Sri Lanka’s banks which are rationing letters of credit to importers on a case-by-case basis will not usually deny the facility to importers who bring intermediate goods, Deputy Central Bank Governor Dhammika Nanayakkara said. “As far as we know we have not been informed of any instance where the importer of an intermediate good has difficulties with LCs,” Nanayakkara told reporters on June 08.
“Sometimes bank can say they cannot open the LCs on that day but to come on a different day if they want to open the LC on the same day. “An LC is an irrevocable undertaking to pay the foreign counterparty on time. So banks may look at their cashflows.
“Banks will look at what type of goods they are brining and also how much they had imported already. Some had imported not only for current needs but for 10 to12 months ahead. “In that instance banks to manage their fund flows.” Sri Lanka’s banks started to ration LCs and foreign exchange after interbank trading above 200 to the US dollar was barred and some banks, especially those without exporter or remittance customers could not square their net open positions, market participants say.
Sri Lanka’s soft peg with the US dollar came under pressure as liquidity injections made for ‘stimulus’ and outright debt monetization to a make up for lost state revenues following a tax cut in December 2019 drove forex outflows above inflows. The central bank is now defending a pattern of gilt yields below 5.23 percent in the one year Treasury bills markets.
The central bank has also imposed a surrender requirement on export proceeds and is also selling more rupees into the overnight balance and pullout dollars available to meet the demand from existing excess liquidity. Most of the extra rupees are redeemed at the de facto convertibility undertaking (now set at around 200 to the dollar) in financial account transactions (mainly government debt repayment) leading to a steady running down of reserves.