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Cabraal refuses to float rupee despite dwindling remittances

30 Nov 2021

  • Says directive keeping USD rate below Rs. 203 won’t be revoked
  • Will maintain current rate throughout 1Q 2022
  • Unregistered channels selling rate hover around Rs. 235-240
  • Remittances drop for five consecutive months in Oct.
  • Central Bank to take action against USD ‘black market’
BY Shenal Fernando The Central Bank of Sri Lanka (CBSL) is unlikely to revoke the directive sent by them to licensed commercial banks (LCBs) by former CBSL Governor Prof. W.D. Lakshman days before his resignation, advising the banks to keep the selling rate of the US dollar (USD) below Rs. 203, The Morning Business learns. Current CBSL Governor Ajith Nivard Cabraal confirmed this during a recent webinar in which he expressed his plans to maintain the Sri Lankan rupee at its current rate throughout the first quarter (1Q) of next year. “We won’t have a depreciation of the rupee in the 1Q 2022, we are confident that the rupee would maintain its value, and it will probably have an opportunity of appreciating a little more in value,” he said at a webinar held by the International Chamber of Commerce. Despite assurances by the CBSL that it will crack down on informal money exchangers as the widening disparity between the exchange rate set by the CBSL and the value set by the black market has prompted foreign workers to remit money via informal channels. As of yesterday (29) the Canadian dollar was sold at Rs. 195 (CBSL rate – Rs. 161) and the US dollar was sold at Rs. 237 (CBSL rate – Rs. 203) in the “black market”. Sri Lanka has been plagued by a foreign exchange liquidity crisis since 2020 as a result of the loss of tourist revenue, following the Covid-19 pandemic and its foreign debt servicing obligations. In order to address the foreign exchange liquidity crisis, the Government has imposed stringent import restrictions. However, the effectiveness of such measures in addressing the root cause of the foreign liquidity issue is debatable because Sri Lanka possesses a soft-pegged exchange rate regime and excess liquidity rather than a trade deficit, which is the primary cause for forex shortages in such regimes. This situation was exacerbated by the monetary policies of the Government which involved continuous printing of money on Treasury bill purchases, leading to significant forex outflows which in turn has resulted in significant pressure on the peg. Amidst these challenging conditions in the local foreign exchange market, the CBSL engaged in a moral suasion strategy requesting commercial banks to artificially maintain the selling rate of the US dollar at a conservative range between Rs 200-203.  However, by August 2021 it was widely reported that while the CBSL was quoting a selling price of Rs. 203 for the dollar most local banks were quoting an exchange rate at around Rs. 210-220 and the kerb (black market) rate was around Rs. 240-250. Consequently, a directive was issued by the former CBSL Governor Prof. W.D. Lakshman, demanding 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 in the selling rate between the CBSL website and LCBs’ websites. Thereafter, while LCBs appear to be maintaining the CBSL denoted exchange rate, the black market has continued to offer high rates, which is more attractive to foreign workers when remitting money and thus, they have started utilising such informal channels over the CBSL regulated formal channels. This is reflected by the fact that worker remittances have continued decreasing during 2021 despite the increasing trend of worker remittances observed in the rest of South Asia. According to reports, remittance inflows have fallen to $ 317.4 million in October down 99% year-on-year (YoY) and cumulative remittance inflows for 2021 have fallen 14% YoY to $ 4.9 billion. October is said to be the fifth consecutive month remittances recorded a drop. In June, remittances dropped to $ 478 million while in July, August, and September, it dropped to $ 453 million, $ 447 million, and $ 353 million, respectively.  In contrast, recent data released by the World Bank on 17 November has projected remittance inflows to South Asia to grow by 8% in 2021, supported by high oil prices driving incomes in the Middle East, a key source market for remittances to the region. Remittances to Pakistan were projected to grow by 26%, and remittances to India were projected to grow by 4%.


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