Impact of exchange rate system on imports and exports: Special reference with Sri Lanka after 1977

Abstract

This study investigates the impact of exchange rate on exports and imports in Sri Lanka’s trade after liberalization policy. The multiple regression models were used to analyze the time series data for the period of 1980 to 2014. Ordinary Least Squares method is applied to check the relation between dependent variable (imports and exports) and independent variables (Exchange rate and inflation). The results of OLS show that exchange rate system has positive and significant effect on exports and imports in Sri Lanka after liberalization policy. The findings of the study indicate that exports and imports are increased during the post liberalization period. Therefore the free floating Exchange rate system could be able to increasing the exports and imports in the open economy in Sri Lanka. Sri Lanka is the import dependent country. Therefore, the import expenditure is higher than the exports revenue. It leads to the budget deficit. To control this situation the government must be control the import items and inflationary situation in Sri Lanka. The government should take a necessary action against this problem.