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Why is Sri Lanka Rupee depreciating?

Sri Lanka Rupee Depreciation

Sri Lanka rupee bid closes at 199.90 to US dollar is this solely due to the pandemic? Will this continue and scare the foreign investors. Sri Lanka rupee has been plummeting forever but it was never this bad in recent years. Is this because Sri Lanka has weak economic fundamentals, such as current account deficits and high inflation or political incompetence? What might be the underlying fact to Sri Lanka Rupee Depreciation?

According to central bank data, Sri Lanka recorded an external current account deficit of 792 million dollars in the six months up to June 2020. This can be one of the reasons for Sri Lanka Rupee depreciating. This is bad news for foreign investors and they may pull portfolio investments out of Sri Lanka soon if this continues.

Is it always good when the government spends more than it earns or when the government spends as little as possible? In 2020, the national debt of Sri Lanka amounted to approximately 98.26% per cent of the GDP. Sri Lanka inflation in 2021 is at 4.65% and it might rise at this rate. There is no limit to the size of the debt of Sri Lanka in relation to income as long as the inflation is kept in check.

Fighting Inflation

When unemployment is higher than the Non-Accelerated Inflation Rate of Unemployment (NAIRU) there is a lot of slack in the labour market because there are many qualified people to fill in the limited vacancies and companies can fire one and hire another for lower pay. When the unemployment is lower than NAIRU employees can negotiate for higher pay due to the tight labour market. Sri Lanka’s NAIRU is at 6.04 and the unemployment rate is at 4.18 and that can be one of the reasons that Sri Lanka’s inflation is at 4.65% in 2021.  So the government can keep people unemployed to avoid inflation from rising, tough luck for the unemployed.

If a country has a higher level of unsustainable debt and if they more print money, this can lead to hyperinflation in the worst-case scenario similar to Zimbabwe and eventually people may lose trust in the currency. Lifting a nation up from a similar eventuality is not easy unless there is a deep political change following reforms to build trust and eventually building the economy. Imports are more expensive and quality of imports is low due to depreciation of currency and inflation is high as a result of it on the other hand Exports are cheaper and quality of exports increased which results in an aggressive demand rise. Some Economists still argue that Economic stimulus, in the long run, can do more harm than short-term good. 

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