A Sri Lankan rupee falling sharply against the US dollar may cause problems for importers using letters of credit (L/Cs) and fuel inflation as well, according to one of the country's leading business figures.

President of the Colombo Traders' Association, K Palaniyandan, also reckons that prices of essential food items will spiral as a result of the weakening rupee.

L/C settlements

Palaniyandan explained to local media that the increasingly high US dollar exchange rate means that importers have to pay high prices for goods at the time of import.

This also applies to commodities for which importers opened L/Cs some weeks ago, he said, explaining that the credits usually have to be settled at prevailing exchange rate at the time of delivery.

Inflationary pressure

As a result, prices of imported food items such as onions, dhal, sugar, rice, tinned fish and milk powder are likely to go up, according to Palaniyandan.

However, Sri Lanka's central bank governor Ajith Nivard Cabraal disagrees with the business leader's arguments.

Counter argument

Cabraal, who has so far resisted calls for the central bank to intervene to shore up the rupee, reckons the currency remains reasonably strong on a global basis.

While the Sri Lankan currency has fallen against the US dollar, he points out that it has increased against the UK pound, the Japanese yen, the Indian rupee and the Australian dollar.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.