The Sri Lankan rupee fell sharply against the dollar on Thursday, after the country’s central bank ordered a 15% depreciation in a bid to avert an impending economic collapse caused by a shortage of foreign currency.
The country’s worst economic crisis since independence has led to fuel and electricity rationing in the South Asian nation of 22 million, crippling public transport and causing long queues for food and medication.
The coronavirus pandemic has hit the island’s tourism sector – a major foreign exchange earner – raising fears the country may not be able to repay its $51 billion foreign debt.
Traders said the rupee fell 11.53% against the US dollar, the island’s main foreign trade currency, on Thursday, as authorities scrambled to raise funds to finance oil imports including they desperately needed.
The state-owned Ceylon Petroleum Corporation (CPC) has asked the government to urgently raise the retail price of oil in order to save itself from bankruptcy.
This week’s writedown added another 198 billion rupees ($760 million) to service the company’s $3.3 billion foreign debt, according to official figures.
The Central Bank of Sri Lanka announced on Monday evening that it would allow “greater flexibility” in the exchange rate, fixed at 197 rupees to the dollar since last April.
But then he backtracked, telling commercial banks he would not step in to prop up the rupee.
The remarks led to a sharp depreciation when markets opened on Thursday, traders said, with exporters expecting the currency’s value to fall further.
The CPC loses 120 rupees on every liter of diesel sold at the current government-regulated price, Chief Sumith Wijesinghe said.
“If we had the power to increase (the price), we would have done it already,” Wijesinghe told reporters.
The government has said it hopes to import $500 million worth of oil soon under a line of credit from India to meet local shortages.
The government on Wednesday tightened restrictions on a wide range of imports – from whiskey to kitchen appliances – to save foreign exchange and finance essential imports such as oil, food and medicine.
An import ban was already introduced in March 2020 on big ticket items such as cars, in a bid to stop the outflow of dollars needed to pay Sri Lanka’s debts.
Powdered milk, sugar, lentils and wheat, as well as medicines, are lacking.
The International Monetary Fund last week urged Colombo to devalue its currency and raise taxes, warning the cash-strapped country that its external debt was “unsustainable”.