Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva has warned of a deepening breakdown in Sri Lanka’s foreign exchange market, saying a collapse in confidence is driving a “vicious cycle” of volatility and uncertainty.

In a recent address, de Silva pointed to the rapid depreciation of the Sri Lankan rupee, noting that the Bank of Ceylon selling rate had recently reached 354, as evidence of mounting pressure on the currency market.

He said the core issue is not only economic but also structural, arguing that financial markets operate primarily on trust rather than political assurances. “Markets operate on trust. If market trust collapses, the market itself collapses,” he said, adding that both the forex and rupee markets are being shaped by weakening confidence.

Responding to government statements that the country will not be allowed to fail, de Silva said such assurances are insufficient to stabilise investor sentiment. He stressed that markets require clear and transparent signals rather than political messaging.

He further described what he called a “vicious cycle” in market behaviour, where exporters are withholding foreign currency in anticipation of further depreciation, while importers are rushing to secure dollars ahead of expected rate increases, potentially above 375. This, he said, is worsening liquidity conditions.

De Silva also highlighted what he described as an unprecedented freeze in trading activity. “Today there isn’t even a rate in the market. There isn’t a single bid or offer,” he said, adding that most transactions are now limited to those involving the Central Bank.

He questioned how the government expects to attract foreign investment or advance major projects such as Colombo Port City under such conditions, citing a lack of transparency in price discovery and market functioning.

Looking ahead, de Silva warned that restoring stability may require a sharp policy response, including a possible increase in interest rates by 50 to 100 basis points in the coming week.

While acknowledging such measures may be necessary to restore confidence, he cautioned that the broader economic impact would be felt by the public through higher borrowing costs and increased fiscal pressure. “If interest rates are increased, the cost of government borrowing will rise, and ultimately taxes on the public will also increase,” he said. (Newswire)

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