By Adolf
Sri Lanka has seen this movie before. The script may have changed, the actors may be different, and the political slogans may be new, but the underlying economic story appears remarkably familiar. The recent intervention by the authorities to defend the rupee has raised uncomfortable questions about whether the country is repeating some of the same mistakes that contributed to the economic crisis of 2022.
Former Minister Udaya Gammanpila recently alleged delayed action by the Central Bank forced Sri Lanka to spend nearly US$500 million from its foreign reserves to stabilize the currency. According to his argument, authorities waited until the rupee weakened to around Rs. 353 against the US dollar before intervening, resulting in a costly rescue operation that could have been avoided through earlier action.
Whether one agrees with Gammanpila’s numbers or not, the broader concern deserves serious attention. Currency management is not merely about defending an exchange rate. It is about maintaining confidence, preserving reserves, and ensuring that market distortions do not create opportunities for speculation and arbitrage.
Sri Lanka learned this lesson painfully during the final years of the administration of former President Gotabaya Rajapaksa. At that time, the Central Bank attempted to maintain an artificial exchange rate for the rupee despite mounting pressure from global markets and deteriorating domestic economic fundamentals. The official rate remained disconnected @ 230 from reality while a thriving parallel market emerged.
The consequences were severe. Exporters delayed converting foreign earnings, remittances increasingly flowed through unofficial channels, and many individuals and businesses rushed to accumulate dollars in their bank vaults . Confidence in the official exchange rate collapsed. When the inevitable correction came, the rupee depreciated dramatically to 360, foreign reserves evaporated, and the country entered its worst economic crisis since independence. Today, critics argue that warning signs are once again becoming visible.The official exchange rate and the rates effectively faced by many market participants are not always moving in tandem. Businesses report that obtaining foreign currency can involve costs that differ significantly from official quotations. In some cases, effective exchange rates quoted in the market have reportedly exceeded official levels by a considerable margin. Such discrepancies are dangerous. Whenever a gap emerges between official pricing and market reality, incentives are created for speculation. Those with access to privileged information or greater financial resources are often the first to benefit, while ordinary businesses and consumers ultimately bear the cost.
CBSL Incompetence
What makes the current debate particularly sensitive is that the Central Bank is headed by Dr. Nandalal Weerasinghe, who was also a senior official of the institution during earlier periods when exchange-rate management decisions came under criticism. Supporters credit him with helping stabilize the economy after the crisis. Critics argue that the institution has yet to fully demonstrate that it has learned all the lessons of the past. The key issue is not personalities. It is policy.Sri Lanka cannot afford to return to a mindset where exchange-rate stability is pursued at any cost. Artificially defending a currency may create a temporary appearance of strength, but if it requires significant reserve losses or encourages market distortions, the long-term consequences can be severe.
A flexible and transparent exchange-rate regime is often uncomfortable because it allows markets to reflect economic realities. However, attempting to suppress those realities usually ends badly. History has repeatedly shown that markets eventually prevail over administrative interventions.The Government of President Anura Kumara Dissanayake was elected on a promise of change. That promise must extend to economic management as well. The objective should not be to create the illusion of a strong rupee but to build a genuinely strong economy supported by exports, investment, tourism earnings, remittances, and fiscal discipline. Sri Lanka’s reserves remain a precious national asset. Every dollar spent defending an exchange rate is a dollar unavailable for future shocks, debt obligations, or economic development.
Wrong Priorities
At a time when the country faces numerous economic and governance challenges, the Government’s priorities are also coming under scrutiny. Critics question whether significant political attention should be devoted to relatively small allegations concerning former President Ranil Wicramasinghe’s overseas travel expenses and rather work with him, while larger public concerns remain unresolved. They point to controversies surrounding coal procurement, container-related issues, and alleged vehicle import policies favoring Hayleys and LOLC, arguing that these matters deserve equal or greater public attention and transparency. Ultimately, the most effective way for any government to demonstrate public confidence is through the democratic process. If the administration believes it retains strong public support, proceeding with long-awaited Provincial Council elections would provide voters with an opportunity to express their verdict directly. If Sri Lanka has truly learned from the crisis of 2022, policymakers should focus less on rescuing the rupee and more on ensuring that the market never loses confidence in it in the first place. That is the lesson the last crisis taught at enormous cost. The question now is whether anyone in authority is listening. They must not forget how the SLPP ministers houses were torched and former President’s house was gutted. It can happen to them if they screw up.
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