Sri Lankan Rupee (LKR) has been the best-performing currency among emerging markets in the first five months of 2023 with spot returns of 26.25% as the US dollar (USD) fell below Rs. 300 for the first since April 2022, Bloomberg data revealed.

According to Bloomberg, Sri Lankan Rupee was on top of the emerging market currency performances between January to May 2023 with spot returns of 26% while Colombia and Mexico were in second and third places with 12% and 11% respectively as the LKR appreciated by 10.2% in May 2023.

Ironically, Sri Lanka was the worst-performing currency globally a year ago when the LKR was hovering near Rs. 300 per US dollar in the first week of April 2022, down by 32% year to date.
However, a report by Bloomberg on Wednesday (31), predicted that the LKR, which climbed 1.4% to Rs 289.91 per dollar on Wednesday, is forecast to decline to 350 by the end of December, according to Standard Chartered Plc and BMI.

“Once imports normalise with the relaxation of restrictions and demand picks up, we expect the rupee to depreciate,” said Dimantha Mathew, Head of Research at First Capital Holdings PLC told Bloomberg. Mathew noted that the LKR may trade at 280 to 320 per dollar this quarter before weakening to as low as 405 per dollar in the second half of the year. That would surpass its record-low 370 per dollar it reached in 2022. Dollar inflows have also allowed the central bank to replenish its foreign-exchange reserves, which climbed to a 15-month high in March.

“The rupee will be highly volatile as the economy picks up toward the second half of the year,” he added.

Moreover, Raphael Mok, Head of Asia country risk at BMI in Singapore said to Bloomberg that upcoming external debt repayments which could start around the fourth quarter, alongside the need to build up reserves, will exert downside pressure on the LKR once again in the coming months.
On Thursday (01), Central Bank (CBSL) Governor, Dr. Nandalal Weerasinghe said that they have purchased $ 1.7 billion from the market in the first five months of 2023 with $ 662 million purchased in May alone.

Weerasinghe, quoting the recent Bloomberg forecasts on LKR by the end of 2023, said that analysts and international newslines have their own predictions on the LKR but it is the credibility that matters. In March, Bloomberg reported quoting Fitch Solutions that LKR could plummet to Rs 390 per US dollar by the end of 2023.
“What we are warning is that people who believe in these predictions, if they make their decisions based on these kinds of predictions, they have got their hands burned,” Weerasinghe said.

He noted that people should do their own analysis looking at what the central bank is saying, the outlook and the market-determined exchange rate before taking any decision.