An Echelon Media Company
Friday December 8th, 2023

Sri Lanka rupee dollar parallel markets step in amid money printing, forex curbs

ECONOMYNEXT – Sri Lanka rupee is hardly traded in official interbank markets after ban on outright trades above a 200 to the US dollar non-credible peg, but parallel foreign exchange markets are coming into play, as they had done in earlier money printing episodes, market participants say.

Sri Lanka’s interbank forex market saw some isolated outright trades over the past week and market based swap deals but activity had largely dried up after outright trades were banned by the central bank above 199.90 to the US dollar.

The central bank has been printing large volumes of money to keep down interest rates artificially which is making it difficult to maintain the exchange rate.

Banks are also not expected to quote over 203 to the US dollar to import customers or buy from exporters below the level.

Parallel Market

However some banks including international banks had been paying over the limit to exporters making the original bankers to the firms unhappy, market participants said.

Regulators made physical or on-site visits this week to check the rates at which dollars are being sold.

A parallel exchange rate higher than the 203 limit had emerged for capital outflows, market participants said.

To finance the outflows some banks had bought above the cartel-like agreement supposedly existing among banks not to pay a higher rate to exporters following informal requests.

Meanwhile the kerb market has also seen a steep fall to around 215 to 220 amid money printing.

The interbank trading ban without halting money printing had also led to rationing of Letters of Credit by banks.

“Regular meetings with key officials of the banking community are held by the Central Bank, and the banking community has mutually agreed to manage their outflows within inflows, while giving priority to essential and urgent imports, and discouraging orders of speculative nature,” Central Bank Governor W D Lakshaman said in a statement this week.

“Overall, I wish to assure the media, the general public, the business community and the investor community that the conditions of foreign currency liquidity observed in the domestic market at present are temporary and are driven by excessive speculative activity.”

As a result some importers who had previously gone through formal channels were forced to use the unofficial or ‘undiyal’ net settlement system long used in Asia before the emergence of banks, at around 220 rupees to the US dollar or higher.

Official payments are made through gross settlement systems, where each transaction is settled separately through systems such as SWIFT messaging.

Plus ça change, plus c’est la même chose

Sri Lanka saw official parallel exchange rates during late 1968 with Latin America style Foreign Exchange Entitlement Certificates (FEECs) being developed by the money printing Dudley Senanayake administration instead of restraining, reforming or abolishing the central bank.

The failure to restrain the domestic operations of the central bank had led to forex shortages, currency collapses and repeated trips to the IMF.

“…[I]n May 1968, Ceylon implemented a dual exchange rate (FEECS) that was commonly used in Latin America with tacit acceptance of the IMF,” top economist Saman Kelegama wrote in a summary of memoirs of Gamani Corea, a Sri Lanka planner and central banker.

“The Fund was not entirely happy but approved it by saying it was ‘a wrong step in the right direction’.”

Sri Lanka set up a Latin America style central bank in 1950 using elements of a cookie-cutter monetary law cooked up by Robert Triffin, an admirer of the Argentina central bank built by Raul Prebisch.

Triffin who headed the Latin America unit of the Fed set up a series of central banks with non-credible pegs in the region which ended up in import substitution, parallel exchange rates and sovereign default.

Some ended in dollarization. Dollarization is also picking up in Sri Lanka.


Sri Lanka listed companies cleared to sell dollar shares and bonds
Sri Lanka Port City dollarization upheld, constitution violation from depreciation: SC

In 1969 the Senanayake administration enacted Sri Lanka’s import control law, without reforming or abolishing the central bank.

In the 1970s Sri Lanka closed the entire economy, making extensive use of the law, instead of restraining the domestic operations of the central bank or abolishing it in favour of a currency board.

The law has been used to curb many imports in 2020, which had earlier brought outsize amounts as taxes in 2020.

The import control law to giving massive profits to rent-seeking import substutution businesses which are arbitraging the taxes and reporting large profits at the expense of consumers.

Meanwhile low taxed imports deemed ‘desirable’ by planners have bounced back with credit starting to flow, including with printed money.

