ECONOMYNEXT – Sri Lanka’s volatile currency has been one of the barriers deterring foreign investors to the country, but the situation has improved recently, Colombo Stock Exchange Chairman Dilshan Wirasekara said.
“If I just wear a hat of a foreign investor and say, okay, what am I worried about? I would be somewhat concerned about the exchange rate,” Wirasekera said.
“But I think, over a period of time, we’ve now seen stabilization of reserves.
“And now, I don’t think that’s the issue. There’s actually some investors who think the rupee can appreciate for them.”
Since the currency collapsed from around 200 to 360 to the US dollar following three years of aggressive macroeconomic policy 2022 the rupee has strengthened amid deflationary policy by the central bank and the lifting of a surrender rule in 2023.
The central bank has kept the exchange rate around 295 to 305 to the US dollar amid deflationary policy and what the IMF calls its ‘other managed’ exchange rate regime.
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During the last currency crisis some investors who sold stocks were stuck in rupees unable to remit money back.
Sri Lanka has seen steep currency depreciation since the end of a civil war in 2012 with the rupee falling from 113 to 360 in a series of currency crises after rates were cut with inflationary open market operations and direct purchase of g-secs to inject excess liquidity.
Since 1978, IMF programs have also built in monetary instability in the form of high inflation and currency depreciation as a given, initially under basket-band-crawl policy but now under flexible inflation targeting.
In Sri Lanka, each currency collapse has been associated with lower growth, sharp spikes in interest rates, and ad hoc tax hikes under IMF programs.
The lack of policy stability from aggressive macro-economic policy is frustrating for investors.
“There is a slight sense that the Treasury Secretary looks around and sees what businesses make profits and sees what businesses to tax,” a long-term foreign investor who has a soft spot for Sri Lanka, but invests in Asian countries with monetary stability, told EconomyNext in recent interview.
“If policy stability could be achieved, with a solid commitment by the government instead of tinkering with taxes every 9 months it would go a long way to encourage investors to come to Sri Lanka.
“It is almost impossible to set up a big industry in Sri Lanka because investments like that require stable policies for many years.
“For portfolio investors at least 3 to 4 years of stability is required. Unlike direct investors, portfolio investors will still come, but they will pay a lower premium for the assets.”
The investor is based in Hong Kong, where monetary policy is illegal and macroeconomists are barred from debasing money.
A formal exchange rate target serves as a check on macroeconomists’ ability to cut rates with printed money, and the destruction of capital, which then leads to high inflation and interest rates, analysts say.
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So far Sri Lanka’s central bank has undershot its 5 percent inflation target providing a strong foundation for growth to recover after its earlier excesses.
However it is promising a return to 5 percent inflation, which may require higher rises in food and energy prices.
The Stock Exchange is having an ‘Invest Sri Lanka’ forum next week to showcase Sri Lanka.
Already around 100 foreign investors including 30 fund managers have confirmed attendance.
Wirasekera said Sri Lanka’s market price earnings multiple was lower and more attractive to regional peers even after recent gains.
“I think we are still at about eight and a half times price to earnings ratio,” he said.
“If you compare that, the closest I think in the region is probably Bangladesh. I was there just a week ago and I can tell you even through the turmoil that that country is undergoing, their market is trading at a 12 times.
“So it shows the potential that we as a market based country have and that’s something that we really want to capitalize.”
In 2024 foreign investors have seen returns of around 50 percent Wirasekera said, helped by stock rises as well as currency appreciation which was only second to Pakistan at around 70 percent.
In 2025 some foreign investors have sold out after making gains.
“Market is probably almost flat,” Wirasekera said. “But I think that’s, again, a part of consolidation.
“And as long as interest activity and fundamental demand is supported, I think from a Stock Exchange point of view, we are not worried when the market goes up or down.”
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