Despite prevailing foreign exchange (forex) issues plaguing the financial system of the country, licensed commercial banks (LCBs) appear to be acting in compliance with the directive issued by the Central Bank of Sri Lanka (CBSL) on 6 September to maintain the selling rate of the US dollar at a conservative range between Rs. 200 and Rs. 203, The Morning Business learns.
However, according to LCB customers, there appears to be a hesitancy amongst LCBs to do transactions that require a significant amount of dollars with the selling rate of the dollar being forced to hover below Rs. 203.
Moreover, exporters are also piling up their dollar earnings without bringing them into the Sri Lankan banking system with a reluctance to convert them into Sri Lankan rupees due to the lower rates LCBs are providing for the dollar.
This directive was issued after the noticeable failure of the moral suasion strategy of the CBSL to maintain the exchange rates quoted within the local foreign exchange market at the CBSL-set rates, leading to a wide disparity between the transaction rate published by the CBSL and rate quoted by LCBs. According to reports prior to this directive, most local banks were quoting an exchange rate at around Rs. 210-220 and the kerb market (black market) rate was around Rs. 240-250.
In the directive dated 6 September 2021, former CBSL Governor Prof. W.D. Lakshman requested all heads of LCBs to coincide in respect of maintaining the exchange rate within the agreed range of Rs. 200-203, in order to urgently address the stark difference of the selling rate between the CBSL website and LCBs’ websites.
“I most unambiguously require the continuous co-operation of all bank CEOs to support these endeavours. Needless to say, the CBSL has necessary tools and intervention instruments to be used to ensure that financial institutions duly comply in the greater national interest that is overwhelmingly paramount,” the directive included.
However, this directive was not accompanied by a CBSL intervention offering dollars to the local banks who were already facing precarious foreign exchange positions.
Therefore, despite assurances by the LCBs that they would fulfil their obligations under the directive, there existed a well-founded fear that the foreign currency liquidity problems faced by the banks would force them to act in violation of the said directive.
Nevertheless, it appears that the local banks have so far acted in compliance with the said directive and have imposed internal regulations and restrictions on outward payments to protect their foreign exchange positions and to enable them to operate in compliance with the said directive.
The CBSL imposed a maximum interest rate of 5% on foreign currency deposits of LCBs and National Savings Bank (NSB) as a measure to eliminate the interest rate anomaly that prevailed in the domestic market between interest rates offered by banks on foreign currency deposits and rupee deposits. This measure is implemented in order to influence foreign currency earners to convert their receipts into rupees, thereby contributing to improve the foreign currency liquidity in the domestic foreign exchange market.
However, the existing foreign exchange liquidity issues in the local market are expected to exacerbate over the coming months due to falling inward remittance, which constricted 35.5% YoY in July 2021 to $ 453 million from $ 702 million in July 2020.
While the influx of $ 787 million from the International Monetary Fund’s (IMF) special drawing rights (SDR) allocation and $ 150 million from the Bangladesh Central Bank under a swap agreement strengthened the foreign reserves to $ 3.5 billion in August, it did not have the desired effect on the exchange rate.
Moreover, further inflows are expected in the shape of a three-year bilateral currency swap facility amounting to ¥ 10 billion (approximately $ 1.5 billion) between the People’s Bank of China (PBoC) and the Central Bank of Sri Lanka.
The fact that Sri Lanka will be obligated to repay around $ 6.9 billion in foreign debt over the next 12 months means that such inflows shall be reserved for debt payment. Therefore, it is highly likely that the existing foreign exchange liquidity issues in the local foreign exchange market will prevail for the perceivable future.