Rupee crisis deepens as economists urge dollar releases and higher interest rates, while government rejects moves to contract the economy.
The rupee crisis has triggered fresh warnings from economic experts, who say Sri Lanka may need higher interest rates to control further depreciation.
Experts point out that steps should be taken to contract the domestic economy by raising interest rates in order to control the fall of the Sri Lankan rupee against the US dollar.
However, Deputy Minister of Economic Development Dr. Anil Jayantha Fernando has said the current situation will be maintained without raising interest rates or contracting the economy.
Professor Aminda Mithsila Perera of the Faculty of Finance and Management at Wayamba University said contracting the economy is essential to prevent further erosion of the rupee.
He said monetary policy must be adjusted to suit the current situation.
By contracting economic activity, demand for dollars would fall, which could temporarily stop the depreciation of the rupee.
During the severe economic crisis that hit the country in 2022, interest rates were raised to stabilize the economy.
Professor Perera said the same process should be followed at this moment as well.
He also said the Central Bank must provide the market with a clear picture of what lies ahead.
The Central Bank, he added, must explain how the collapse of the rupee will be controlled.
He further said the government must urgently release a supply of dollars into the market.
Since the country’s reserves are insufficient, funds received from institutions such as the International Monetary Fund could be released into the market to temporarily stop the rise of the dollar.
If the value of the dollar continues to rise, import costs will increase.
That would eventually lead to higher inflation, a rising cost of living, and greater uncertainty in the market.
Professor Sirimal Abeyratne, Executive Director of the Centre for Poverty Analysis and a professor of economics, said releasing existing foreign reserves into the market is the only immediate step available to the Central Bank.
However, he warned that such a move could create many other problems.
He said the only immediate action the current government can take is to control and restrict imports.
He added that if the “productive economy” promised by the government had already been initiated, some stability could have been achieved in the present situation.
But he said it is problematic that the government waited until the issue escalated.
As a final measure to prevent the continuous depreciation of the rupee, economists say the economy must be contracted by raising interest rates.
Government says it has enough surplus money in treasury by the income of income tax department revenue , VAT collections ? They can pump from that without damaging current shape of the economy !