Unlike in the 1960s and 1970s however there is now greater scrutiny of central bank activity in Sri Lanka.

This week, a statutory paper transaction involving a customary reversal of provisional advances (a type of printed money relating mostly to deficits in the past) via one-day Treasury bill issue, drew a lot of twitter comments.

However it is a book transaction involving a provision in the original US designed constitution of the central bank and does not acutualy change reserve money, and therefore cannot create monetary instability in the form of credit, forex shortages or inflation.

This week members of the public stormed the Lebanon central bank after it halted withdrawals of forex deposits, in a cautionary message to central bankers the world over.

Forex deposit withdrawals were in any case only allowed at a parallel exchange rate lower than the kerb market rate.

Foreign exchange is being released for oil at a still different parallel exchange rate.

The US Fed is again firing a commodities bubble which can push up commodity and food prices hurting the poor and the rich alike though some oil companies and can benefit.

Among major central banks the Fed has done the most damage to the world.

The Fed created the Great Depression with its roaring 20s bubble, blew up the centuries old Gold Standard along with the Bretton Woods system of non-credible soft-pegs in 1971 with output gap targeting and generated a massive housing and commodity bubble which ended in the Great Recession in 2008/9. (Colombo/June30/2021)

Leave a Comment

Your email address will not be published. Required fields are marked *

Leave a Comment

Leave a Comment

Cancel reply

Your email address will not be published. Required fields are marked *

SLPP enjoying “great demand” from potential presidential candidates: Namal

FILE PHOTO – President Gotabaya Rajapaksa with nephew Namal at the opening of the last part of the Southern Expressway/PMD

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) enjoys “great demand” from potential presidential candidates, and the party will have to take a call on working with incumbent President Ranil Wickremesinghe, MP Namal Rajapaksa said.

Speaking to reporters on Thursday December 07, Rajapaksa claimed several names have come up concerning the SLPP’s candidate at next year’s presidential election.

“There is great demand: entrepreneurs, businessmen, politicians, are all there. There are presidents too, ready to come forward with our party,” he said.

“Out of all these people, we will put forward on behalf of our party the candidate that can take the country forward while stabilising the economy,” he added.

Commenting on continued support for President Wickremesinghe, Rajapaksa said the while SLPP at present works with the former in the present government, the party will have to decide whether that relationship continues going forward.

“The matter of whether we work with the United National Party (UNP) in the future – this is not a politics dependent on individuals; the SLPP is a party. We will talk as a party with other parties, but no discussions will be held centred around individuals,” he said.

Rajapaksa noted that Wickremesinghe was the only member of parliament representing the UNP at the time of his election by parliament following the resignation of his predecessor Gotabaya Rajapaksa .

“If we are to collaborate with the UNP in the future, we’ll have to discuss that. Once the party has decided on that, we can get a start on those discussions. Today, we work with the president in the present government,” he said.

Last month, when asked to comment on President Wickremesinghe’s 2024 budget, MP Rajapkasa sounded rather sceptical of the president’s ambitions for turning the crisis-hit economy around.

“We must study the budget. He had presented a lot of these proposals in last year’s budget too. They don’t seem to have been implemented,” Namal Rajapaksa said, speaking to reporters after the budget presentation Monday November 13 afternoon.

Rajapaksa’s father and leader of the SLPP former president Mahinda Rajapaksa, however, spoke in favour of Wickremesinghe’s budget.


Sri Lanka’s “forward-looking” 2024 budget will instill fiscal discipline: MR

While not without its shortcomings, the older Rajapaksa said, the 2024 budget is a forward-looking one that aims to ensure fiscal discipline and put Sri Lanka on the path to recovery. (Colombo/Dec07/2023)

Continue Reading

Sri Lanka ruling party MP contradicts poll to claim his party is overtaking president’s

ECONOMYNEXT – The ruling Sri Lanka Podujana Peramuna (SLPP) is rising from the ashes albeit at a slower than anticipated pace, while President Ranil Wickremesinghe’s United National Party (UNP) still commands only 1-2 percent of the vote, an SLPP legislator said.

