound sterling by 6.03%.
2011
In 2011, the annual average exchange rate was Rs. 110.57. The rupee appreciated by 1.23% against the US dollar in the first half of 2011, supported by substantial receipts on account of remittances, tourism, and inflows to the capital and financial account.
However, it saw a slight depreciation of 0.54% during the third quarter of 2011 due to demand pressure led by the sharp increase in import expenditure. The depreciating trend continued in November as the rupee depreciated by 3%. Accordingly, by the end of 2011, the rupee’s depreciation rate against the US dollar was 2.59% at Rs. 113.90. Meanwhile, the annual average exchange rate against the US dollar in 2011 was Rs. 110.57 compared to Rs. 113.06 in 2010.
2012
The annual average exchange rate in 2012 leapt by over Rs. 17, compared to the previous year, to Rs. 127.60. This was mainly due to the settling of a portion of petroleum import bills during the first few months of the year.
Following this, the CBSL adopted several measures to prevent any further excessive fluctuations in the exchange rate market. Accordingly, restrictions on forward contracts and tightening limits on net open positions (NOPs) of commercial banks were imposed; nevertheless, the rupee depreciated by 14.56% against the US dollar in the first half of 2012.
However, with increased foreign inflows to the country during the second half of 2012, the rupee gained value and appreciated by 4.83% against the US dollar. Overall, the rupee depreciated against the US dollar by 10.43% during 2012. Due to the rupee depreciation, expenditure on motor vehicle imports declined by 43.8% to $ 495 million in 2012.
2013
The annual average exchange rate of the rupee against the US dollar was Rs. 129.11 compared to Rs. 127.64 the previous year.
Since January 2013 through early June 2013, the rupee appreciated marginally by 0.55% against the US dollar, while it depreciated by 5.01% during the second week of June through end-August mainly due to an increase in import demand and the expectation of unwinding by foreign investors from the government securities market in anticipation of the possible tapering of the US bond buying programme.
However, from early September, the Sri Lankan rupee began to appreciate against the US dollar supported by an increase in inflows to the banking sector and bond issuances by NSB (National Savings Bank) and DFCC Bank, strengthening market expectations further.
The Sri Lankan rupee remained relatively stable compared to many other currencies in the region, which suffered sharp depreciation amidst concerns regarding the scaling back of the US quantitative easing (QE) programme. The rupee depreciated only at a moderate rate against the US dollar that year as by end 2013, it depreciated by 2.75%.
2014
In 2014, the annual average exchange rate of the rupee was Rs. 130.56, an increase of Rs. 1.55, compared to that of 2013.
The Sri Lankan rupee appreciated against the US dollar during the first three quarters of the year, resulting in intervention by the CBSL in order to avoid over-appreciation.
The appreciation was mainly due to the increase in foreign exchange inflows in the form of export earnings, workers’ remittances, and other financial inflows on account of international sovereign bonds, government securities, foreign loans to the government, and also private sector and foreign investment in the Colombo Stock Exchange (CSE).
Accordingly, the rupee appreciated by 0.29% against the US dollar by the end of the third quarter of 2014. However, increased import demand and net outflows associated with the government securities market exerted pressure on the Sri Lankan rupee in the last quarter of 2014 to depreciate by 0.47% against the US dollar, resulting in an overall annual depreciation of 0.23%.
Accordingly, the year-end and annual average exchange rates against the US dollar stood at Rs. 131.05 and Rs. 130.56, respectively. The Sri Lankan rupee appreciated against all other major currencies in 2014. The rupee appreciated against the Japanese yen by 13.48%, the euro by 13.19%, the pound sterling by 5.65%, and against the Indian rupee by 2.13%.
2015
This year, the annual average exchange rate of the rupee was Rs. 135.94, an increase of over Rs. 5 compared to the previous year’s rate.
The rupee remained broadly stable during the first eight months of 2015, but depreciated substantially thereafter as a result of CBSL’s decision to allow greater flexibility in the determination of the exchange rate.
The lower-than-expected foreign exchange inflows, coupled with high levels of outflows, exerted significant pressure on the exchange rate during the year. This was mainly due to the reversal of foreign investments in the government rupee securities market in anticipation of and the subsequent hike in interest rates in the US, and the high level of demand for foreign exchange due to increased expenditure on non-oil imports and foreign debt service payments.
This resulted in persistent depreciation pressure on the rupee, thereby necessitating continuous intervention of the CBSL in the domestic foreign exchange market in order to reduce volatility. Supported by the supply of $ 1.9 billion by the CBSL on a net basis, the rupee recorded marginal depreciation of 2.42% during the first eight months of 2015.
However, on 3 September 2015, the CBSL decided to limit its intervention in the domestic foreign exchange market and allowed the exchange rate to be largely determined by the demand and supply conditions of the market. This resulted in the Sri Lankan rupee depreciating by 6.64% during the period from 4 September to end-2015.
