ECONOMYNEXT – Sri Lanka is not ready to allow large scale exports of rupee notes to other countries as it may complicate monetary policy, Central Bank officials said.
Central Bank Governor Indrajit Coomaraswamy told reporters the practice was currently illegal when asked whether it could be liberalized, or even traded abroad.
Last week Sri Lanka’s customs seized over 80 million rupees of Sri Lanka currency which was being ‘smuggled’ to Dubai ostensibly to be paid out to Sri Lankans who were willing to get payment.
"Why many countries do not like to allow their local money to be transacted or circulated abroad is because of monetary policy implications," Deputy Central Bank Governor Nandalal Weerasinghe said.
"If you want monetary policy effectively implemented it has to be territory where you have control. That is why US monetary policy has effects all over the world.
"Effectiveness of monetary policy is eroded if we allow the rupee to be traded off shore."
Weerasinghe said it is on a limited basis that countries like India and China were allowing their currencies to be traded abroad.
Indian rupees are now also used in Nepal and Bhutan, he said through peg or similar arrangements and those countries did not have independent monetary policy (to print money) and imported Indian inflation.
"One is the monetary policy aspect," Weerasinghe said. "The transaction you described where the rupee is going out and coming back there isn’t a need for Sri Lankan authorities to back the rupees with foreign currency,"
"What you are saying is if you allow the rupee to be traded then we have to have the capacity to back the rupees with foreign currency if and when someone wants to trade the rupees with foreign currency.
"That is really convertibility we are talking about, for that we do not have the reserves or the strength to allow it.
"As the Deputy Governor said if you allow the rupee to go around you have no control over narrow money in the economy and that becomes problematic as well."
Reporters pointed out that when external use was allowed, a portion of the notes would be permanently out of the country (effectively sterilized) and may also grow with time.
"Even outside the country if that is a significant amount it can have implications," Weerasinghe said.
"Trading outside can have implications on the exchange rate as well."
Before the Reserve Bank of India was nationalized, and the rupee was destroyed by being printed to finance Nehru’s 5 year plans, by becoming a soft-peg many Middle Eastern nations used the rupee. Sri Lanka also had a currency board backed to the Indian rupee. (Colombo/Sept27/2017).