ECONOMYNEXT – Sri Lanka exporters are bringing back almost all export proceeds, based on data generated from a monitoring mechanism, Central Bank Governor Nandalal Weerasinghe said.
Sri Lanka tightens rules on exporters and also on importers whenever the central bank prints money to mis-target interest rates and triggers forex shortages.
The rule requiring exporters to bring back dollars was put in August 2021, to his recollection, Governor Weerasinghe said.
The monitoring mechanism was put in July 2021, with some officials also claiming that there appeared to be a discrepancy between reported export numbers and conversions, firing public anger against the country’s export businesses.
“We have data from the time we started the monitoring mechanism,” Governor Weerasinghe said.
“Based on that we see that exporters have brought back almost 100 percent of proceeds as foreign exchange.”
Governor Weerasinghe was responding to a question by a Washington based agency which had claimed that there was large scale under-invoicing by businessmen who had kept money abroad.
Similar and even larger estimates had been made against other countries, he said.
Mis-invoicing is a matter for Sri Lanka Customs over had authority and not the central bank he explained.
“If anyone has any information that can reported to the Financial Intelligence, action can be taken against illegal money transfers using anti-money laundering laws,” he said.
While exporters are targeting by activists after forex shortages came, the usual accusation is that importers are under-invoicing.
Importers under-invoice to avoid excessive tax protection given to nationalist businessmen with political connection.
Protected business rake in the taxes which would otherwise have gone to the state but they escape censure.
Exporters usually do not have enough margins to keep large shares of money abroad as it is very competitive business.
Exporters however may get more packing credit and delay conversions as central bank money printed to maintain a non-market based fixed policy rate through aggressive open market operations begins to put pressure on the currency.
The limit to which such delays can be done also depends on their credit limits, which are not unlimited.
However analysts even if exporters borrowed domestically they cannot put pressure on the currency unless the central bank printed money, injected rupee reserves to banks and allowing excess credit to be given.
When central banks allow market based interest rates to resume, it is no longer profitable to borrow domestically and delay conversion.
In the absence of open market operations, a bank that gives extra credit to an exporter, has to necessarily crowd out another customer, reducing an equivalent amount of exports.
Currencies started to collapse – and the Gold Standard also broke down – after fixed policy rates with aggressive open market operations were invented by the New York Fed Governor Benjamin Strong.
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Strong’s Fed fired the roaring 20s bubble and the subsequent Great Depression.
With open market operations being done with government securities, central bankers then go its main scapegoat to blame for monetary stability – the budget deficit.-
In 2018 in particular, Sri Lanka triggered a currency in the course of flexible inflation targeting using aggressive open market operations to keep call market in the middle of the policy corridor.
Because claims on government and claims on commercial banks – due to open market operations – are no separately accounted for in general and in Sri Lank in particular, budgets are then blamed. (Colombo/Jan28/2023)