ECONOMYNEXT – Sri Lanka plans to remove a forced conversion rule of services exports as part of plans to gradually relax controls imposed in recent months, Central Bank Governor Nandalal Weerasinghe said.
The central bank imposed a series of controls on forcing exporters of goods and services to convert dollars by force and also imposed outward exchange controls as money was printed to keep rates down over the past two years driving up credit and excess demand creating forex exchange shortages.
“In the case of services exports like IT and tourism, we will remove the mandatory conversion requirement,” Central Bank Governor Nandalal Weerasinghe said.
“Goods imports are made through customs. We have no way to track these services. We have been told that some person are not bringing these money in at all because of the forced conversion rule.”
“We want to progressively remove this also.”
The central bank was also planning to relax a rule that required tourists to pay hotels in dollars only.
Governor Weerasinghe immediately slashed a surrender requirement which made banks transfer 50 percent of export and remittances to the central bank for new money, to 25 percent.
Analysts and economists have pointed out that the steep depreciation of the rupee during an attempted float (suspension of convertibility) was due to the surrender requirement which made the regime a peg with ‘strong side convertibility’, a rule that should be use when the exchange rate was appreciating.
Central bank purchases of dollars pushes a peg down.
When a third world intermediate regime central bank prints money, the controls imposed rapidly worsen the crisis. Analysts had pointed at the time that the conversion rules were similar to those imposed by Zimbabwe which was printing excess RTG dollars.
It is not clear to what extend the existing controls fall foul of International Monetary Fund rules on capital flow measures and multiple currency practices.
“We want to progressively remove control step by step,” Governor Weerasinghe said. “For the time being these have been done to stabilize the foreign exchange rate market.”
Governor Weerasinghe said the exchange rate was not being controlled and expatriate workers and other were getting a fair rate now.
Under Governor Weerasinghe policy rates were raised to 14.50 percent from 7.50 in a bid to end the fundamental cause of the currency crisis which is money printed to keep interest rates artificially low.
Treasuries yields have also been allowed to go up, which will drive private savings to the budget deficit instead of to areas like construction and capital goods imports, creating forex shortages for items like medicines.
There have been no major food shortage due to the use of Undiyal payments through open account imports.
Newly appointed Treasury Secretary has also ordered a temporary halt in capital expenditure which will also reduce the deficit, the need for money printing and high rates and construction related imports. (Colombo/Apr30/2022)