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Sunday March 26th, 2023

Sri Lanka forex market activity down, spot dollar quoted wide

ECONOMYNEXT – Sri Lanka’s forex market activity was down Friday and the spot dollar was quoted at 335/345 to the US dollar, in late morning trade, dealers said.

The rupee closed around 337/344 to the US dollar Thursday, with activity also down.

There were no tom deals, only 0.8 million tom deals and 6.25 million in spot and forwards, traders said.

There were few firm quotes in the market in the morning, following recent events, market participants said.

Sri Lanka shifted to an ad hoc pegging arrangement from March 07, leading to a steep appreciation of the currency amid a slowdown in domestic credit.

The International Monetary Fund also recommends ad hoc pegging (flexible exchange rates) where the monetary regime is neither a clean float nor hard peg and can lead to a rapid loss of confidence.

Ad hoc, near-zero-credibility pegs, were devised by Washington based Mercantilists and are peddled to third world countries without a doctrinal foundation in sound money, according to critics.

Mercantilists believe that exchange rates are determined by the ‘market’ or ‘trade’ and not the monetary policy anchor and credit.

Sri Lanka had monetary policy consistent with exchange rate stability and the central bank was able to buy up to March and the central bank was able to buy around 200 million dollars a month on a net basis in both January and February.

A surrender rule kept the exchange rate from appreciating, but the central bank sold back dollars for some transactions.

In March however the central bank had bought around 500 million US dollars as there was large sell down.

Bank are now collecting dollars, or settling in house, dealers said.

Meanwhile some members of the public who had dollar notes (in effect a private foreign reserve, like the central bank has), preventing their savings from being used for imports through consumption or rupee credit system had also sold them as the rupee appreciated.

The holders are now with rupees, who may spend it on imports. (Colombo/Mar17/2023)

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Sri Lanka seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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