Challenges and Barriers of Developing Sri Lankan Economy

By Senior Professor Kennedy D Gunawardana, Professor of Accounting, University of Sri Jayewardenepura.

Rupee depreciation has been the hot subject in current economic scenario. We are experiencing a

tough time with rupee depreciation every day. Current economic context created anxious

moments to various industrial sectors in Sri Lanka. The experts in the field perceived the

situation in different manners. Some considered it has highly depressed and threatening

environment; some other considered it as an opportunity in disguise. There are various positive

and negative impacts which are being predicted by experts in the fields. Rupee depreciation, no

doubt it will affect upper and lower sectors of the economy. This paper tries to explore the causes

and impact of rupee depreciation on the Sri Lankan economy and also tries to review various

measures to the Government to get over the present crisis.

Recently every Sri Lankan economic and political discussions toss around the subject of the

upsetting news of rupee depreciation and its effects, both long term and short term on Sri Lankan

economic context. Sri Lanka rupee has experienced considerable depreciation of value in recent

times and that has affected even the bottom lines of Sri Lankan economic scenario. Currency

depreciation, as the name suggest refers to fall in value of one currency with respect to another.

That is one US dollar can buy 176 today, and can buy 176.3 tomorrows. SL would have

depreciated by percent. The value of rupee had weekend about this financial year.

Increased price of oil

Increased prices and demand for Oil is another reason for rupee fall. Sri Lanka has to import

Bulk of its oil requirements to satisfy its local demand which is increasing every year. The

domestic demand for oil is increasing which cause causes the price of the oil to increase in the

international market. The demand for dollar increases as we have to make payments to our

suppliers in dollars. This increase in demand for dollar weakens the rupee. 55% of the Sri

Lankan oil import is used for transportation of goods and people and 50% of that or 27% of the

total is used for transporting the 3 Sri Lankan who owns cars. 36% of total population owns any

kind of vehicle including the motor cycles.

Low growth

Lower growth is another reason for currency depreciation. That is due to the low growth foreign

institutional investors were pulling of money from Sri Lanka. Sri Lanka GDP growth rate

dropped to 3.1% for the first quarter of the financial year which was much lower compared to

4.5% in the previous year. Sri Lanka’s economic grew by only 3.1 per cent last year, the lowest

in 16 years with the fall blamed on mostly adverse weather conditions, according to Central

Bank (CB). Though this data was contained in the CB's annual report for 2017 released to the

public. CB officials have indicated in the past few months that economic (GDP) growth was

expected to fall to 3 per cent from 4.5 per cent in 2016. The worst year before this was in

2001 when the economy contracted and recorded negative growth of 1.4 per cent after being hit

by a series of global and domestic economic issues.

High demand for gold

Increased demand for gold or increased import of gold is another reason for the crisis. In Sri

Lanka there is a tradition to wear gold and diamond ornaments for the auspicious occasions. So

there are more requirements for these but are not abundantly available in Sri Lanka so Sri Lanka

has to import these at huge price. When the rupee value gets depreciating, the percentage for each dollar increases making the demand increase. Total demand for gold -whose twin drivers

are jewellery and investment buying -- advanced two percent to 4,309 tonnes compared with

2015,

However, in the final three months of 2016, overall demand retreated 11 percent to 994.1 tonnes

from a year earlier. Investment demand rose in the first, second and third quarters of 2016 by

inflows into exchange-traded funds (ETF) -- which allow investment without trading on the

futures market. But this hit reverse in the fourth quarter. Jewellery demand meanwhile sank over

the year on the back of higher gold prices.

High fiscal deficit