Overall, the rupee depreciated against the US dollar by 9.03% to Rs. 144.06 as of end-2015. The annual average exchange rate of the rupee against the US dollar also depreciated to Rs. 135.94 in 2015 from Rs. 130.56 in 2014.
2016
In 2016, the annual average exchange rate of the rupee against the US dollar was Rs. 145.60 compared to Rs. 135.94 the previous year.
The external value of the rupee continued to depreciate in 2016. The rupee, which depreciated by 0.82% in the first half of the year, depreciated at a higher rate of 3.04% in the second half.
The relatively low depreciation of the rupee in the first half was supported by the supply of foreign exchange liquidity by the CBSL, amounting to $ 1. 93 billion, on a net basis. However, the rupee depreciated at a higher rate with the curtailment of intervention by the CBSL with a net absorption of $ 325 million during the second half of the year.
A substantial amount of the foreign exchange supplied during the second half of the year was to partially ease the pressure arising due to the disinvestment by non-resident investors in the government securities market, particularly during the last quarter of the year.
This outflow from the government securities market was driven by the expectation and the subsequent increase in interest rates by the US Federal Reserve Bank. Throughout the year, with these developments, the rupee depreciated by 3.83% against the dollar from Rs. 144.06 as at end-2015 to Rs. 149.80 as at end-2016.
2017
The rupee continued its increasing average annual exchange rate of Rs. 152.46 against the US dollar, with it dropping in 2017 too.
The significant depreciation pressure on the rupee that prevailed, particularly during the first two months of 2017 due to continued outflows stemming from import expenditure, debt service payments, and unwinding of foreign investments in the government securities market, necessitated the CBSL to supply foreign currency liquidity to the domestic foreign exchange market to defend the external value of the Sri Lankan rupee.
However, this situation turned around from March 2017, particularly with higher foreign investments in the CSE and the government securities market and the increased conversion of export proceeds, which provided an opportunity for CBSL to absorb foreign exchange liquidity from the market.
The depreciation pressure on the rupee further eased gradually from May onwards, with International Sovereign Bond (ISB) issuances, the receipt of the foreign currency term financing facility, and disbursement of the third and the fourth tranches of the International Monetary Fund’s Extended Fund Facility (EFF) which helped improve investor confidence.
This situation contributed towards the stability of the rupee against the US dollar during the period from end-March to end-December 2017, even amongst some periods of gradual appreciation of the rupee amidst substantial absorption of foreign exchange liquidity by the CBSL.
With these developments, the rupee, which depreciated by 1.28% in the first quarter of 2017, recorded an overall depreciation of 2% against the US dollar during the year from Rs. 149.80 at end-2016 to Rs. 152.85 at end-2017. In addition, the annual average exchange rate depreciated by 4.50% to Rs. 152.46 against the US dollar in 2017.
2018
The average annual exchange rate increased by almost Rs. 10 to Rs. 162.54, compared to 2017. During the first four months, the influx of foreign exchange to the domestic foreign exchange market enabled the CBSL to absorb foreign exchange amounting to $ 459 million on a net basis.
However, this favourable condition was reversed since May 2018 onwards, as a result of both external and domestic factors. On the external front, the strengthening of the US economy prompted an increase in the policy rate of the Federal Reserve Bank, accompanied by the expectation of a number of possible interest rate hikes for 2018 and 2019.
The exchange rate was permitted to depreciate in line with market fundamentals, while intervening in the domestic foreign exchange market by providing liquidity only to mitigate excessive volatility of the exchange rate. This resulted in the CBSL supplying $ 1,120 million on a net basis to the foreign exchange market during 2018, while the Sri Lankan rupee depreciated against the US dollar by 16.4% during the year.
2019
While the annual report of the CBSL for the year of 2019 is yet to be released, the selling rate of the US dollar was Rs. 183.33 at the end of 2019.
The selling rate of the US dollar was Rs. 184.63 in the beginning of the year, and it reported a considerable drop to Rs. 176 in April, before the Easter Sunday attacks. Since then, it remained well below the Rs. 180 level until mid-August and picked up to the Rs. 181-183 range during the latter part of the year.
Following double-digit depreciation a year ago, the Sri Lankan rupee appreciated by 0.6% against the US dollar in 2019, outperforming several Asian currencies including the Pakistani rupee, Vietnamese dong, and Indian rupee.
So far in 2020
The rupee has depreciated so far by over 9.4% with the selling rate of the US dollar passing Rs. 200 last week for the first time. The rupee opened the year at Rs. 183.15 against the US dollar, which hovered around the same level until mid-March.
The rupee depreciated sharply since the third week of March, driven by the identification of the first Sri Lankan coronavirus (Covid-19) patient inside the country and the spread of the virus in several parts of the island.
However, given that the current Covid-19 global pandemic is taking over the world, currencies the world over are depreciating amidst economic slowdown driven by it.