The Sri Lankan rupee, which ended 2024 as the best-performing emerging market currency, has started 2025 on a low note, becoming the worst-performing emerging market currency by the fourth week of January. According to Bloomberg market data, the rupee recorded a negative spot return of 1.72% as of January 24, surpassing the Argentine peso (-1.46%) and the Turkish lira (-0.89%) in depreciation.
By contrast, the Russian ruble has emerged as the top-performing emerging market currency in 2025, with a spot return of 16.07%, followed by the Colombian peso, which posted a 5.45% gain.
Sri Lanka’s rupee had a strong performance in 2024, appreciating to below Rs. 300 per US dollar and delivering a return of 10.85%. The impressive performance was driven by a $9.6 billion inflow from tourism and worker remittances, coupled with $13 billion in export earnings. The Central Bank supported this growth by purchasing $2.6 billion from the market while imports remained moderate at $18 billion.
However, the current decline in the rupee has raised concerns about Sri Lanka’s external sector stability. The Central Bank of Sri Lanka, in its report to Parliament on inflation target breaches for the second and third quarters of 2024, flagged potential risks. The report noted that while the external sector has largely stabilized, the higher-than-expected economic growth in 2024 and anticipated growth in 2025 could lead to a surge in aggregate demand.
Moreover, the government’s plan to relax motor vehicle import restrictions after several years could exacerbate import demand, adding further pressure to the current account balance. This, coupled with the ongoing uncertainties in global commodity prices due to heightened geopolitical tensions, poses significant risks. The Central Bank warned that an overly accommodative monetary policy stance could amplify import demand at a time when Sri Lanka resumes external debt servicing, potentially leading to further depreciation of the rupee.
As the global economic landscape remains volatile, Sri Lanka faces a challenging path ahead to maintain currency stability and manage its external sector risks effectively.
