FCR forecasts Sri Lankan Rupee to decline to Rs.310-320 by Year's end

First Capital Research (FCR) predicts that the Sri Lankan rupee will likely depreciate to the range of Rs.310-320 against the US dollar in the latter part of this year. This projection is attributed to increased import demand and the resumption of foreign loan repayments following the completion of the External Debt Restructuring (EDR).

In the first half of the year, the rupee is expected to appreciate to around Rs.295, driven by higher taxes dampening consumer demand in the short term amidst rising living costs. The indicative USD/LKR spot exchange rate was recorded at Rs.300.83 yesterday.

FCR anticipates that slower consumer demand may lead to a reduction in imports, while the first quarter of 2024's peak tourism season and higher remittances from workers could strengthen the LKR. However, some stabilization is expected as consumer demand improves and tourism income moderates.

The rupee's appreciation is also supported by improving tourism earnings and higher remittance inflows. FCR projects tourism earnings to increase by 46.3 percent year-on-year to US $3 billion this year, with workers' remittance inflows rising to US $6.6 billion from last year's US $6 billion.

The deceleration in consumer-driven imports in the first quarter, alongside the Central Bank's efforts to bolster foreign reserves through US dollar purchases, has contributed to the rupee's sharp appreciation so far this year. FCR expects Sri Lanka to end the year with US $6.3 billion in foreign reserves, although this accumulation is likely to moderate as loan repayments resume.

While bilateral and multilateral inflows are expected post-EDR, along with a possible sovereign credit upgrade, FCR notes that import relaxations and resumed loan repayments could offset currency appreciation in the fourth quarter. Additionally, Sri Lanka faces annual external debt repayment obligations of nearly US $6-7 billion until 2029, which may decline post-EDR but still influence the exchange rate.

The Central Bank's move to relax cash margin deposit requirements on specific imports in May, coupled with potential removal of existing import restrictions including on vehicle imports, may further impact the rupee exchange rate downward.