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Wednesday June 29th, 2022

Sri Lanka central bank plans to acquire US$650-700mn from forex surrenders

ECONOMYNEXT – Sri Lanka’s central bank plans to acquire up to 700 million dollars a year from foreign exchange surrenders by banks that buy remittance and exporter dollars, a top central bank official said.

“The expectation is that during the second half of the year we will collect at least 350 million US dollars from that, Director of Economic Research Chandranath Amasekara said.

“And the annual collection will be around 650 -700 million US dollars.”

The measure is part of plans to acquire reserves to pay foreign loans falling due.

The central bank has directed banks that buy dollars from exporters to sell 10 percent to the central bank.

Out of 25 percent mandatory exporter conversions 10 percent has to be sold to the central bank.

Authorities are mulling whether to raise the limit.


Sri Lanka central bank studying hike in 25-pct exporter dollar conversion rule

When a central bank (and not the Treasury) buys dollars, new liquidity is injected to the banking system boosting loanable bank reserves through an expansion of reserve money, further pressuring a pegged exchange rate, analysts have warned.

As long as the Treasury buys dollars from rupees raised from taxes or actual bond sales to real buyers or banks (curtailing credit and consumption), no reserve money expansion takes place to create forex shortages and pressure the peg.

The peg now set at around 203 is already under pressure and parallel exchange rates have also developed amid rationing for imports.

In June the central bank has bought 33.71 million US dollars from commercial banks, despite the existence of over 80 billion rupees (about 400 million dollar equivalent at 200 to the dollar peg) in excess liquidity remaining in the system. (Colombo/July13/2021)

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