{"id":247815,"date":"2026-06-23T04:47:11","date_gmt":"2026-06-22T23:17:11","guid":{"rendered":"https:\/\/www.colombotelegraph.com\/?p=247815"},"modified":"2026-06-23T04:47:11","modified_gmt":"2026-06-22T23:17:11","slug":"next-wave-of-currency-depreciation","status":"publish","type":"post","link":"https:\/\/www.colombotelegraph.com\/index.php\/next-wave-of-currency-depreciation\/","title":{"rendered":"Next Wave Of Currency Depreciation"},"content":{"rendered":"

By Hema Senanayake<\/a> –<\/strong><\/p>\n

\"\"

Dr. Hema Senanayake<\/p><\/div>\n

Sri Lanka is soon to be shocked by another wave of rupee depreciation after mid-August this year unless the government and monetary authorities do something proactively to avoid it. The necessary conditions have already been set for the crisis. The previous time (in May, 2026) the domestic conditions for rupee depreciation were set, perhaps unknowingly, by the government and the Central Bank. This time, the necessary conditions have already been set by the government and the Central Bank under the pressure of the IMF. Let me explain.<\/p>\n

The government issued an extraordinary Gazette notification on May 15th imposing a 50% surcharge on import duty on vehicles. The objective was to curb non-essential imports. On May 18th,<\/sup> the Gazette was amended for practical application reasons, but the broader objective remained the same. Just two days later, on May 20th, the government issued a letter to the IMF stating that the imposition of the 50% surcharge was temporary, lasting only three months. The market, especially buyers of vehicles and importers, reacted quickly by postponing their intended purchase for another three months. This means that by the end of August, there would be unrealised accumulated demand for three months. Keep that in mind.<\/p>\n

Why the government issued the said letter signed by the Minister of Finance, Anura Kumara Dissanayake and the Central Bank governor, Nandalal Weerasinghe. First, have a look at the letter shown below. This letter could be found in the last section of the IMF Country Report 26\/111, May 2026.\"\"<\/p>\n

The IMF Agreement contains a continuous performance criterion prohibiting the imposition or intensification of import restrictions. The government violated it by imposing a 50% surcharge on vehicle imports through a Gazette notification dated May 15, 2026. This clearly constitutes an intensification of import restrictions. The IMF viewed this as a violation of the continuous performance criterion and immediately asked the government to revoke the restrictions on vehicle imports. The government agreed to do so after three months and requested a three-month waiver for non-observance of that particular continuous performance criterion.<\/p>\n

This clearly indicates that the 50% surcharge imposed will be removed by mid-August. Given that there is an unrealised accumulated demand of three months as mentioned above, importers might be rushed into importing vehicles, and buyers\u2019 demand might increase as vehicle prices have come down due to the removal of the surcharge. The resultant effect is that private credit growth might go up, negatively affecting the national current account and foreign exchange reserves. Then begins the rupee depreciation. The Central Bank might be willing to allow the rupee depreciation, thinking that a depreciated exchange value for the rupee would reduce car imports and stabilise the currency based on demand and supply.<\/p>\n

Those who argue for a strict floating exchange rate believe that a floating exchange rate acts as an automatic stabiliser of the external sector, and that the value of a country\u2019s currency is determined mainly by market demand and supply and is beneficial. This might be the theory that the central bank might adhere to when the next wave of currency depreciation occurs, possibly towards the end of August. The IMF will be jubilant for the observance of a continuous performance criterion on not imposing import restrictions.<\/p>\n

The theory is good. But this will not work if the country\u2019s private sector credit growth is excessive. Private credit growth was excessive in the last year, and in the first quarter of 2026. Private credit growth was above 20%. Under such circumstances, what could happen is that we will see significant exchange rate volatility, which can cause uncertainty for exporters, importers, investors, borrowers in foreign currency, and for the general public.<\/p>\n

The solution is to set the necessary conditions for a floating exchange rate regime by containing rapid private credit growth. Rapid private credit growth was triggered by vehicle imports. The central bank increased interest rates, but the market did not respond. Increasing interest rates can slow private credit growth, but it is not always an effective brake if borrowers\u2019 appetite for loans and liquidity in the banking system is high.<\/p>\n

The IMF report itself suggests that private credit growth must be below 10% for the years 2025, 2026 and 2027. These are stabilization benchmarks. Therefore, the prudent action for both the Government of Sri Lanka and the IMF is to extend the non-performance waiver on not imposing import restrictions until such time that Sri Lankan monetary authorities take control of private credit growth. If the country fails once again, the IMF fails too. But we, the people of Sri Lanka, cannot afford to fail again.<\/p>\n","protected":false},"excerpt":{"rendered":"

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