Letters of credit (L/Cs) opened by Sri Lankan importers before the government devalued the Sri Lankan rupee (SLR) are causing exchange rate and inflationary pressures.

Sri Lanka devalued its currency by three per cent in its budget on 21 November in a bid to defend its exchange rate and interest rates.

US dollar demand

Unfortunately, the pressure on the exchange rate has continued, in part due to importers who had already opened L/Cs having to cover their now unexpectedly higher US dollar costs.

The exchange rate has also come under increased pressure from high seasonal demands for imports.

Inflationary pressures

Demand for US dollars by importers that opened L/Cs before the devaluation has also caused pressure on the money markets.

Moreover, importers are likely to pass on their extra L/C costs to Sri Lankan consumers, thus creating inflationary pressures on the economy.

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