MP S B Dissanayake, who is not a member of the cabinet of ministers headed by President Wickremesinghe, told reporters on Thursday December 07 that support for any major political party of the island nation is on a downward trend while the SLPP alone is gaining ground.

An independent poll by the Institute for Health Policy (IHP) however shows that this is decidedly not the case. Polling data for October showed that the leftist National People’s Power (NPP) had enjoyed support from 40 percent of likely voters, having dipped 2 percent from September, while the main opposition the Samagi Jana Balawegaya (SJB) stood at 26 percent, increasing four percent from 22 percent in September. President Ranil Wickremesinghe’s UNP’s support decreased marginally to 11 percent in October from September’s 13 percent. The SLPP also saw a decrease to 5 percent from the previous month’s 8 percent.

“You can’t gamble with elections. The election must be held. We always say electrons must be held. The presidential election must be held next year. There is no alternative,” said Dissanayake.

“Parliamentary elections can be called if needed. But that’s not how it is with the presidential election. Nominations for that will have to be called by September, October next year,” he added.

Asked by a reporter if the SLPP is ready for elections, Dissanayake acknowledged that support for his party had eroded, to nothing.

“We crashed to zero. We were turned to ashes. But we will rise from those ashes. We’re not where we thought we were. The 6.9 million [votes received at the 2019 presidential election] no longer applies. We’re at about half of that. But we’re rising, like this,” he said, gesturing upwards.

“As other major parties go in the opposite direction, we’re rising slowly. But the UNP is not. It’s still on the ground, and still at 1 to 2 percent,” he claimed.

“The SLFP is there too. Those who left us are the same. Even together they cannot form 1 percent. But we’re climbing,” he said. (Colombo/Dec07/2023)

Continue Reading

Sri Lanka president appoints main opposition MP advisor

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has appointed MP Vadivel Suresh as a Senior Advisor aimed at “fostering the integration of Hill Country Tamils into Sri Lankan society”, the president’s office said.

A statement from the President’s Media Divison (PMD) said Suresh’s “pivotal role will centre around overseeing the comprehensive integration of Hill Country Tamils, particularly focusing on the districts of Badulla, Nuwara Eliya and Rathnapura”.

“The Senior Advisor will play a key role in coordinating various initiatives related to the welfare of Plantation Companies, the promotion of women, safeguarding children, addressing disparities in Tamil schools and upgrading the delivery of health services,” the statement said.

In May this year, Suresh, who represents the main opposition Samagi Jana Balawegaya (SJB) in parliament and also serves as the general secretary of the Lanka Jathika Estate Workers’ Union, made headlines when he issued an ultimatum to opposition and SJB leader Sajith Premadasa, demanding an apology for a perceived slight on the Indian-origin Tamil community that Suresh represents. He also spoke favourably of President Wickremesinghe, hinting at a possible cross over.

Sri Lanka’s Indian-origin Tamils, most of whom have historically worked in the plantation sector and live in dire conditions on wages widely considered unacceptably low. Speaking at a May Day rally, the Badulla district MP said Premadasa must apologise to the estate Tamils for allegedly snubbing them at an event in Madulsima that he failed to attend.

“I would like to say to our leader, sir, do not take us for granted,” said Suresh.

“If you need us to stay with you, come right now to Madulsima and apologise to my people and then we shall restart our journey. Otherwise I won’t be part of that journey. There will be no Vadivel Suresh. If you don’t apologise to my people, I won’t be with the SJB,” he said.

Making matters worse, the MP also expressed a willingness to join President Wickremesinghe if he was able to raise the daily wage of plantation workers and resolve their grievances. He also said the president has been successful in containing the disruptions caused by the currency crisis.

“On this May Day, we say to both the opposition leader and the president, I and my people would join hands with a leader that worked to increase [estate workers’] wages and give them [access to the Samurdhi welfare scheme] and include them in national policy,” he said. (Colombo/Dec07/2023)

Continue Reading