Economics

Foreign Inflows into Sri Lanka’s Government Securities Rise Amid Deflationary Policies

Foreign investment in Sri Lanka’s government securities surged last week, with Central Bank data revealing a 15.7 percent increase in foreign holdings. The rise, amounting to 6.9 billion rupees ($23.4 million at an exchange rate of 1 US dollar = 295 LKR), brought the total foreign holding in Sri Lanka’s Treasury bills and bonds to 50.6 billion rupees.

Currency dealers noted that foreign investors have been actively purchasing both short-term securities and longer-term bonds, such as those maturing in 2026 and five years. “They are taking a calculated risk based on the country’s deflationary policies, which have restricted imports and led to an appreciating currency,” a currency dealer explained. “As long as import restrictions remain, particularly on vehicles, the rupee is expected to face continued appreciation pressure.”

This uptick follows the previous week’s inflow of 4.4 billion rupees ($14.9 million). Analysts have attributed the recent trend of foreign interest in emerging markets, including Sri Lanka, to expectations of U.S. Federal Reserve rate cuts.

In a political boost to investor confidence, the peaceful presidential election in Sri Lanka saw Anura Kumara Dissanayake, leader of the Marxist Janatha Vimukthi Peramuna (JVP), elected as president for a five-year term.

Despite recent inflows, Sri Lanka experienced significant foreign outflows earlier in the year, with a 66 percent or 78.1 billion rupee decrease in government securities over the first nine months of 2024.

In the U.S., signals from Federal Reserve policymakers indicated potential rate cuts in the coming months, driven by slowing inflation and concerns over the job market. U.S. consumer price inflation slowed to 2.4 percent in September, down from 2.5 percent in the previous month, while a spike in unemployment claims, partly attributed to Hurricane Helene, added further caution to economic forecasts.