The sudden fall and equally rapid recovery of the Sri Lankan rupee within a matter of days has left many Sri Lankans confused about what truly happened inside the country’s foreign exchange market.

Within a short span, the rupee weakened sharply from around Rs. 324-325 against the US dollar to Rs. 354 in parts of the commercial market, before unexpectedly stabilising again close to previous levels. The speed of both the depreciation and the recovery triggered widespread speculation among businesses, importers and the public.

Responding to questions from the media regarding the abrupt divergence between official exchange rates and commercial bank quotations, Central Bank Governor Dr. Nandalal Weerasinghe recently explained that the volatility had emerged mainly outside the formal interbank foreign exchange market.

According to the Governor, Sri Lanka operates through two connected foreign exchange markets. One is the interbank market, where commercial banks exchange dollar liquidity among themselves. The other is the retail market between banks and customers, including importers, exporters and individual foreign exchange buyers.

Under normal conditions, customer buying and selling rates fluctuate within a narrow margin around the interbank market rate. However, during the week leading up to Friday, May 22, an unusual surge in dollar demand disrupted this balance.

The Governor said excessive speculation and panic-driven import demand created abnormal pressure on the market, pushing some customer transactions far above prevailing interbank rates.

“We observed that because of speculation and panic related to imports, there was excessive demand for US dollars,” he explained. “Transactions between banks and customers began taking place well above interbank market rates, which created a distortion.”

While the interbank rate remained around Rs. 320 to the dollar, certain customer transactions were reportedly taking place between Rs. 346 and Rs. 354.

The Central Bank viewed this widening gap as a breakdown in normal market transmission rather than a reflection of underlying fundamentals.

To restore order, the Central Bank held discussions with treasury officials of commercial banks on the evening of May 21 and introduced measures aimed at improving liquidity flows and reactivating smoother interbank trading.

According to the Governor, these measures helped reconnect the interbank market with commercial bank customer pricing, allowing exchange rates to realign rapidly.

“Liquidity returned to the market and buying and selling rates became fully aligned again,” he said. “The market has now normalised.”

The Governor emphasised that the Central Bank’s intervention was limited and intended only to smooth excessive volatility rather than artificially defend a specific exchange rate.

He noted that the authorities intervened only to a certain extent during the sharp depreciation phase and later carried out small operations to reduce market instability while allowing normal demand and supply conditions to function.

The episode has nevertheless raised broader questions about how fragile confidence remains in Sri Lanka’s post-crisis economy despite improving macroeconomic indicators.

Although foreign reserves and external sector conditions have improved significantly since the height of the economic crisis in 2022, the foreign exchange market remains highly sensitive to expectations, rumours and sudden shifts in import demand.

Many ordinary Sri Lankans believe the panic may have been triggered by a surge in Letters of Credit (LCs) opened for vehicle imports amid speculation over increased import activity and future dollar demand.

Meanwhile, Professor Wasantha Athukorale at the University of Peradeniya said remarks made by President Anura Kumara Dissanayake regarding rising US dollar outflows for fuel shipments may also have heightened importers’ anxiety over possible currency instability.

Economists say the episode demonstrates how market psychology can sometimes move exchange rates faster than economic fundamentals, particularly in relatively thin and fragile foreign exchange markets like Sri Lanka’s.

The speed of the rupee’s rebound suggests that the turbulence was driven more by speculative demand, temporary liquidity distortions and market sentiment than by a structural foreign exchange crisis.

Still, for a population that continues to carry memories of shortages, inflation and currency collapse, the brief rupee shock served as another reminder that confidence in Sri Lanka’s economic stabilisation remains delicate.

By Sanath Nanayakkare ✍️

The 21st edition of the “Build Sri Lanka” housing and construction exhibition concluded last week at the BMICH. On the surface, it was a modest success: stalls were staffed, catalogues were exchanged, and the usual dignitaries cut the usual ribbons. But beneath the low hum of polite conversation, a far more urgent story was unfolding – one that policymakers appear to have missed entirely.

For an industry that contributes nearly 8% to Sri Lanka’s GDP and employs over 500,000 people, the quiet profile of this year’s exhibition was telling – the kind that settles over an industry bracing for impact.

