Understanding the Future of USD to LKR Exchange Rate: Insights and Projections 

As we look ahead to the coming months, the exchange rate between the US Dollar (USD) and the Sri Lankan Rupee (LKR) remains a critical topic for businesses and investors alike. Historically, the LKR has shown a tendency to depreciate by approximately 6% to 7% annually, and several key factors suggest that this trend is likely to continue. 

Historical Depreciation Trends 

Over the past few decades, the LKR has consistently depreciated against the USD at a rate of 6% to 7% per year on CAGR basis. This pattern is not uncommon for many emerging market currencies, which often face pressures from global economic shifts, local economic policies, and market sentiment. As an import-oriented country, Sri Lanka is no exception to this pattern. 

Limited Currency Outflows from Imports 

One significant factor currently supporting the LKR is the restriction on imports, particularly vehicles. Prior to these restrictions, Sri Lanka spent an average of USD 10 billion annually on vehicle imports. These restrictions have reduced the demand for foreign currency, temporarily easing pressure on the LKR. In early 2022, the Central Bank struggled to repay external debt while using dwindling foreign reserves to import essentials like fuel, leading to halted or extended debt repayments. As long as these measures remain, reduced currency outflows may slow the rate of depreciation.  

Funding Fiscal Deficit Through External Sources 

Sri Lanka’s fiscal deficit is another crucial element in this equation. In May 2024, Foreign Reserves stood at USD 5.4 billion while the recorded Fiscal deficit stood at LKR 2,282 billion as of end of 2023.  The country needs to bridge this deficit, and doing so typically involves securing funds from external sources. While securing external funding can inject much-needed foreign currency into the economy, it can also lead to future obligations that may put pressure on the LKR. If the external funds are used efficiently, they could help stabilize the economy in the short term however, the long-term impact will depend on the terms and sustainability of the debt restructuring policies. 

Expected Depreciation of the LKR 

Considering the above factors, it is reasonable to expect the LKR to continue its historical trend of depreciating by 6% to 7% against the USD. While import restrictions and temporary suspension of external debt servicing may provide temporary relief, the continuous fiscal deficit will put pressure on the LKR. In our opinion, the interplay of these factors suggests that the LKR’s value will likely continue its gradual decline.  

Conclusion 

In conclusion, businesses and investors can expect the LKR to continue its historical depreciation trend of 6% to 7% going forward. While certain measures, such as restricted imports, and temporary suspension of external debt servicing may offer short-term support, the underlying economic fundamentals and the need to address the fiscal deficit through external funding will likely perpetuate the downward trend. Staying informed and strategically planning for these currency fluctuations will be essential for navigating the financial landscape in Sri Lanka. 

By understanding these dynamics, companies can better position themselves to mitigate risks and capitalize on opportunities in the evolving economic environment. Stay tuned for further updates and insights as we continue to monitor factors that affect the economy and its implications on the business community. 

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