Sri Lanka’s corporate leaders said business activities have been disrupted from forex shortages coming from a 200 to the US dollar non-credible peg to which the central bank is no longer providing full convertibility.
The partial suspension of convertibility has led to parallel markets of 240 to the US dollar in the kerb market and for Hawala remittances.
The central bank is continuing to print money to maintain a 6.0 percent policy rate including after giving a limited amount of dollars for oil and medicines creating a gap between inflows and outflows.
“The gap between the informal market rate and the official rate has resulted in the dollar shortage,” Krishan Balendra, the chairman of John Keells Holdings PLC told a business forum organized by Sri Lanka’s Ceylon Chamber of Commerce, the Sri Lanka Economic Summit 2021.
“The dollar shortage is obviously having an effect on the businesses whether it is importing materials for large construction projects or for import trading business and some of the restrictions come around that have also disrupted businesses.”
Authorities have already controlled a number of imports including cars, but imports exceeded pre-pandemic levels up to July as large volumes of money was printed due to bond auction price controls, which have since been removed.
The increasing gap between the central bank’s rate and grey market rates have already reduced remittances because many Sri Lankan expatriate workers have switched to informal hawala’ and other unofficial channels.
The central bank itself started a Christmas parallel market at 210 for remittances in December.
Market analysts also say exporters have started to use some loopholes to not bring dollars to the country because they face a risk of sharp depreciation.
“If you want to recover, you can’t hold that position,” Kasturi Chellaraja Wilson, the Group CEO of Hemas Holdings, said.
When a central bank gets into sterilization trap (intervening and re-filling liquidity shortages to maintain the policy rate) a float of the currency will lead to a full suspension of convertibility (no interventions) ending the liquidity injections and the currency will stabilize at a lower level.
Mercantilists usually say currency pegs break because they are ‘overvalued’ and not due to liquidity injections from open market operations.
However Sri Lanka’s real effective exchange rate is now below 100. The REER is a naked mercantilist (trade based) measure.
However, the central bank governor Ajith Nivard Cabraal says there is no need for depreciation.
“Our view is that the rupee is already depreciated,” Cabraal told a media briefing on Saturday.
“We don’t want to depreciate any further. We don’t want to get into an auction sale with the hawala people.”
However with the credibility of the peg broken, and the agency running out of reserves to give convertibility it is difficult to enforce the peg, analysts say.
The central bank has started repo auctions to take out money last week. However due to the lack of credibility of the 200 to the US dollar peg, there is no spot forex market. A float however will re-activate the spot market.
Economynext
The partial suspension of convertibility has led to parallel markets of 240 to the US dollar in the kerb market and for Hawala remittances.
The central bank is continuing to print money to maintain a 6.0 percent policy rate including after giving a limited amount of dollars for oil and medicines creating a gap between inflows and outflows.
“The gap between the informal market rate and the official rate has resulted in the dollar shortage,” Krishan Balendra, the chairman of John Keells Holdings PLC told a business forum organized by Sri Lanka’s Ceylon Chamber of Commerce, the Sri Lanka Economic Summit 2021.
“The dollar shortage is obviously having an effect on the businesses whether it is importing materials for large construction projects or for import trading business and some of the restrictions come around that have also disrupted businesses.”
Authorities have already controlled a number of imports including cars, but imports exceeded pre-pandemic levels up to July as large volumes of money was printed due to bond auction price controls, which have since been removed.
The increasing gap between the central bank’s rate and grey market rates have already reduced remittances because many Sri Lankan expatriate workers have switched to informal hawala’ and other unofficial channels.
The central bank itself started a Christmas parallel market at 210 for remittances in December.
Market analysts also say exporters have started to use some loopholes to not bring dollars to the country because they face a risk of sharp depreciation.
“If you want to recover, you can’t hold that position,” Kasturi Chellaraja Wilson, the Group CEO of Hemas Holdings, said.
When a central bank gets into sterilization trap (intervening and re-filling liquidity shortages to maintain the policy rate) a float of the currency will lead to a full suspension of convertibility (no interventions) ending the liquidity injections and the currency will stabilize at a lower level.
Mercantilists usually say currency pegs break because they are ‘overvalued’ and not due to liquidity injections from open market operations.
However Sri Lanka’s real effective exchange rate is now below 100. The REER is a naked mercantilist (trade based) measure.
However, the central bank governor Ajith Nivard Cabraal says there is no need for depreciation.
“Our view is that the rupee is already depreciated,” Cabraal told a media briefing on Saturday.
“We don’t want to depreciate any further. We don’t want to get into an auction sale with the hawala people.”
However with the credibility of the peg broken, and the agency running out of reserves to give convertibility it is difficult to enforce the peg, analysts say.
The central bank has started repo auctions to take out money last week. However due to the lack of credibility of the 200 to the US dollar peg, there is no spot forex market. A float however will re-activate the spot market.
Economynext
