An article under the topic "Economic and Financial issues of Sri Lanka" Someone please checkout this and correct my faults..

Depreciation of the Sri Lankan Rupee (LKR)

What is an exchange rate?

An exchange rate is defined as the rate at which one currency is exchanged for another. At present, one U.S. dollar (USD) is equivalent to approximately 125 Sri Lankan rupees (LKR).
This means an American tourist visiting Sri Lanka can exchange 1000 USD and get 125,000 LKR to spend there.

For most transactions in international trade, the USD is the standard currency. The use of such an internationally recognized currency facilitates foreign trade immensely. In the modern world, all governments have adopted a "floating exchange rate", under which the value of a currency changes daily. It is important for a country to have a strong currency.

However, the value of the LKR as gone down over the years, this diminishing of the LKR is termed depreciation of currency.

The depreciation of the LKR has had several adverse affects on the economy of Sri Lanka.

For one, the price of imported goods has risen over the years. Demand inelastic commodities will be imported no matter what the increase in price. The best example is oil. The quantity of oil imported has increased annually.
In 2009, 60 USD had to paid for a barrel of oil, but in 2011, 90 USD was paid.

Inflation also can cause by foreign currency through GGSS, when considering how it happens, in the time with the depreciation of currency have to spend more local money to take one unit of foreign money when export goods and services. Therefore the price of imported goods and services increase, then because of that the cost of goods and services increase. Finally it affects all over the country. The price of all imported items has increased; this can be described as "Imported inflation." Since oil is an essential commodity, the prices of locally manufactured goods and services will also rise, leading to a heavy burden on the entire economy.

The depreciation of the currency will make exports cheaper and thus reduce foreign currency earned. The price of rubber in terms of foreign currency has decreased, but if we try to increase the export price of rubber, competing countries such as India and Malaysia will supply it at a lower price. Therefore, we will lose the competitive advantage.

Sri Lanka has borrowed a large amount of funds from several countries. Mostly these loans are made in USD and hence greater amounts of domestic currency have to be utilized in repaying the loan. The payments, with the accompanying interest, will be higher as more LKR have to be spent in order to buy foreign currency. As a result it causes a loss in budget.

A strong, consistent exchange rate attracts investors. This is because they can make decisions and predictions regarding investing more accurately. Heavy fluctuations in the LKR have discouraged and risky foreign investors. On the other hand, the Kuwait Dinar (KWD) has increased continuously during the same period, leading to more foreign investment in Kuwait. And also the depreciation of the LKR can harm to the long term and middle term trade transactions and discourage trade too.

More than the above effects as a major scenario; when the currency get depreciate it will directly adverse to the balance trade, because when discourage export of goods and services at a low income for exports, imports and when it take more place have to spend more for imports. Therefore trade balance gets worse to the balance trade. It proves that there is a strong bond between foreign currency and balance trade.

And also, the depreciation of the LKR has affected the balance sheets of domestic companies, because liabilities are denominated in foreign currency while assets are in local currency.

Sri Lanka must focus on maintaining a good exchange rate so as to reap the advantages of international trade and gain foreign transactions. This will contribute to the development of the country.