ECONOMYNEXT – Sri Lanka rupees non-credible peg to the US dollar at 203 has mostly broken, especially for large import payments, market participants said, as banks struggled to find dollars to exchange for printed money from failed bond auctions coming up for redemption in forex markets.
Most of Sri Lanka’s bank Treasurers were persuaded to keep rupee at 203 to the US dollar despite the lack of monetary policy to make the peg credible (a floating overnight rate or a wide policy corridor).
Importers say they cannot get dollars at 203 and are begging banks to get dollars at higher prices from exporters to clear import bills before the port charge them demurrage on containers.
Some banks have started to pay as much as 211 to exporters to serve customers.
On Friday Standard Chartered Bank told credit card customers that the 2.5 percent premium usually charged for foreign payments will be raised to 7 percent to “reflect the current market rates.”
Most banks are still carrying a rate of 203 for telegraphic transfers on their websites.
State-run Bank of Ceylon has a notice saying for transactions over 7,500 US dollars to contact the Treasury to get a rate.
“These rates are subject to change according to market levels,” a notice said. “Rate quotations for amounts in excess of USD 7500 or equivalent, should be referred to the Dealing Room and shall be decided at the discretion of the Bank.”
This week at the weekly meeting with authorities bank treasurers explained the difficulties in finding dollars at the 203 rate.
A US money doctor in 1950 set up a Latin America style central bank in then Ceylon, which has since depreciated the currency from 4.70 to over 200 in the worst performance in South Asia.
All South Asian central banks, and those of Mauritius and Seychelles are derived from the Indian rupee which was originally pegged to silver.
Analysts have called for laws to curb the domestic operations of Sri Lanka’s central bank, or its abolition in to a currency board before ‘output gap’ targeting and Modern Monetary Theory led to severe depletion of reserves.
Several central banks set up by the Latin America unit of the Fed before Ceylon, had ended up in market dollarization after severe depreciation.
However last week the central bank raised a ceiling rate on the 12-month bill yield which is serving as a de facto policy rate by 05 basis points. (Colombo/Aug13/2021)