WHY LKR GOING DOWN

The Sri Lankan Rupee Embarrassment

As any currency trader or financial commentator in the world will tell you, one of the worst performing currencies right now is the Sri Lankan Rupee (LKR). It is officially the worst performing currency in Asia for 2023, and among the worst in the world. I aim to explain the series of surprising events that have led to this. Before we dive into the details of why the LKR is in a tailspin, let us first understand a few concepts as to why currencies rise and fall.

Economic Indicators and Forex

When people talk about the value of a currency, what they are usually referring to is the exchange rate, which is the amount of one currency required to buy a unit of another currency. The exchange rate is determined by supply and demand. If there is more demand for a currency than there is supply, the exchange rate will rise. If there is more supply of a currency than there is demand, the exchange rate will fall.

There are many different factors that can affect the supply and demand for a currency. Some of the most common include:

• Interest rates
• Inflation
• Economic growth
• Political stability
• Trade balance
• Debt

The LKR’s Economic Headwinds

Sri Lanka's economic growth has been slowing down in recent years. In 2018, the country's economy grew by 3.4%. In 2019, it grew by 2.3%. And in 2020, it contracted by 3.7%. This slowdown in economic growth has been caused by several factors.

One is the country's high debt levels. Sri Lanka's debt-to-GDP ratio is one of the highest in the world, and it is only getting worse. In 2018, the country's debt-to-GDP ratio was 78.5%. In 2019, it was 83.4%. And in 2020, it is expected to reach 90%.

Another factor that has contributed to Sri Lanka's slowing economic growth is the country's political instability. In 2018, the country had three different presidents. In 2019, it had two different presidents. And in 2020, the country is on track to have three different presidents. This political instability has made it difficult for the government to implement policies that would help the economy.

Impact on Sri Lankans

The depreciation of the LKR has had a negative impact on the lives of Sri Lankans. It has made it more expensive for them to import goods and services. Also, they now have to pay more for everything, from food to fuel to clothing. This is because most goods and services in Sri Lanka are imported, and when the LKR depreciates, the cost of these imports rises.

Government Measures

The government has taken several measures to try to stop the depreciation of the LKR. The Central Bank of Sri Lanka (CBSL) has raised interest rates several times in an attempt to make the LKR more attractive to investors.

The government has also taken steps to reduce the country's trade deficit. Let's break that down; the trade deficit is the difference between the value of a country's exports and the value of its imports. Sri Lanka has a large trade deficit, which means that it imports more than it exports.

The Future of the LKR

The outlook for the LKR is uncertain. The CBSL expects the LKR to depreciate further in the coming months. However, the government's measures may help to stabilize the LKR. Only time will tell what the future holds for the LKR.

FAQs

1. What is the main reason for the depreciation of the LKR?

High government debt levels, political instability, and a widening trade deficit.

2. What impact has the depreciation of the LKR had on Sri Lankans?

It has made it more expensive for them to import goods and services, which has led to an increase in the prices of goods and services in Sri Lanka.

3. What measures has the government taken to stop the depreciation of the LKR?

The CBSL has raised interest rates and the government has taken steps to reduce the country's trade deficit.

4. What is the outlook for the LKR?

The outlook for the LKR is uncertain. The CBSL expects the LKR to depreciate further in the coming months, but the government's measures may help to stabilize the LKR.

5. What can be done to strengthen the LKR?

The government can take steps to reduce its debt levels, improve political stability, and reduce the trade deficit.