Central Bank suspends circulars to save dollars

Sri Lanka rupee vs US dollar

The Central Bank did a 360 degree turn on its plan to save US dollars in the market, suspending decisions which forced banks and exporters to sell a portion of the US currency to the authorities.

The hurried measures came amidst anxiety that the dollar would go way beyond the 200-rupee level. In the early part of the week, it rose to more than Rs. 200 with pressure building and a likelihood that it would rise further but trawled back to Rs.198 on Friday after the Central Bank suspended the decisions, which were only announced a few weeks ago.

On Wednesday, the Central Bank suspended two circulars which directed banks to sell 10 percent of worker remittances to the Central Bank and the requirement that 50 percent of export earnings should be sold to the Central Bank. Additionally, in another move to save foreign exchange, the Central Bank suspended the purchase by banks in international sovereign bonds from March 23 to April 9.

Bankers and exporters welcomed this week the move saying pressure was building up in the market since banks too have obligations to pay foreign debt on loans and thus a crisis was building up in the market due to a shortage of dollars.

“There was pressure and a tight situation brewing in the market as we too have to pay loans and debt, it is not only the government that has to pay foreign debt,” said one banker, adding: “There was also pressure to pay import bills.”

According to estimates, Sri Lanka needs to pay back a total debt of $6.4 billion this year made up of $4.3 billion of government debt, $1.3 billion in Sri Lanka development bonds and the balance from privately-secured foreign loans.

Economists said that despite the Government’s confidence in not seeking the International Monetary Fund’s help, the situation merited seeking support from the global lending agency because delays in resorting to this measure would worsen the country’s debt crisis.

Analysts say IMF package will boost confidence in the market, encourage foreign investment and investment in Sri Lanka’s foreign bonds though on the flip side it means taking unpleasant decisions like cutting government spending and trimming the fat in the budget like piled-up debt from loss-making state-owned companies.

(Source: The Sunday Times)