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Sunday June 26th, 2022

Sri Lanka to ban open account imports to curb Undiyal/Hawala

ECONOMYNEXT – Sri Lanka will shortly ban open account imports in a bid to stop the demand of unofficial transfers made through Undiyal/Hawala net settlement systems, Central Bank Governor Nandalal Weerasinghe said.

“We see that there is a large volume of money going through the Hawala/Undiyal systems,” Governor Weerasinghe said.

“Sometime it is for imports that are not essential.”

About 25 percent of the country’s 1.6-1.8 billion dollars a month are on open account and another 12 percent or so on documents against payment/documents against acceptance (DA/DP), central bank officials said.

“Some imports are made via open account or DA/DP terms instead of letters of credit (LCs) and settlements are made outside the banking system.

Weerasinghe said the Finance Ministry will shortly issue a gazette notice through the Import and Export Control Law.

“Some time will be given, after that a certificate will have to be given that settlements will be done by the banking system only. That is the type of mechanism that is being devised.”

The Import and Export Control Law was enacted in 1969 when economists/Mercantilists printed money through the islands intermediate regime central bank and got an administration led by then Prime Minister Dudley Senanayake into trouble, critics say.

Sri Lanka parallel rates for Undiyal transfers are around 400 rupees a dollar or higher compared to around 365 to the US dollar for the banking system where there are forex shortages.

Governor Weerasinghe said remmittances which were around 500 million US dollars a month had fallen to around 300 million a month, showing the volume that is by passed.

Another demand for parallel transfers came from parents sending money to children through the banking system. Weerasinghe said banks have been asked by the central bank to give small volumes of dollars needed for parent so that the demand for Undiyal falls.

The demand for DA/DP will only be allowed for exporters who bring raw materials in the future.

Governor Weerasinghe said the exchange rate was no longer being controlled and expatriate workers were also getting a fair rate through the official market. Therefore he wanted everyone to return to formal channels.

Forex shortages are caused by extra money printing by the central bank which drives up credit and imports.

Parallel exchange rates emerge when the rupees trying to rush out the country are greater than the inflows.

At the moment there is a surrender requirement (central bank purchases of dollars for new money despite the distressed exchange) which critics say tends to push the currency down.

Foreign exchange shortages and balance of payments crises are a problems peculiar to countries that operate ‘flexible exchange rate’ which are neither clean floats nor hard pegs.

A flexible exchange rate or a soft-peg collapses triggering balance of payments deficits and parallel exchange rates (the peg loses credibility) when economists print money to delay market interest rate rises coming from increases in private credit or budget deficits.

However Governor Weerasinghe had taken the right step by hiking policy rates to 14.50 percent from 7.50 percent and Treasuries yields are now around 22 percent, which will eventually curb bank credit which turn private savings into imports through construction or consumption spending.

Treasury bill and bond rates have also gone up, which will reduce money printed by the central bank which trigger currency pressure and divert more private savings to the budget deficit to pay salaries of state workers.

But concerns have been raised that any attempt to force food importers to open Letters of Credit before private credit falls and the forex shortages end, could lead to food shortages as is already found in the case of medicines and fuel.

Related

Sri Lanka can trigger food shortages as in medicines with new trade controls: Bellwether

When banks stopped issuing letters of credit as they could not find enough dollars due to money printed by the central bank creating shortages of medicine and fuel, Sri Lanka’s essential goods importers kept the people fed with open account imports and settlements via Undiyal.

Undiyal allowed them to bid at a higher market rate, give a better rate to expatriate workers, and get priority foreign exchange to feed the people using the free market. (Colombo/April29/2022)

Comments (2)

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  1. Ashan says:

    Please find fast what them carry 102 ton printing pepper to uganda

  2. A V Thomas says:

    Actually this is very good move and but in order to import through Banks we need sufficient foreign currency and a stable exchange rates to me more competetive in the market with less expensive to the public and good political atmosphere
    Good Luck Governor

View all comments (2)

Comments (2)

Your email address will not be published.

  1. Ashan says:

    Please find fast what them carry 102 ton printing pepper to uganda

  2. A V Thomas says:

    Actually this is very good move and but in order to import through Banks we need sufficient foreign currency and a stable exchange rates to me more competetive in the market with less expensive to the public and good political atmosphere
    Good Luck Governor