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Sri Lanka relaxes exporter dollar repatriation control

ECONOMYNEXT – Sri Lanka is relaxing by two months a repatriation requirement slapped on exporters during a 2015/2016 balance of payments crisis triggered in the course of operating a highly unstable rapidly depreciating soft-peg labeled the ‘flexible exchange rate.’

Sri Lanka central bank triggered the 2015/2016 currency crises initially by releasing tens of billions of rupees of liquidity temporarily mopped up with term repo deals after a 2011/2012 crisis, to generate excess liquidity and later through money printed by acquisitions of Treasury bills to artificially depress rates.

After the rupee collapsed under unsustainable credit and excess liquidity, central bank slapped a three month dollar repatriation requirement on exporters.

The term was later extended to four months (120 days).

Sri Lanka’s cabinet of ministers had now cleared a proposal by finance minister Mangala Samaraweera to extend the period up to six months (180 days), with the approval of the Monetary Board of the Central Bank.

The International Monetary Fund has frowned on the repatriation control, during the operation a ‘flexible exchange rate’ labeling it a capital flow management (CFM) measure.

Sri Lanka’s central bank has committed policy errors and run contradictory exchange and money policies from the around two years after it was set up in 1950 and slapped exchange and trade controls instead of moving towards prudent or contradictory policy except for limited periods.

With the collapse of the Bretton Woods in 1971-73 Sri Lanka completely closed the economy, instead of following prudent monetary and exchange policies like East Asia.

Under President Nixon the US dollar’s peg to gold collapsed after money was printed to close an ‘output gap’ in the amidst of the Vietnam war.

In the last crisis the central bank pressured the Treasury to control car imports in a Nixon shock style trade controls and also slapped credit controls, instead of correcting policy errors involved in operating the unstable ‘flexible exchange rate’

Under an IMF program with the ‘flexible exchange rate’, the central bank is expected to build a ‘reserve buffer’ using a strong-side convertibility undertaking of a peg, which trigger injections of base money.

But there are no money policies (liquidity management rules) to complement base money injections, as a performance criteria, allowing the currency to be busted using discretionary powers of the central bank, critics have said. Base money is also injected using swaps with the Treasury.

Sri Lanka promised to relax the capital flow measure under the last IMF program segment. The relaxation of the CFM comes as Sri Lanka is due to sign a new one shortly for which staff level agreement has been reached.

It is not clear whether the CFM relaxation is a prior action.

“We plan to loosen the repatriation requirement by extending the period to repatriate the export proceeds from 120 to 180 days, with funds in the business foreign currency accounts maintained by exporters of goods freely remittable, and we will assess removing it with the timing linked to progress with the macroeconomic adjustments..” Sri Lankan authorities said last year.

In Sri Lanka currency collapses, balance payments troubles, which are results of policies errors involved in operating a soft-pegs or the ‘flexible exchange rate’ is blamed on trade, not the central bank.

Instead of stopping liquidity injections, which chase after dollars and trigger imports, authorities of Sri Lanka and other soft-pegged monetary authorities either try to restrict dollar flows or imports.

Under the last agreement with the IMF the central bank pledged not to bring in new controls.

“For the remainder of the program, we will not impose or intensify restrictions on the making of payments and transfers for current international transactions; introduce or modify multiple currency practices; conclude bilateral payments agreements that are inconsistent with Article VIII; or impose or intensify import restrictions for balance of payments reasons,” the central bank and the finance ministry pledged jointly.

“The CBSL and the government will also abstain from providing subsidized exchange guarantees for foreign currency borrowing.”

Analysts have called for Peoples Bank of China style restriction to be legislated to the monetary law of Sri Lanka to prevent the agency from entering into forward contracts such as swaps of a style that was used by speculators to bring down East Asian currencies in a 97/98 crisis.

Since the creation of the central bank the rupee has been busted to 182 to the US dollar from 4.70 rupee at the time of independence which is the worst among South Asian central banks and monetary authorities.

All South Asian nations, Mauritius and some gulf nations, which had rupees or currency boards/hard pegs to the Indian rupee started at 4.70 to the US dollar at independence. Like the Reserve Bank of India, Sri Lanka has also descended into taxing gold.

Under the ‘flexible exchange rate’ the rupee has collapsed from 131 to 182 to the US dollar in multiple runs on the rupee which has now pushed up interest rates, inflation and also caused economic activity and growth to plunge. (Colombo/Oct16/2019)