Debt and low foreign funds will cause the depreciation of the Sri Lankan Rupee in 2025

Experts point out that the primary reasons for the depreciation of the Sri Lankan Rupee in 2025 are high public sector debt repayments and lower-than-expected disbursements from multilateral institutions. They believe that the high level of vehicle imports recorded during the year was not the cause.

Mr. Chayu Damsinghe, Head of Macroeconomic Advisory at Frontier Research, stated that while there is a common perception that vehicle imports contributed to the depreciation of the Sri Lankan Rupee in 2025, economic indicators do not substantiate this claim.

"Even though a large number of vehicles, worth nearly US$ 2 billion, would have been imported by the end of the year, we will be able to maintain a current account surplus this year," he stated.

Mr. Damsinghe further stated that Sri Lanka recording a current account surplus of approximately US$ 1.7 billion during the first ten months of 2025, despite high vehicle import volumes, is an indicator that they are not the primary cause of currency depreciation.

He pointed out that the widening of Sri Lanka's current account surplus in the first ten months of 2025 compared to the corresponding period in 2024 confirms that imports are not the main reason for currency depreciation.

Therefore, he opined that the primary reason for the depreciation of the Rupee in 2025 is the high level of government debt repayments.

"Government debt repayments in 2025 are very high. If we only consider central government debt repayments, it's about US$ 2 billion, which is not that high. In addition, the Central Bank of Sri Lanka (CBSL) also has debt repayments."

"When all these are combined, public sector foreign debt repayment is close to US$ 4 billion, which is a relatively high value. This is likely to be higher than what we might have in 2028 and 2029."

Mr. Damsinghe also pointed out that disbursements received by Sri Lanka from multilateral institutions such as the International Monetary Fund (IMF), the World Bank, and the Asian Development Bank were significantly lower than previously anticipated.

According to him, disbursements of approximately US$ 800 million were expected during the year, but only about US$ 200 million was actually received.

He stated that by November, there was a net foreign debt outflow of over US$ 1 billion. Considering this significant outflow for debt repayments, Mr. Damsinghe pointed out that the currency depreciating by only about 5-6% is a testament to the economy's strength.

Mr. Damsinghe mentioned that, under normal circumstances, such a large outflow of funds would typically lead to a currency depreciation of about 10-20%, similar to the situation experienced in 2018.