Colombo, July 4 – The Sri Lankan rupee is expected to fall further this year, steeper than last year, with a rising fuel import bill and heavy government borrowings, a new report by a stock brokerage said.
Bartleet Religare Securities said the Central Bank will not protect the rupee at the cost of external reserves, which would effectively remove the peg for the dirty float.
“We expect a fall in the exchange rate and the rupee to depreciate against the US dollar steeper than it did in 2016,” it said in its latest country report.
The rupee depreciated 2.3 percent during the first six months of 2017, largely at the expense of external reserves, and the brokerage said they expect a further 2-3 percent depreciation given the government’s borrowing needs and a rising fuel import bill.
The rupee depreciated 4 percent in 2016 due to increased imports, continued foreign debt service payments and outflows from government securities following the US Fed hike, the report said.
However, Bartleet Religare Securities said, the receipt of $1.5 billion sovereign bond sales and a $450 million syndicated loan have eased pressure on the rupee recently.
“While we expect the rupee to stabilise at current levels in the short run, due to mid-year and quarter-end reserve targets, a further 2-3 percent decline is expected by the end of the year amid the government’s need for cash and a rising oil import bill.”
Although the Central Bank governor recently said that the Central Bank will continue to buy dollars to build reserves, the brokers said they expect the impact to be minimal.
“Meanwhile, after much delay, the Central Bank allowed the spot rupee to trade freely since last week in adherence to IMF guidelines,” the report said.
External reserves had weakened in an attempt to defend the currency, the report noted, having fallen to $5 billion in April 2017, “merely covering the minimum threshold of three months of import cover,” Bartleet Religare Securities said.