Impacts of The Expansion of Transport Sector on The Changes of Exchange Rate in Sri Lanka

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.