Rupee Pressure Linked to Global Oil Surge, Not Domestic Instability

COLOMBO (News 1st); Central Bank Governor Dr. Nandalal Weerasinghe has stated that the recent depreciation of the Sri Lankan rupee against the US dollar is primarily a direct consequence of the ongoing crisis in the Middle East.

He emphasized that the sharp decline of the rupee in 2022 was driven by factors specific to Sri Lanka, unlike the current situation which is influenced by external global conditions.

Dr. Weerasinghe made these remarks while addressing a conference today, where he outlined the factors contributing to the current currency movement.

According to data from the Central Bank of Sri Lanka, the selling rate of the US dollar stood at Rs. 334.26 today, approaching the Rs. 335.40 level recorded on July 31, 2023.

Explaining the reasons behind this trend, the Governor stated that there is no significant internal pressure on the rupee at present.

Instead, he attributed the situation mainly to rising oil prices caused by conflict conditions in the Middle East.

He noted that higher global oil prices have increased Sri Lanka’s foreign exchange expenditure on fuel and related imports, leading to a greater demand for US dollars. As exchange rates are determined by demand and supply, this increased demand has resulted in a natural depreciation of the rupee.

Dr. Weerasinghe further pointed out that similar trends are being observed in other countries that heavily depend on fuel imports.

He cited comparative data showing that the Sri Lankan rupee has depreciated by 4.8 percent this year, while the Indian rupee has declined by 6.4 percent, the Nepalese rupee by 6.2 percent, the Indonesian rupiah by 5.2 percent, the Philippine peso by 4.7 percent, and the Thai baht by 4 percent.

He stressed that this demonstrates the depreciation is not unique to Sri Lanka but part of a broader global trend affecting similar economies.

In contrast, the significant depreciation of the rupee in 2022 was the result of domestic issues specific to Sri Lanka, rather than external factors.

The Governor also noted that currencies such as the Indian rupee and Indonesian rupiah have reached historic low levels. However, he clarified that this does not indicate that those economies are collapsing or unstable.

He added that it is a misconception to assume that currency depreciation directly reflects economic instability, reiterating that such movements must be viewed in the context of global economic conditions.