The USD to Sri Lankan Rupee soared 77.5% between March and April. The steep surge in food prices, inflation, and fuel shortage has shaken the Sri Lankan economy.
USD to Sri Lankan Rupee Weakens in March and April
The USD to Sri Lankan Rupee saw a sharp surge as it rose from 200 to 355 levels between March and April 2022.
The Sri Lankan Rupee, LKR, was trading below $120 before 2012. By 2017, the USD/LKR surged to 150 levels. Between March and April 2022, the USD to Sri Lankan Rupee shot up from 200 levels to 355 levels.
The weakness in the Sri Lankan Rupee reflects the inefficient handling of its finances, causing a political disturbance as people hit the street protesting against the government.
Sri Lanka finds it difficult to import essential goods like fuel and food as it lacks foreign reserves. Import of products has become very costly for Lanka. Increasing commodity prices caused the USD to Sri Lankan Rupee to surge by 77.5% between March and April 2022.
Inflation Soars to 21.5%
Sky-rocketing prices in Sri Lanka are a huge burden on the people. In January 2022, inflation was at 14%, and in February and at 17.5% in February. In March, inflation is at 21.5%. It has weakened the Sri Lankan currency further.
Commodity prices are surging higher. In particular, food prices are up 25% in February. High food prices create unrest among the people, as essential items have risen beyond the means of the common household. People hit the street, protesting against the high inflation in essential goods. Food inflation is at 29.5% in March, while it was 24.7% in February, pushing the USD to Sri Lankan Rupee higher.
The Department of Census and Statistics claims that essential food products such as rice, milk, bread, and sugar saw a steep hike. The government has rationed the purchase of food products to handle the situation.
Power cuts are frequent in the country. The country faces power disruptions of over 10 to 12 hours per day. Cooking gas and petrol prices are shooting up to new highs every day. Crude prices in the global market have gone higher with the Russian-Ukraine war creating a global panic.
Debt Burden Rises in Sri Lanka
Sri Lanka has a debt burden of $7 billion this year. By 2026, the country will have a foreign debt of $25 billion. The country’s inability to meet its financial debts has moved the USD to Sri Lankan Dollar rise to historic heights.
The country has a sovereign debt of $51 billion in 2022. One of its debts is an international sovereign bond of $1 billion, due in July.
China has added to the downfall of Sri Lanka. It has provided a $5 billion loan to Sri Lanka for low-return projects. The construction expenses for building airports and ports do not yield returns sufficient to repay the huge debt.
Sri Lanka has sought aid from the IMF to provide $3 billion towards stabilizing its balance of payments over the next three years. The negotiations with the IMF may help the government face the financial crisis. Sovereign bond-holders have to wait, says the finance ministry.
Foreign exchange reserves have slipped to $1.94 billion. The country seeks monetary help from India and China. The government has approached the IMF to pay for essential products like food and fuel. The World Bank has helped the country tide over the crisis for now with a $600 million loan as financial assistance.
Covid Pandemic and Ukraine War
Tourism dwindled in Sri Lanka with the international travel banned by countries across the globe. Sri Lanka depends on the tourism and travel sector to boost its economy. It receives heavy foreign inflow through this sector. The travel restrictions have disrupted the flow of money into the tourism industry.
The Russia—Ukraine war has damaged the economy further. The war effects have overflowed into the Sri Lankan economy, causing commodity prices to soar higher. The surge in the USD to Sri Lankan Rupee performance portrays the weakening economic condition caused by supply disruptions in commodities and crude products.
Political Disturbances Add to the LKR Slide
The economic unrest has added to the political disturbance. Thousands have taken to the streets as public anger mounts against Prime Minister Mahinda Rajapaksa and his family’s rule. Mahinda defended his government and blamed the opposition parties for not coming forward to form a united government. Irrational tax cuts and accumulated borrowing add to the woes of the economy already battered by the coronavirus pandemic.
President Gotabaya Rajapaksa has agreed to remove his brother as PM. Protestors want the Rajapaksa brothers to step down.
Finance Minister Ali Sabry says that inflation will remain high, as global commodity prices have shot up.