May 16, Colombo (LNW): The Sri Lankan Rupee (LKR) is anticipated to depreciate to a range of Rs. 310 – 320 against the US Dollar by the end of the year, driven by increased import demand and the resumption of foreign loan repayments following the completion of the External Debt Restructuring (EDR), First Capital Research (FCR) disclosed.
In the first half of the year, the LKR is expected to appreciate to around Rs. 295, as higher taxes dampen rising consumer demand in the short term amidst escalating living costs.
The USD/LKR spot exchange rate was Rs. 300.83 as of yesterday.
Reduced consumer demand may lead to a decrease in imports, whilst the peak tourism season in the first quarter of 2024 and increased worker remittances could further strengthen the LKR, and subsequently, some stabilisation is anticipated as consumer demand improves and tourism income moderates,” according to a FCR report.
The Rupee’s appreciation is also supported by improving tourism earnings and higher remittance inflows.
FCR projects a 46.3 per cent year-on-year increase in tourism earnings to US $3 billion this year.
Similarly, worker remittance inflows are projected to rise to US $6.6 billion, up from US $6 billion last year.
The notable reduction in consumer-driven imports in the first quarter, due to front-loading of imports at the end of last year, also contributed to the Rupee’s appreciation.
Additionally, the efforts by the Central Bank of Sri Lanka (CBSL) to bolster foreign reserves through US Dollar purchases have played a significant role in the Rupee’s appreciation this year.
FCR expects Sri Lanka to conclude the year with US $6.3 billion in foreign reserves.
However, reserve accumulation is expected to moderate later this year as the government resumes loan repayments post-EDR.
Although bilateral and multilateral inflows are expected immediately after EDR completion, complemented by a potential sovereign credit upgrade, FCR noted that anticipated import relaxations and the resumption of loan repayments might partially offset the currency’s appreciation in the fourth quarter.
“We anticipate that the GDP turnaround, coupled with the relaxation of import restrictions, may slow the currency’s appreciation trend,” FCR remarked.
Sri Lanka faces an annual external debt repayment obligation of nearly US $6-7 billion until 2029, potentially declining to US $3-4 billion post-EDR.
Therefore, the CBSL is likely to build up its foreign reserve buffer in the coming months, which may exert downward pressure on the exchange rate.
In May, the CBSL relaxed cash margin deposit requirements on specific imports.
Continuing this initiative, the government is expected to gradually remove existing import restrictions, including those on vehicle imports, which may further impact the Rupee exchange rate.
