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Thursday June 30th, 2022

Sri Lanka central bank controls dollar deposit rates amid currency crisis

ECONOMYNEXT – Sri Lanka has linked the rates paid to foreign currency deposit to rupee yields using powers of a Monetary Law devised by a US money doctor, as a currency crisis triggered by record liquidity injections gripped the country.

The maximum interest rates that shall be offered or paid by a licensed commercial bank and the National Savings Bank on foreign currency (FCY) deposits below one year would be 150 basis points below the one year Treasury bill auction yield or 5 percent, whichever is higher.

Deposits of more than a year will be “based on the market behaviour” the central bank said.

Special Deposit Accounts can be paid a higher interest rate.

“The auctions for calculating the above average rate, shall be selected based on the auction date falling within the corresponding calendar month, and not the settlement date,” the central bank said.

“The maximum interest rates for the forthcoming quarter shall be computed on the last working day of the current quarter.”

In August the central bank imposed a ceiling rate of 5.0 percent on dollar deposits, discouraging the active raising of deposits by banks.

Sri Lanka’s dollar yields have risen sharply as liquidity tightened after downgrades and counterparty risks rose.

Sri Lanka is currently facing a currency crisis due to low interest rates enforced with liquidity injections.

During the ousted ‘Yahapalana’ administration when the currency collapsed from 131 to 181 in two crises, deposit rate controls were slapped on rupee deposits of hapless poor savers after printing money to bust the currency peg and drive inflation up.

The rupee is now on a 200 to the US dollar peg which has lost credibility and parallel exchange rates are around 250 to the dollar.

In 1950 a classical analyst writing in the London-based The Banker magaize warned of things to come when a discretionary central bank with money printing power was set up with other sweeping powers.

“It will be obvious from this summary that the new Monetary Board is going to be given almost unlimited power of control over the banking system of Ceylon-a power which, if misused, could do irreparable harm to the island’s economy,” the analyst wrote.

“The experience of the next few years will be watched with inter~st to see whether the Ceylon experiment will indeed show the rest of the Empire the way that a developing economy should take to free itself from the as yet ungauged disadvantages of the Currency Board system or whether it will merely provide another example of the tangled skein so often woven by those who set out with the good intention of making finance ” the servant instead of the master of the people “. (Colombo/Jan02/2021)

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