Sri Lanka’s rupee to remain on a ‘very comfortable terrain’ in coming years: SLBA

• Says exporters, who somewhat benefited from devaluation of currency, need to take future trajectory of rupee into account
• Notes SL is currently running at around US $ 400mn surplus in current account, which is a rather rare situation for country
• Says more inflows will start to come in from beginning of next year, upon anticipated completion of external debt restructuring by yearend

By Nishel Fernando

Sri Lanka’s rupee is projected to remain on a ‘very comfortable terrain’ in the coming years, with the gross foreign exchange reserves standing to top the US $ 12 billion mark before the capital repayments to the creditors begin in 2029, according to a top banker. 

Despite the potential challenges, such as a surge in import demand or rising oil prices, amid the Middle Eastern tensions, Sri Lanka Banks’ Association (SLBA) Chief and Standard Chartered Sri Lanka CEO Bingumal Thewarathanthri expects the rupee to remain resilient.

He stressed that the exporters, who somewhat benefited from the devaluation of the currency, need to take the future trajectory of the rupee into account. 

“It’s a very comfortable terrain for the rupee. It’s something all of you (exporters) have to take a look at and think about. If there’s a huge surge in the import demand or crisis in Middle East, oil prices going to US $ 90-US $ 100, it might take out US $ 500 million per year but it’s still a very comfortable level.

The rupee story is going to be very good for Sri Lanka in the coming years. It’s something to think about for the exporters,” he said.

He shared these remarks at the South Asian Apparel Leadership Forum, held last week, as part of the Colombo Design Festival at Cinnamon Life.

As of November 1, the Sri Lankan rupee was the best-performing currency among the emerging markets, appreciating by 10.56 percent against the US dollar since the end of last year.

Commenting on the external sector, Thewarathanthri noted that Sri Lanka is currently running at around US $ 400 million surplus in the current account, which is a rather rare situation for the country. 

Thewarathanthri noted that the country could earn US $ 5-5.5 billion in tourism comfortably next year, without having to increase the capacity. At the same time, the country is also reaching closer to the pre-pandemic worker’s remittance inflows, with the monthly inflows hovering around US $ 500 million, potentially generating around US $ 7 billion next year. 

With these two inflows, he pointed out that the country could easily cover the trade deficit, which has increased to around US $ 600 million per month recently and leaving a US $ 5.3 billion in balance.

In addition, he noted that another US $ 3 billion of this balance can be set aside for vehicle imports, commitment fees, accumulated interest and payments to multilaterals next year, which would leave the country with a positive balance of US $ 2.3 billion.

“I wouldn’t be surprised, if we reach US $ 12-13 billion in reserves in December 2028 because we start settling our debts (capital payments) only in 2029,” he added. 

Sri Lanka’s gross official reserves currently stand at US $ 6,467 million, with an import cover of four months. 

Even with a US $ 20 increase in crude oil prices, due to the potential escalation in tension in the Middle East, he noted that Sri Lanka can absorb an estimated US $ 1 billion in additional costs annually, maintaining a comfortable buffer.

The US $ 1 increase in the crude oil prices is expected to add approximately US $ 4 million to Sri Lanka’s monthly costs, while a US $ 10 increase would cost around US $ 480 million annually. 

In addition, Thewarathanthri noted that more inflows would start to come in from the beginning of next year, upon the anticipated completion of the external debt restructuring by the end of this year, leading to a sovereign credit rating upgrade.