ECONOMYNEXT – Sri Lanka’s banks are being asked to share payments for fuel and essential items like food, Central Bank Governor Nivard Cabraal said as lack of dollars at banks delayed clearing of letters of credit for fuel.
Usually state banks opened letters of credit for fuel imported by state-run Ceylon Petroleum Corporation.
Top state bureaucrats had previously stopped state agencies from dealing with private banks.
Governor Cabraal said private banks will also now have to pay for fuel imports, not just state banks.
“Discussions have been held with banks,” he said.
Whether private banks will also open fuel LCs or whether they share other payments are under discussion, Cabraal said.
The delays are partly coming due to a surrender requirement but overall imports are surging due to money printed to keep interest rates down while operating a 200 to the US dollar peg.
Dollars surrendered to the central bank create money, which banks then lend to customers, creating new demand, instead of matching payments from existing reserve money, analysts have warned.
Surrender requirements are part of a repertoire of policy errors made by central banks which trigger currency crises.
Sri Lanka hiked a surrender requirement from 10 to 25 percent for banks getting dollars, and also tightened requirement for exporters to sell dollars.
Before dollar surrender requirements were tightened exporters and banks had got together to give dollars to clear fuel ships when state banks could not find dollars.
However giving reserves for imports also triggers money printing as interventions are sterilized. In November imports are estimated to have surged to 2.2 billion US dollars. (Colombo/Jan20/2021)