ECONOMYNEXT – Sri Lanka is exploring the possibility of conducting tea auctions in US dollars but it requires central bank approval, Plantations Minister Ramesh Pathirana told parliament amidst the worst currency crises in the history of the 72-year old monetary authority.
“We have submitted this proposal to the (Sri Lanka) Tea Board. They have said the decision to transmit dollars down the chain rests with the exporters,” Minister Pathirana told parlianmetn on June 22.
“There is a further problem in that even if the auction was conducted in US dollars there no way to pay tea smallholders in dollars at the market.
“For that the central bank has to take a policy decision.”
Minister Pathirana was responding to a request by ruling party legislator Weerasumana Weerasinghe to dollarize the auctions so that small tea farmers could import fertilizer and other inputs freely.
Forex shortages had made it difficult to import fertilizer after a fertilizer ban advocated by the Governor Medical Officers Association and legislator monk was lifted.
In May tea exports fell 17 percent.
Minister Pathirana said the cabinet of ministers had discussed the question of allowing exporters to buy diesel in US dollars.
“I personally think that is a good idea,” he said. “But the central bank has to take a decision on whether to conduct these transactions in dollars.”
Sri Lanka has an intermediate regime central bank with anchor conflicts triggering currency crises whenever aggressive floating rate style monetary policy is employed against a highly unstable peg or flexible exchange rate.
Sri Lanka is unable to transfer wealth from the domestic credit system based on a rupee reserve money to the dollar credit system linked to the Fed due to the lack of a working or credible peg or a clean floating exchange rate.
Analysts have said allowing parallel dollarization will help reduce pressure on the rupee credit system and prolonged policy conflicts will may lead to market dollarization.