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Forex issue: Short-term measures no solution to descent

a year ago

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By Yoshitha Perera The decline in foreign reserves has caused many issues. Local banks were finding it difficult to honour Letters of Credit (LCs), prompting some economists to predict that challenges in access to funding may persist as the situation gradually gets worse. Reserve currencies are important to any currency’s stability. A reserve currency is a currency that central banks around the world hold in significant numbers to facilitate international transactions and investments. When it comes to imports and accomplishing economic goals, these are the primary pillars of any country’s stability. Sri Lanka is facing a severe decline in foreign reserves. According to information from the Central Bank of Sri Lanka (CBSL), the country’s forex reserves reduced to $ 2.6 billion by the end of September. Sri Lanka’s forex reserves were $ 3.5 billion by the end of August. Experts stressed that seeking loans from foreign countries will not be a long-term solution, pointing out that if Sri Lanka did not seek assistance from the International Monetary Fund (IMF) to restructure its debt, the crisis would only become more complicated. While the CBSL stated that measures were taken to prevent any such issues in future, economists, on the other hand, predict funding access challenges in the country. Economists raise concerns Speaking to The Sunday Morning, senior economist and former CBSL Deputy Governor Dr. W.A. Wijewardena pointed out that the foreign exchange situation in the country was deteriorating by the day, and there were no reports of new inflows that were expected to ease the forex situation. “(CBSL) Governor Ajith Nivard Cabraal wanted to have a forex source for Sri Lanka, so that we would be able to maintain the exchange rate of Rs. 203 per US dollar (USD) till the end of the year. However, foreign resources were not coming to Sri Lanka as a result of the country’s forex situation,” he said. Dr. Wijewardena explained that the CBSL and the Government had to find an immediate solution for the matter, and stated that visiting foreign countries and trying to get relief would not solve the problem permanently. “This is why many have said that Sri Lanka needs to go to the IMF (International Monetary Fund) and seek their assistance. It is a permanent solution. Otherwise, the country would have to face a very serious situation in the next few months,” he said. Explaining the removal of the 100% cash margin on non-essential imports, Dr. Wijewardena opined that most of the items were imported by big companies that did not have issues in maintaining the 100% cash margin. He added: “It affected only small investors who didn’t have cash to maintain a 100% cash margin. It was not effective and that is why Cabraal decided to remove it immediately.” Speaking to The Sunday Morning, economist and Advocata Institute Chief Operating Officer (COO) Dhananath Fernando said the country’s foreign exchange reserves was at a critically low level and the country did not have a way of getting a dollar income. “The only solution to a decline in foreign reserves is depending on the IMF programme, since they can bring credibility to our system. As of now, we have proven that as a country we are not good at managing money. We are not managing our expenses and income in a proper manner,” he said. Sharing views with The Sunday Morning, a senior official from the CBSL, who wished to remain anonymous, acknowledged that the country’s foreign reserves position was still at a low level. They added that the Governor and a team from the CBSL were overseas, meeting several investors and central bank institutions to look at the possibilities of acquiring new inflows and funding for the country. The senior official also said that a notable improvement was marked in export earnings, which was recorded at over $ 1 billion in August 2021. “Expenditure on imports also increased, partly reflecting the surge in global commodity prices, resulting in an expansion in the trade deficit during the eight months ending August 2021, over the corresponding period of last year,” the senior official said. It was also mentioned that the depreciation of the Sri Lankan rupee against the USD was recorded at 6.8% thus far in 2021. “The Sri Lankan rupee remains largely undervalued, as reflected by the real effective exchange rate indices. The gross official reserves were estimated at $ 2.6 billion by the end of September 2021. This, however, does not include the bilateral currency swap facility with the People’s Bank of China (PBoC) of CNY 10 billion, equivalent to approximately $ 1.5 billion,” the senior official further said. Earlier this month, the CBSL announced its six-month roadmap for ensuring macroeconomic and financial system stability, which was expected to give a fillip to the Covid pandemic-impacted economy in the short term. CBSL Governor Ajith Nivard Cabraal announced that the new policy framework to stabilise the financial system and the foreign exchange position envisaged a rapid recovery of the economy with stable prices and sound macroeconomic fundamentals. He added that the new measures would be the first step in a long journey to bring in greater stability to the economy

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