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Friday January 21st, 2022

Sri Lanka shipping agents seek dollarized payments amid forex trouble

ECONOMYNEXT – Sri Lanka’s shipping agents have asked for dollarized freight charges, a report said as foreign exchange shortages intensified amid low interest rates and liquidity injections.

“The current US dollar shortage in the banking system has made it difficult to convert any rupee collections of freight to US dollars in order to make the remittances to principals,” Sri Lanka’s The Sunday Times newspaper quoted the Ceylon Association of Shipping Agents representing lines as saying.

“Hence shipping lines are forced to request exporters to pay freight in US dollars.”

Exporters have been told by shipping lines to pay freight in dollars and they in turn have raised the matter with Sri Lanka’s Export Development Board.

CASA had warned that delays in paying principles could reduce freight allocations for Colombo compared to other countries where payment are made faster, and this may make it difficult for exporters to meet customer deadlines, the newspaper said.

“The average value of export freight per month is US$ 100 million and it is vital for shipping agents to retain foreign funds held in Principals’ accounts to meet on going disbursements as well as remit funds to Principals in accordance with the Agency Agreements between Principals and Shipping Agents,” the CASA was quoted as saying.

Sri Lanka has printed around 1.6 trillion rupees from January 2020 to November 2021 and lost 5.6 billion US dollars in balance of payments deficits up to October 2021.

About 350 billion has been absorbed in a reserve money expansion and inflation.

Holders of rupees now find it difficult to convert to dollars at the 200 to the US dollar soft-peg as its credibility has been lost due to two years of money printing to maintain low interest rates.

Parallel exchange rate are now around 250 to the US dollar.

Under severe monetary instability involuntary market dollarization takes place.

Analysts have suggested that dollarization be encouraged to get over the barrier of converting dollars to rupee and back again, especially for the government.


Sri Lanka should prepare to float, and promote parallel dollarization: Bellwether

Allowing dollarized settlement of contracts avoid ‘jumping the hoop’ between Sri Lanka’s and US monetary bases, at a time when the peg has lost credibility, EN’s economic columnist Bellwether has said.

Parallel Dollarization

However parallel dollarization in the form of taxes being paid in US dollars, utility and energy bills being paid in US dollars would also allow both the government and importers to get US dollars without disturbing domestic reserve money.

The central bank has ordered banks to sell 25 percent of their dollars to it, which analysts had warned tends to create more rupees and further undermine the peg, which is on its weak side.

Key points

*One part of the surrender rule, allowing exporters to buy SLDBs is correct. That will directly transfer dollars to the government without having to go through the rupee credit system. However since some SLDBs were earlier repaid in rupees, their attractiveness is now less than before.

*In the same way the exporters should be allowed to pay taxes in dollars. The government can give the same two rupee extra (a discount) for paying taxes in dollars now given to expat workers.

*Exporters and hotels can also pay electricity bills in dollars. This will keep the power flowing to their factories and hotels. They can also pay dollars for fuel. This will keep fuel flowing to their factories and trucks.

*Exporters and hotels should also be allowed to pay their suppliers in dollars. That way the problem that is there with some inputs to the export industry will disappear.

*This includes tea exporters. Plantations have to buy some chemicals and other inputs for which suppliers can no longer get dollars. Some export manufacturing firms also get inputs from local importers including specialist chemicals where the agencies are held by locals.

*In fact SLDB bond auctions should be held weekly like Treasury bill auctions.

*Governor Nivard Cabraal’s suggestion of allowing car imports for dollars and taxes to be paid in dollars is absolutely correct.

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