The Central Bank of Sri Lanka (CBSL) has decided to fully float the LKR since the 7th of March 2022, as a measure to tackle the depleting foreign currency reserves of the country. Since then, the LKR has depreciated by 44.20% to date. To bring the support needed to the currency, CBSL increased policy rates on 8th April 2022 by 700 basis points. CBSL also reduced the surrender requirement of Licensed Banks to facilitate the
We expect LKR depreciation to slow down over the short term, allowing the currency to reach its lowest value and recover afterwards.
Post the policy rate hike, the 364 day T-bill rate increased to 23.36% and continued to increase thereafter ( 364 day T-bill rate at the 15th July auction was 29.87%). Bank lending rates have almost doubled while most Licensed Banks are offering fixed deposits at approximately 14.00%.
NCPI based inflation stood at 45.30% by end of May 2022 (CCPI based inflation was 54.60% YoY in June 2022). The increase in global fuel prices and other essential imports over 1H CY22 are yet to be reflected in Sri Lankan consumer prices. It may take another 3-4 months for these to be reflected in consumer prices. As such, inflation is expected to increase further. Monetary tightening in the US and Europe will also put pressure on weaker currencies that will in turn increase import costs – leading to further inflationary pressure. However, the increase in interest rates will support in absorbing excess liquidity from the market that will curtail consumption. We will be able to witness the continuation of double-digit inflation in the short to medium term.
Land prices in Colombo have been increasing steadily and the asking prices have gone up significantly since the LKR depreciated. Land in prime residential neighbourhoods are scarce and prices are prohibitive. A townhouse in central Colombo on a land extent of 10 perches would cost over LKR 320 mn. This makes apartments the more affordable and practical option, given the current challenges with new construction.
Dollarisation of pricing: Over the past few months, major apartment projects which are complete or almost complete (existing inventory) are already repriced in USD. This would create a hedge against LKR depreciation and hence the demand for these apartments would rise as investors look to these properties to diversify their LKR risk.
The LKR is at a very low value at present, which provides attractive apartment prices for foreign investors: LKR is at its lowest levels presently, with the currency stabilising. Hence apartment prices are currently attractive for foreign investors and for Sri Lankan expatriates who are looking to invest.