Abstract:
Economic development and transport are solely linked since the transport activity is a key
component of economic development and human welfare. The main objectives of this
study is to identify, whether or not the expansion of transport sector and the resultant
ballooning of imports bill due to this incidence had a significant impact on the exchange
rate in Sri Lanka. For this purpose, data were collected from the Ceylon Petroleum
Cooperation, annual reports of CBSL, the Department of Motor Traffic and the World Bank
database. Augmented Dicky-Fuller, Johansson cointegration test and Vector Error
Correction Model were employed as major econometrics procedures to identify the
impacts of vehicles and crude oil imports on exchange rate in Sri Lanka.
This study revealed that, vehicle imports and crude oil imports are positively affected to
depreciate the Sri Lankan rupee in the long run as well as in the short run. A one per cent
increase in vehicle and crude oil imports affect the depreciation of Sri Lankan rupee by
4.6% and, 14.98% respectively, in the long run. Interest rate was found as an insignificant
factor affect the changes of exchange rate. Increasing export, promoting public transport
system, encouraging fuel efficient vehicles could be suggested to mitigate associated
problem with currency depreciation of Sri Lanka.
