What USD/LKR 200 means to General Public?
The selling rate of the rupee is Rs 200.46 against the USD April 08 2020, according to the daily exchange rates issued by the Central Bank of Sri Lanka.
Last 1 year — Exchange Rate Movement-Rupees per USD
Last 2 years — Exchange Rate Movement-Rupees per USD
In the chart above, we can see the USD/LKR currency pair. If you are unfamiliar with how forex exchange rates work, this chart essentially prices the LKR in terms of the US dollar. So, if the chart value is falling, it means that the LKR is getting stronger while the dollar is getting weaker. If the chart value is rising, it means that the dollar is getting stronger while the LKR is getting weaker. This chart plots the relatively price of both currencies over the last year. So, here, we can see that the dominant trend is very clear in terms of how the dollar has been progressing against the LKR.
Of course, this news is not at all positive.
With the impact of COVID-19 pandemic on global economy, LKR surpassing Rs. 200 against the USD for the first time in history. LKR depreciated sharply with the speculative behavior in the market with the spread of COVID-19 outbreak, investors move towards safe havens ( expected to retain or increase in value during times of market turbulence) such as gold (large capital outflow from emerging market like Sri Lanka) and rise of oil prices.
The selling rate of the rupee slid to Rs 200.46 against the USD April 08 2020, according to the daily exchange rates issued by the Central Bank of Sri Lanka. The buying rate was recorded as Rs. 193.95 per dollar. Sri Lankan rupee depreciated around 5.4 percent against the USD from year 2020.
Rising currency values are generally unfavorable to any economy. The Government and the Central Bank of Sri Lanka have introduced further measures on outward remittances on Capital Transactions for a period of three (03) months and Special Foreign Currency AC introduced to preserve the foreign currency reserve position. Authorities intervention active support or help to smoother the downdraft but it will be a challenge to reverse the direction. (The Extraordinary Gazette №2169/3 dated 02.04.2020 & №2170/04 dated 08.04.2020)
Seems like USD/LKR trend is likely to be headed in the future, it is important to remain focused on the below economic indicators:
Public Debt against Nominal GDP
Government Debt in Sri Lanka increased to 12.87 LKR trillion in the third quarter of 2019.
The Gross Domestic Product (GDP) in Sri Lanka was worth 14.82 LKR trillion (USD 91 billion) in 2019.
In relation to the 2019 nominal GDP of Rs. 14.82 trillion, total debt stands at 86.8% of GDP. Amount of public debt and its rate of recent increase sound an alarming bell.
GDP Per Capita
Sri Lanka’s GDP Per Capita reached 3,852 USD in Dec 2019, compared with 4,079 USD in Dec 2018.
Debt composition between domestic and foreign currency
As of June 2019, Rs. 6.3 trillion of Rs. 12.6 trillion debt is foreign debt. As a result, foreign vs domestic debt is now 50/50. Foreign currency denominated debt requires repayment on foreign currency. If the LKR depreciates further, then those debts would be more expensive to repay.
Sri Lanka’s Foreign Reserves
Sri Lanka’s Foreign Exchange Reserves was measured at 7.1 USD bn in Mar 2020, compared with 7.5 USD bn in the previous month.
Sri Lanka’s reserves may fall due to changes in cross currency valuations, interest earnings, the price of gold and repayments of foreign debt using fiscal reserves.
For now, monetary policy for the rest of this year will mainly be driven by volatility of corona outbreak. Sri Lanka working hard to maintain macroeconomic stability, exchange rate volatility and keeping to fiscal consolidation.
What USD/LKR meant to general public in short term?
An exchange rate shock can affect domestic prices through two distinct channels. The first is a direct effect through the marginal cost channel, as the exchange rate alters the price of imported inputs.
For common man, the falling rupee is going to hit where it hurts the most — the pocket. From essentials such as food, FMCG and foreign education to foreign vacation. Since Sri Lanka rely on more imports, the weakening LKR has made crude oil, fertilizers, medicines, essential food items and daily consumption, costlier. Some imports impact consumers finance indirectly. As every industry which is dependent on imports will have to face an increase in cost of production and operations.
For above said reasons, a fall in the value of the LKR could contribute to inflationary pressures.
What will be the Impacts on USD/LKR in medium term?
Fall in imports/switch to domestic goods — A boost in the Sri Lanka manufacturing sector — “Made in Sri Lanka” moment
As a result of the fall in LKR, consumers will face increased prices in imported goods, so the growth in demand for imports will slow. It may encourage Sri Lankan consumers to switch to domestically produced goods.
However, to some extent in the short run, global companies can prevent price increases by reducing profit margins and cutting costs and becoming more efficient. However, there is a limit to this; in the long-term, firms cannot keep absorbing the price increases.
Also fall in exchange may contribute positively to our economy as well. Please refer my previous article for same.
