Dollar crisis: Central Bank shuts door for commercial banks; importers badly hit

Sri Lanka rupee vs US dollar

The Central Bank has told banks not to request dollars from the banking regulator’s depleted foreign currency reserves, and instead find it in the cash-short market as the country faces a major scarcity of dollars in the forex market.

This has resulted in several private banks being unable to pen Letters of Credit (LCs) to importers even for essential items such as pharmaceutical products.

According to a Central Bank directive, commercial banks dealing in the inter-bank foreign exchange market have been restricted in maintaining foreign currency reserves and managing foreign exchange liquidity within the banking system.

This has created a shortage of dollars in the country for transactions involving individual or institutional customers, Finance Ministry sources confirmed.

Local banks are also facing difficulties in accessing foreign-currency funding while forex reserves had come down to low level of US$ 4.4 billion by the end of April.

Banks’ holdings of Sri Lanka Development Bonds have declined by 15 percent in 2020 to $2.24 billion and it is likely to come down further this year due to the forex shortage, according to available Finance Ministry statistics.

The present drop in dollar circulation and conversion in the market is temporary due to exporters holding on to their dollar earnings hoping for a high rate while importers are rushing to buy dollars, State Minister of Finance Ajith Nivard Cabraal told the Sunday Times.

He noted that the exporters were not converting their foreign currencies till they got higher deposit rates in dollars.

He was of the view that gross foreign exchange inflows of over $3 billion from long term foreign loans would strengthen foreign reserves position and make the dollar situation and exchange rate stable soon.

Meanwhile, gross inflows on account of long-term loans included the receipt of the syndicated loan facility from the China Development Bank amounting to $ 500 million and from Bangladesh a $200 million currency swap facility plus a $400 million foreign currency swap with the Reserve Bank of India.

The Central Bank has also entered into a currency swap with the Central Bank of China for $ 1.5 billion and a term loan and concessional loan of $ 500 million from the Exim Bank of Korea.

Some exporters have resorted to the practice of obtaining US dollar loans to continue their exports and thus they had to settle the loan soon after they receive their payments for export products making them penny less, an economic expert said.

“Sri Lanka importers have been badly hit by a foreign currency scarcity as the banks are now refusing to open Letters of Credit even for the importation of essential commodities,” P.M. Abeysekera, President of the Sugar Importers Association and consultant of Essential Food Commodities Importers and Traders Association told the Sunday Times.

Banks are refusing the request of the clients to open LCs, even with the endorsement of the Central Bank, due to the shortage of dollars in the market.

The banks have a responsibility to help customers, specially essential commodity dealers, by informing them about the current situation before making them enter into forward exchange contracts desperately to mitigate the exchange risk, he said.

Commercial banks have been directed not to enter into forward exchange contracts with importers for three months, he said, adding that this was the only facility available for importers to tackle forex risk.

This restriction was extended until further notice and this act prevented the forex market from revealing the real exchange rate.

(Source: The Sunday Times – By Bandula Sirimanna)