The Sri Lankan rupee's depreciation is a double-edged sword, offering both challenges and opportunities. While it may seem like a boon for those with dollar debt, the reality is far more complex. The rupee's depreciation is effectively anchored to the US dollar, which is currently depreciating against the euro and pound. This means that the rupee's depreciation is not a one-time event, but a continuous process that has significant implications for the country's external balance sheet. As the rupee depreciates, the cost of imports rises, putting pressure on the country's external reserves and increasing the need for external borrowing. This is particularly concerning given the country's limited external borrowing space and high import dependency. The depreciation also expands the money supply, creating a vicious cycle where firms face higher costs, leading to inflation and increased demand for working capital. This, in turn, puts pressure on the banking system and the country's external balance sheet. The key to navigating this challenge lies in rebuilding net reserves through targeted and credible current account adjustment policies, while keeping monetary policy steady enough to support production and export competitiveness. The Central Bank must carefully balance the need to defend the anchor and prevent depreciation, while also avoiding excessive credit growth that can fuel inflation and external pressure. In my opinion, the real problem is external dollar scarcity, and the solution lies in a combination of industrial and fiscal policies that address the country's structural weaknesses and support export scaling capacity. The clock is ticking, and the Central Bank must act carefully and prudently to navigate this delicate balancing act.
