CB warns against linking economic strength to currency performance always

There is widespread misconception among the public that currency depreciation is often associated with poor economic performance although the data showed otherwise and thus it should be very careful in interpreting the currency movement and their impact on the economy, the Central Bank Governor, Dr. Nandalal Weerasinghe said.

A recent media report which cited Bloomberg market data had identified the Sri Lankan rupee as the worst performing emerging market currency thus far this year.

Sri Lanka isn’t an emerging market.

Sri Lankan Rupee against the United States Dollar weakened by 2.1 percent in the year to January 24 on top of back-to-back strengthening of the Rupee in 2023 and 2024 by over 10.0 percent.

Hence Dr. Weerasinghe emphasised that the context to which the Rupee weakened mattered although the Rupee weakness was factually correct, as many identify the currency weakness with economic frailty, which isn’t necessarily the case.

In fact Sri Lanka’s economy is doing better, according to almost all regular economic readings although there are pockets of weakness which may not be fully captured by those data.

Despite certain concerns about the external stability and the possible further weakness in the currency in 2025 in view of the impending re-opening of vehicle imports and the general rise in the imports in tandem with the rising consumer demand, the Central Bank said they are comfortable with even up to a billion dollar outflows in respect of vehicle imports this year, which wouldn’t threaten the progress made in the external sector.

Sri Lanka ended 2024 with multi-year high inflows from remittances and tourism inflows of US$ 6.6 billion and US$ 3.2 billion respectively and the authorities expect even higher inflows from the two key services inflows on top of the resilient merchandise and other services sector exports in 2025.  

Despite the strengthening inflows, Sri Lanka has about US$ 2.7 billion worth of foreign currency debt service payments in 2025, which provides them with much more wiggle room to accommodate additional imports from vehicles and all else. This is about half of the annual debt repayments Sri Lanka ought to have made prior to its debt suspension in 2022.

Meanwhile Dr. Weerasinghe also cited the case of the Indian and the Chinese currencies which are currently trading at their lowest levels in record against the US dollar but pointed to their massive reserve pile and also their economic strength, particularly of India although there is some slowdown in the Chinese economy in the post-pandemic period.

He said India has a foreign currency reserves pile of US$ 240 billion and China’s is US$ 3.2 trillion despite their currencies trading at their lowest levels against the dollar.

Sri Lanka ended 2024 with foreign currency reserves of US$ 6.1 billion, down from US$ 6.5 billion in November due to some year-end debt service payments.

Hence he cautioned against drawing direct parallels between the currency performance and the economic performance, particularly when linking the currency depreciation with poor economic performance.