First Capital expects max depreciation of LKR to 360 in 2023

According to First Capital, the Sri Lankan rupee is projected to depreciate to a maximum of Rs. 360 per US dollar by the end of 2023. However, the depreciation trend is expected to be slower than initially anticipated due to positive factors such as an improving gross domestic product (GDP) and the relaxation of import restrictions. The forecast suggests a gradual depreciation towards the range of Rs. 320-360 per US dollar by December 2023, with a similar target for June 2024.

 

 

The approval of an IMF loan in March 2023 has led to increased foreign inflows into government securities and higher dollar-to-rupee conversions by locals, strengthening the Sri Lankan currency beyond First Capital's expectations. The report anticipates further inflows and predicts that the Central Bank of Sri Lanka (CBSL) will continue its dollar purchases in the market. However, the government's gradual easing of import restrictions, coupled with an anticipated recovery in GDP growth, may exert downward pressure on the currency.

 

 

The report highlights that the recovery in GDP could boost consumer demand, potentially leading to higher imports and outflows, which may weigh on the rupee in the second half of 2023. Additionally, the country's substantial debt repayments and tightening global monetary conditions are expected to impact the rupee negatively, as Sri Lanka faces around $6-7 billion in annual rebates until 2029.

 

 

Despite these challenges, First Capital foresees inflows into government securities accelerating as Sri Lanka nears the completion of Domestic Debt Optimisation. The report also expects tourism arrivals to exceed one million by the end of 2023, generating $1.9 billion in earnings, which could further contribute to inflows and act as a buffer against depreciation pressure. Worker remittances are predicted to reach $5.4 billion in 2023, exerting upward pressure on the exchange rate.