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Friday March 1st, 2024

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.

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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)

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Sri Lanka’s RAMIS online tax collection system “not operatable”: IT Minister

ECONOMYNEXT – Sri Lanka’s online tax collection system RAMIS is “not operatable”, and the Ministry of Information Technology is ready to do for an independent audit to find the shortcomings, State IT Minister Kanaka Herath said.

The Revenue Administration Management Information System (RAMIS) was introduced to the Inland Revenue Department (IRD) when the island nation signed for its 16th International Monetary Fund (IMF) programme in 2016.

However, trade unions at the IRD protested the move, claiming that the system was malfunctioning despite billions being spent for it amid allegations that the new system was reducing the direct contacts between taxpayers and the IRD to reduce corruption.

The RAMIS had to be stopped after taxpayers faced massive penalties because of blunders made by heads of the IT division, computer operators and system errors at the IRD, government officials have said.

“The whole of Sri Lanka admits RAMIS is a failure. The annual fee is very high for that. This should be told in public,” Herath told reporters at a media briefing in Colombo on Thursday (29)

“In future, we want all the ministries to get the guidelines from our ministry when they go for ERP (Enterprise resource planning).”

President Ranil Wickremesinghe’s government said the RAMIS system will be operational from December last year.

However, the failure has delayed some tax collection which could have been paid via online.

“It is not under our ministry. It is under the finance ministry. We have no involvement with it, but still, it is not operatable,” Herath said.

“So, there are so many issues going on and I have no idea what the technical part of it. We can carry out an independent audit to find out the shortcomings of the software.”

Finance Ministry officials say IRD employees and trade unions had been resisting the RAMIS because it prevents direct interactions with taxpayers and possible bribes for defaulting or under paying taxes.

The crisis-hit island nation is struggling to boost its revenue in line with the target it has committed to the IMF in return for a 3 billion-dollar extended fund facility. (Colombo/Feb 29/2024) 

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Sri Lanka aims to boost SME with Sancharaka Udawa tourism expo

ECONOMYNEXT – Sri Lanka is hosting Sancharaka Udawa, a tourism industry exhibition which will bring together businesses ranging from hotels to travel agents and airlines, and will allow the small and medium sector build links with the rest of the industry, officials said.

There will be over 250 exhibitors, with the annual event held for the 11th time expected to draw around 10,000 visitors, the organizers said.

“SMEs play a big role, from homestays to under three-star categories,” Sri Lanka Tourism Promotion Bureau Chairman, Chalaka Gajabahu told reporters.

“It is very important that we develop those markets as well.”

The Sancharaka Udawa fair comes as the Indian Ocean island is experiencing a tourism revival.

Sri Lanka had welcomed 191,000 tourists up to February 25, compared to 107,639 in February 2023.

“We have been hitting back-to-back double centuries,” Gajabahu said. “January was over 200,000.”

The exhibition to be held on May 17-18, is organized by the Sri Lanka Association of Inbound Tour Operators.

It aims to establish a networking platform for small and medium sized service providers within the industry including the smallest sector.

“Homestays have been increasingly popular in areas such as Ella, Down South, Knuckles and Kandy,” SLAITO President, Nishad Wijethunga, said.

In the northern Jaffna peninsula, both domestic and international tourism was helping hotels.

A representative of the Northern Province Tourism Sector said that the Northern Province has 170 hotels, all of which have 60-70 percent occupancy.

Further, domestic airlines from Colombo to Palali and the inter-city train have been popular with local and international visitors, especially Indian tourists. (Colombo/Feb29/2024)

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Sri Lanka rupee closes at 309.50/70 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 309.50/70 to the US dollar Thursday, from 310.00/15 on Wednesday, dealers said.

Bond yields were slightly higher.

A bond maturing on 01.02.2026 closed at 10.50/70 percent down from 10.60/80 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.10 percent from 11.90/12.00 percent.

A bond maturing on 01.07.2028 closed at 12.20/25 percent.

A bond maturing on 15.07.2029 closed at 12.30/45 percent up from 12.20/50 percent.

A bond maturing on 15.05.2030 closed at 12.35/50 percent up from 12.25/40 percent.

A bond maturing on 01.07.2032 closed at 12.55/13.00 percent up from 12.50/90 percent. (Colombo/Feb29/2024)

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