The Chamber of Construction Industry (CCI) President, Manilal Fernando, used the platform not to celebrate, but to warn. Two specific points he raised should be ringing alarm bells in the Treasury and the Ministry of Housing. But because the event lacked high-level political attendance, these warnings have so far fallen into a policy void.

Fernando noted that after a brutal slump from 2020 to 2023, the industry saw a fragile recovery in 2024. But that green shoot is now withering. “With the rupee volatility due to the war in the Persian Gulf,” he said, “again we are heading for uncertain times.”

According to CCI, Sri Lanka’s construction industry is an importer in disguise. Over 60% of construction materials from steel and cement to tiles, fittings, and MEP (mechanical, electrical, plumbing) components are either directly imported or have high import content. Even locally manufactured items rely on imported raw materials.

When the rupee depreciates, costs don’t just rise; they leap. And here is the crux according to Fernando : current contractual payment mechanisms do not automatically reflect these real-time cost increases. As he warned, unless cost escalations are correctly reflected in contract payments, many contractors and consultants will simply be unable to perform. That means stalled projects, abandoned housing schemes, and unfinished infrastructure – paid for, but not delivered.

The second issue is even more maddening because it is entirely within the government’s control to fix. Fernando revealed that a set of long-overdue amendments to the Construction Industry Development Act (CID Act) was finalised in 2024. These amendments were developed over six years by the National Advisory Council on Construction, approved by the Legal Draftsman, and could be enacted within two months.

But instead of enacting these ready-made fixes, CIDA is now pushing for a complete overhaul of the Act – a process that will take a minimum of two years to reach parliament.

He pointed out that without these amendments, the industry lacks a fair, transparent price variation mechanism. Right now, MEP contractors and others complain that CIDA’s official price indices do not reflect actual market price fluctuations. The CCI, therefore, proposed a simple solution: a joint committee (CCI + reputable contractors + CIDA) to oversee index compilation. But even that cannot be implemented effectively without the Act’s update.

The construction industry, once a bellwether of national economic health, is now whispering its crises in a conference hall with no television cameras to air high-decibel news stories or make it a headline event.

The builders of Sri Lanka are not asking for subsidies. They are asking for predictability, fairness, and speed. The war in the Persian Gulf is beyond Sri Lanka’s control. But the CID Act and contract index reforms are not.

By Sanath Nanayakkare

A new study by the Institute of Policy Studies of Sri Lanka (IPS) examines the effectiveness of sugar‑sweetened beverage (SSB) taxation and traffic light labelling (TLL) in influencing consumer behaviour and reducing sugar consumption in Sri Lanka. The findings show that although both policy instruments have proven effective, existing policy gaps limit their full potential.

The study provides strong evidence that demand for SSBs in Sri Lanka is price-responsive, with consumers continuing to purchase unhealthy beverages due to their lower cost, despite having adequate knowledge of TLL signals. A price sensitivity analysis of Carbonated Soft Drinks (CSD), using Household Income and Expenditure Survey data, shows that a 10% increase in CSD prices leads to an approximate 15% decline in quantity demanded.

Authors Priyanka Jayawardena, Nisha Arunatilake, and Usha Perera of IPS use a discrete choice experiment to assess the effectiveness of TLL on purchasing decisions. A nationally representative consumer survey reveals that approximately two‑thirds of consumers are aware of TLL, with higher awareness among younger, more educated, and higher‑income groups. The findings indicate that TLL discourages the selection of high‑sugar beverages and promotes lower‑sugar options, even when price and product attributes are considered. However, lower‑income consumers are less responsive to TLL cues, largely due to affordability constraints, highlighting the importance of maintaining effective SSB taxation.

In this regard, the study recommends the following actions: • Regular adjustments to tax rates to preserve their real value; and• Strengthening public awareness and understanding of nutrition labelling.

The study underscores the need to close critical policy gaps, particularly in awareness, equity, and effectiveness, to strengthen Sri Lanka’s response to diet‑related non‑communicable diseases and promote healthier, more equitable food environments.

Download the publication via the IPS website: https://www.ips.lk/understanding-the-influence-of-traffic-light-labelling-and-pricing-on-the-demand-for-sugar-sweetened-beverages-in-sri-lanka/