Sri Lanka rupee falls to 320 per US dollar as inflation returns to target, raising fresh fears over imports, wages, EPF savings and policy.
Sri Lanka rupee depreciation has deepened fresh concerns over inflation, import costs and wage erosion after the currency closed at 319.75/320.00 to the US dollar in the spot next market.
Market participants said trades had taken place at 319.50/320 shortly after macro-economists celebrated the return of inflation to the Central Bank’s target range.
Intervention was seen around 319.50 to the US dollar.
On April 30, inflation reached the midpoint of the Central Bank’s 5 percent target. However, questions remain over whether the agency can create more inflation and allow further rupee depreciation before any corrective action is taken.
Earlier this week, the Central Bank started repo operations to mop up some of the excess liquidity it had built up through buy-sell swaps and dollar purchases.
To debase the rupee, critics say the agency allowed excess liquidity of almost Rs. 400 billion to remain in the system, almost twice the level seen before the economic crisis.
Analysts have pointed out that the fall of the rupee and forex shortages in 2015 and 2018, followed by the eventual default without war or external trouble, were all achieved while inflation was below 5 percent.
In the current cycle, the rupee was systematically weakened from 297.50 levels to 310 through money printed via buy-sell swaps and aggressive dollar purchases.
Critics say this was done to signal exporters to sell at increasingly depreciated prices throughout 2025 as private credit recovered.
This has been described as an explicit exchange rate policy, even as the narrative was spread that the rupee was “market determined.”
In 2026, the rupee depreciated from 310 to 320 to the US dollar despite a Ditwah credit slowdown, as authorities heavily over-purchased dollars in February to prevent appreciation and block a restoration of confidence in the currency.
This raises concerns about whether monetary policy is once again placing pressure on households, businesses and workers after the country’s recent economic crisis.
The monetary depreciation has amplified the cost of fuel and imports, with oil prices rising due to the Middle East war.
The debasement of the rupee also pushes up the prices of imported and exported foods.
In Sri Lanka, however, some Indian foods have not yet picked up sharply because the Reserve Bank of India is depreciating the Indian rupee faster than Sri Lanka.
Commercial banks are selling dollars for telegraphic transfers at Rs. 323.
The Real Cost of Monetary Depreciation
Building material prices have also shot up, and some builders have halted construction while hoping prices will fall and the rupee will appreciate.
The depreciation feeds not only into traded goods such as imports and exports, but also into services and housing costs over time.
That process destroys wages and also weakens employee provident fund balances, deepening the long-term cost for ordinary workers.
“A stable value for money is a key fundamental for a healthy and growing economy,” Prime Minister Goh Chok Tong said at the 25th anniversary of the Monetary Authority of Singapore, which rejected inflationary policy and does not go to the IMF after creating external crises.
“For businessmen, unstable prices create uncertainty, hamper business planning, and inhibit long-term investment.
“For our workers, high inflation erodes the purchasing power of their salaries, eats into their Central Provident Fund (CPF) balances, and discourages savings.”
“Fortunately for Singapore, our inflation rate has been low and our currency strong.
“Low inflation has preserved the real value of our CPF savings and protected our purchasing power.”
“In 1971, it took three Singapore dollars to buy one US dollar. Today it takes one dollar 40 cents to exchange for one dollar.”
The Central Bank began creating high inflation from the early 1980s, with the IMF’s Second Amendment to its articles, after previously being restrained to US levels, including during the 1970s Great Inflation period.
That restraint had existed due to a legal requirement to maintain an external anchor, before policy shifts triggered social and political unrest.
Critics argue that IMF-prone central banks that reject classical economic theory escape accountability for rate cuts and the “exchange rate as the first line of defense” doctrine.
They also point to what they call a deeply flawed operating framework involving inflation targeting without a floating rate.
In Sri Lanka’s case, analysts say it is unfair for the Central Bank to destroy the rupee through spurious monetary doctrines that reject economic theory associated with thinkers such as Hume, Ricardo and Smith.
They argue that workers’ wages and EPF balances are being damaged along with the currency.
After destroying wages and EPF balances of workers from the early 1980s, the Central Bank then paying its own employees high salaries and inflation-protected defined benefit pensions represents a serious escape from accountability, critics say.
Analysts also say Sri Lanka’s Central Bank engages in inflationary rate cuts, this time through foreign exchange swaps, and behaves like the rogue note issue bank described by Adam Smith in The Wealth of Nations.
At that time, Scotland had free banking. Only the bank that printed money and fired excess credit failed.
Prudent banks that avoided inflationary policy, reduced credit and redeemed their excess note issue through the return of reserves, effectively defending the peg in time, survived.
However, after the setting up of the IMF, central banks with bad operating frameworks are bailed out and entire countries fall into crisis.
Critics say the same policy errors involving flexible policy and monetary debasement are then repeated.
In earlier periods of external trouble, the Central Bank escaped accountability by pointing to current account deficits, which were the result of net foreign borrowings and printed money turning into imports, as well as budget deficits.
However, last year the external current account was in surplus and budget deficits collapsed.
What happens next could be critical because when the current excess liquidity turns into imports, and new swap liquidity from banks and finance companies also turns into imports, the external current account can narrow and move into deficit again.
Vehicles are also mostly credit financed, increasing the risk that imported demand could place renewed pressure on the currency.
Meanwhile, bond yields were broadly steady across most of the yield curve.
A bond maturing on 15.12.2026 closed at 8.60/75 percent.
A bond maturing on 15.12.2028 closed down at 9.75/83 percent.
A bond maturing on 15.10.2029 closed flat at 9.95/10.00 percent.
A bond maturing on 01.07.2030 closed at 10.17/20 percent, up from 10.15/20 percent.
A bond maturing on 01.11.2033 closed at 10.95/11.00 percent.
However, questions remain over whether Sri Lanka’s monetary authorities will act quickly enough to prevent further depreciation, protect wages, and avoid another cycle of import-driven pressure, inflation and public anger.
