Another Crisis for Sri Lanka: Running short on Foreign Money?

Posted on January 18th, 2009 at 3:51 pm

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Do you know that the Sri Lanka’s foreign exchange reserves has gone as low as 1.5 months of imports?

Sri Lanka is an import-dependent country and we need foreign currency to import. Currently the foreign exchange reserves are enough to buy only for the one and half months of imports. This is the lowest after 1976 where Sri Lanka had a controlled economy under Mrs. Sirimavo Bandaranayake.

Although this is a very serious situation and big blow for the economy, only a very few in Sri Lanka are aware of this. Economists say the Central Bank’s (CB) efforts to stabilize the exchange rate may have caused this, while low exports (especially tea) too have contributed in getting less foreign money to Sri Lanka.

Economists suggest the following 3 solutions for this crisis.

  • Devalue the Rupee
  • Seek financial help from IMF (International Monetary Fund)
  • Reduce imports

Out of the above options, bailout from IMF is less likely with the current Mahinda Chinthanaya. Reducing imports too may not look good for the current government with few elections coming up in near future. This leaves devalue of Rupee as the only option according to Economists.

CB has been controlling the value of Rupee, but allowed controlled devaluation few weeks ago. Currently 1 US Dollar is valued at Rs. 114.00. Following graph describe the US Dollar exchange rate for the last 120 days.

According to the Central Bank officials, the foreign exchange reserve crisis is under control. They hope to launch a mega campaign to bring foreign currency from Sri Lankans living abroad through investment in bonds and treasury bills. This campaign will launch on Independence Day.

Read SundayTimes for more details on the above.