While reserves bleed, CBSL controls US$ at Rs 133.40 Heading for a 1970-77 situation
Ceylon Finance Today: The foreign exchange (FX) market was little changed yesterday, with trades being done on one week forwards at Rs 133/40 to the US dollar in interbank trading on thin volumes, while the 'spot' continued to be locked at Rs 132.90 by Central Bank of Sri Lanka (CBSL) by moral suasion, market sources told Ceylon FT.
Moral suasion is also very much there in forwards trading as well, they said.
"Finance Minister Ravi Karunanayake had told the media on Wednesday that they will continue to defend the rupee at whatever the cost from their reserves, but this is no different to the stance taken by the CBSL Governor of the former regime Ajith Nivard Cabraal," the sources further said.
Moral suasion is also very much there in forwards trading as well, they said.
"Finance Minister Ravi Karunanayake had told the media on Wednesday that they will continue to defend the rupee at whatever the cost from their reserves, but this is no different to the stance taken by the CBSL Governor of the former regime Ajith Nivard Cabraal," the sources further said.
Ceylontoday, 2015-02-27 02:05:00
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While reserves bleed, CBSL controls US$ at Rs 133.40 Heading for a 1970-77 situation
By Paneetha Ameresekere
Ceylon Finance Today: The foreign exchange (FX) market was little changed yesterday, with trades being done on one week forwards at Rs 133/40 to the US dollar in interbank trading on thin volumes, while the 'spot' continued to be locked at Rs 132.90 by Central Bank of Sri Lanka (CBSL) by moral suasion, market sources told Ceylon FT.
Moral suasion is also very much there in forwards trading as well, they said.
"Finance Minister Ravi Karunanayake had told the media on Wednesdaythat they will continue to defend the rupee at whatever the cost from their reserves, but this is no different to the stance taken by the CBSL Governor of the former regime Ajith Nivard Cabraal," the sources further said.
Moral suasion is also very much there in forwards trading as well, they said.
"Finance Minister Ravi Karunanayake had told the media on Wednesdaythat they will continue to defend the rupee at whatever the cost from their reserves, but this is no different to the stance taken by the CBSL Governor of the former regime Ajith Nivard Cabraal," the sources further said.
Reserves are not meant to be frittered away for consumerism like what is happening now, the sources said. Reserves are meant to be used for emergency situations, they added. They may even be used to settle a petroleum bill, but not to buy motor-cars, the sources said.
Ninety per cent of the dealings done in the FX market by importers are executed by buying the required dollars after paying the required rupees. But if that avenue is blocked by moral suasion, there may be a complete breakdown in the economy similar to what Sri Lanka experienced in the 1970-77 period, they said.
As a result of encouraging consumerism begun by the previous regime with their budget delivered in November 2014, the country's reserves in a space of a month, that is, from 31 December, 2014 to 31 January, 2015 had gone down by a massive US$ 1 billion, that is, from US$ 8.2 billion to US$ 7.2 billion, the sources further said.
Due to these developments, exporters and high net worth individuals earning in dollars are holding on to their assets without converting them into rupees, thereby causing further pressure on the exchange rate, they said.
It's only the poor housemaids' dependents who are converting their dollar remittances for their day-to-day survival as they have no holding power, sources said.
Sagarika Chandra, Fitch's Associate Director, Sovereign Ratings, for Asia and Pacific, speaking at a seminar in Colombo yesterday viewed such developments due to the transitionary state of the government.
This outlook was supported by CBSL's Director Bank Supervision Yvette Fernando, in response to a question made by Ceylon FT as the same seminar, where she said that bank consolidation have been put on hold and are being reviewed, till the elections are over.
General elections are expected in June. The government will not like to have a weak rupee because that will make imports more expensive in the interim. As Sri Lanka is an import dependent economy, they fear that such a stance would jeopardize their chances at the poll.
Former Director Economic Affairs, Commonwealth Secretariat, Dr. Indrajit Coomaraswamy another speaker at this event said that since the liberalization of the economy in 1977, Sri Lanka has always been running a current account deficit in its budget.
This was previously covered by foreign aid amounting to 6-7% of GDP. But that avenue is now closed. Therefore, Sri Lanka will have to get its act right, however, painful that may be to get over this crisis, he said
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