Sri Lanka rupee depreciation has re-emerged at a moment when economic growth is cautiously returning, raising serious concerns about monetary direction, institutional discipline, and political risk. The weakening currency, despite external surpluses, highlights deep contradictions within the current policy framework.
Why Sri Lanka rupee depreciation threatens stability despite surpluses
Sri Lanka rupee depreciation in 2025 has occurred under conditions that traditionally should have supported currency stability. The country is recording a current account surplus, inflation has moderated from crisis levels, and economic activity is gradually improving. Yet the rupee has weakened, exposing structural weaknesses in how monetary operations are conducted and revealing policy choices that risk undermining hard-won stabilization.
A current account surplus, often celebrated by inflation-oriented macroeconomic schools, simply reflects that a country is repaying foreign obligations or accumulating reserves while capital outflows dominate the financial account. It does not automatically guarantee exchange rate strength. In Sri Lanka’s case, the surplus has coincided with central bank dollar purchases that injected new rupee liquidity into the system without sufficient sterilization. This mechanism, long identified by classical economists, exerts downward pressure on the currency once excess liquidity feeds import demand.
The contrast with East Asian experiences is instructive. Singapore, frequently cited as a benchmark, achieved sustained stability not by weakening its currency but by allowing capital outflows under disciplined monetary conditions. Large outward investments, reserve accumulation, and neutral liquidity management prevented domestic price instability. Sri Lanka briefly approached a similar path when inflationary operations were halted and interest rates were allowed to reflect scarcity. That adjustment enabled debt repayment and reserve rebuilding without destabilizing prices.
However, renewed rupee weakness suggests that this discipline has been compromised. When a central bank accumulates foreign exchange by creating domestic money and fails to neutralize that liquidity rapidly, depreciation becomes almost inevitable. The resulting higher import prices feed directly into administered costs such as fuel, electricity, transport, and food, placing pressure on household budgets already stretched by years of economic strain.
President Anura Kumara Dissanayake has publicly emphasized the need for exchange rate stability, echoing lessons drawn from regional success stories. Similar warnings have come from parliamentary oversight bodies in previous years, urging authorities to allow short-term rates to adjust in order to protect the currency. These calls, historically ignored, have often preceded episodes of voter dissatisfaction and political turnover.
Sri Lanka’s experience over the past decade illustrates this pattern clearly. Repeated attempts to stimulate growth through accommodative monetary settings have coincided with four major currency crises, driving the rupee from near 113 to over 300 against the dollar. For households operating on narrow margins, the cumulative effect has been severe. Education costs, healthcare expenses, and basic utilities now consume a disproportionate share of income, leaving little tolerance for further price shocks.
History shows that currency instability carries consequences beyond economics. Previous episodes of sharp depreciation were followed by social unrest, the rise of nationalist movements, and abrupt changes in political leadership. The risk today is not abstract. Fuel and electricity tariffs are again under upward pressure, even as global commodity prices remain relatively stable. The political cost of passing these increases to consumers is significant, particularly when the underlying trigger is perceived as institutional mismanagement rather than external shock.
International assistance has provided temporary relief, but it cannot substitute for credibility. Emergency financing to cover external obligations underscores how fragile the situation remains. Growth achieved under unstable monetary conditions rarely endures, and programs built on such foundations often falter in their second year as liquidity pressures re-emerge.
The central lesson is straightforward: sustainable growth requires monetary stability. Rate reductions intended to accelerate activity can, in a reserve-accumulating system, weaken the very foundation needed to support expansion. Credit growth accelerates, import demand rises, reserves are drawn down, and the currency adjusts sharply. The social and political fallout then overwhelms any short-term gains.
Sri Lanka rupee depreciation amid a record current account surplus demonstrates the limits of doctrines that prioritize stimulus over stability. Classical economic principles, which emphasize anchors, discipline, and balance, remain relevant precisely because they recognize the political consequences of monetary disorder. Without a firm commitment to currency stability, recovery risks devolving into another cycle of inflation, unrest, and lost opportunity.
The responsibility ultimately lies with democratic institutions to ensure that monetary authorities operate within a framework that prioritizes stability for citizens and businesses alike. Governments should be judged at the ballot box for policy choices and governance failures, not for cost-of-living crises triggered by preventable currency weakness. Sri Lanka’s recent history offers ample warning of what follows when that distinction is ignored.