Abstract:
This study aims to identify the factors affecting the exchange rate volatilities in Sri
Lanka compared to Peru. The country Peru was selected because it is the most
comparable to Sri Lanka based on the GDP Per Capita (PPP), population and Human
Development Index (HDI), and colonization. The main objective of this study is to
identify the factors affecting exchange rate volatilities in Sri Lanka compared to Peru.
The aim of the study is to investigate whether the external value of the Sri Lankan
Rupee is influenced by issues, such as macroeconomic factors, sociocultural factors,
institutional factors, and social factors and, if yes, how, and why. In other words, the
study aims to find out the impact of macroeconomic factors on exchange rate
volatilities in Sri Lanka, the impact of institutional factors on exchange rate
volatilities in Sri Lanka, the impact of sociocultural factors on exchange rate
volatilities of Sri Lanka and the impact of social factors on exchange rate volatilities
on Sri Lanka. A quantitative regression analysis technique was employed on the data
collected from secondary sources, such as the Central Bank of Sri Lanka, IMF
databases, and World Bank databases for the period from 1997 to 2022. The
discussion of the results was done from a critical perspective with the support of the
literature. The findings of the study revealed that major elements that have an impact
on a country's exchange rate volatility are GDP per capita, unemployment rate, social
contributions, and human development index. Foreign Direct Investments also
became significant when the social contribution factors moderated it. The regression
statistics between the two countries show that Sri Lanka has a higher level of
exchange rate volatility compared to Peru. It is evident that sociocultural and
macroeconomic factors have the biggest effects on the currency rate volatility in Sri
Lanka, while institutional factors, such as political stability, absence of violence, and
rule-based governance index, have no discernible impact on Sri Lanka's exchange
rate volatility. The findings will be helpful for the researchers to advance their
research studies in this field and for policymakers to develop sustainable frameworks
for exchange rate stability, which is identified as an essential factor for economic
development.
