ECONOMYNEXT – Sri Lanka’s recent exchange rate stability is providing investor confidence and predictability, Ray Abeywardena, Director of the Colombo Stock Exchange and Group CEO at HNB Investment Bank said.
“A key highlight of our recent achievement is the stability of the Sri Lankan rupee,” Abeywardena told an Invest Sri Lanka forum in Singapore.
“Over the past year, the exchange rate has remained stable, supported by prudent policy initiatives, improved external sector performance and a steady influx of foreign investments and tourism receipts.
“The exchange rate stability enhances investor confidence and provides predictability for businesses operating in Sri Lanka.
“Our commitment to macroeconomic stability is further evidenced by ongoing fiscal consolidation, a positive regulatory environment and strengthened governance.”
Sri Lanka’s central bank has given exceptional monetary stability since 2022 by running broadly deflationary policy and missing its 5 percent target to generate lower inflation.
By cutting rates to reach the 5 percent inflation target, Sri Lanka triggered serial currency crises in 2012, 2015/16, 2019 and 2019/22 which led to consumption shocks and SOE losses from depreciation and negative growth shocks from the stabilization crisis that follows rate cuts, which in turn pushes up deficits.
Sri Lanka started to depreciate the currency in the 1980s (before the 1978 Second Amendment to IMF Articles, countries were not allowed to depreciate currencies without specific approval) as the Bretton Woods was set up to stop the 1930s depreciation.
By depreciation and positive inflation, macro-economists denied basic attributes of money as a store of value and a means of deferred payments.
By creating forex shortages, they also denied another attribute of money, as medium of exchange across borders.
Sri Lanka started to experience external trouble from 1952, as the central bank loosened policy keeping rates down two years from its creation amid a commodity bubble fired by the Federal Reserve the year before, through a commitment to Liberty Bond yields down despite budget surplus.
In the previous it ran exceptional deflationary policy, including through sell-buy swaps, as it had not yet started open market operations through Treasury bill purchases.
Ten people were shot in the following year and the Prime Minister resigned, as rates and taxes were hiked and subsidies were phased out. The blaming of budget deficits by macro-economists after suppressing market rates through open market operations may have started then, analysts say.
In 1949 the rupee steeply depreciated (against the US dollar) due to a big post-war Sterling crisis in the UK from lost generation (Cambridge) economics and Ceylon maintained the hard peg to the Bank of England while having record foreign reserves. (Colombo/Aug12/2025)