Sri Lankan rupee faces depreciation pressure despite foreign currency swaps
A significant depreciation pressure on the Sri Lankan rupee was observed since the dates of entering into currency swap agreements with India and China.
The rupee has come down sharply and it has fallen to Rs.187.86 per dollar on July 31 from Rs.188.02 on July 24 2020 in six days since signing the currency swap with India, Central Bank data showed.
According to a financial analyst, a sufficient inflow of foreign exchange is needed to reverse rupee depreciation and its down fall after the Indian currency swap equivalent to US$400 million didn’t meet this requirement.
The recent China Yuan swap with Sri Lanka was unlikely to meet this requirement of boosting foreign reserves as it was a Chinese currency facility and not a dollar one, he pointed out.
“Since the swap is in Yuan the Government can only use that money to pay import bills. This is useful since China is one of the biggest import destinations with Sri Lanka regularly importing about $ 3.5-4 billion in goods,” he added.
But it will not top up reserves and that is what Sri Lanka really needs, another economist told the Business Times on conditions of anonymity.
On March 10 2021, the State Minister of Finance Ajith Nivard Cabraal had announced that the Peoples Bank of China had approved 10 billion Yuan currency swap with Sri Lanka.
The rupee has depreciated to Rs. 203.50 against the US Dollar on April 8 from Rs. 198.66 on March 10 in 10 days after entering into the Chinese currency swap agreement, Central Bank data showed.
Up to now the Central Bank’s intervention in the domestic foreign exchange market through supply of foreign exchange and sell/buy swaps with local commercial banks has contributed to enhancing the foreign exchange liquidity in the market.
Minister Cabraal expressed his confidence that fresh foreign exchange inflows are on the way and government policies are in place for creating the right environment to attract them.