ECONOMYNEXT – Sri Lanka will place ceilings on dollar deposit rates of exporters to reduce the gap between rupee and dollar deposit rate and rupee loans, Central Bank Governor W D Lakshman said.
“Our intention is to impose these caps on export earnings that are held in foreign currency accounts,” Governor Lakshman said.
“In order to sort out the problem created by it this is one of the measures that is proposed.”
Sri Lanka’s lending rates have fallen sharply despite a double digit budget deficit due to liquidity injected by the central bank mainly through a ceiling rate on Treasuries.
Dollar yields went up as Sri Lanka credit was downgraded by international rating agencies, driving up rates on sovereign bands and overall risk premiums.
Exporters can now borrow the printed rupees at low rates, finance their expenses and keep dollars.
However if no money was printed, and rupee rates were market determined, exporter borrowings will offset other domestic credit, slow domestic investment and consumption and ‘crowd out’ imports.
In the absence of liquidity injection dollar deposits will be effectively financed by a reduced import bill and a narrowing of the external current account.
The money would then be available for banks to roll-over maturing Sri Lanka Development Bonds. Exporters can still directly buy SLDBs which are paying around 7.5 percent.
However if liquidity is injected through a price control on Treasury bill yields or other lender of last resort facility, banks would be able to finance the exporter and also grant other credit boosting imports and the trade deficit.
The central bank on Thursday hiked the overnight liquidity facility to 06.00 percent from 05.50 percent.
However most of the recent mischief in the external sector has been created by liquidity injections through the ceiling on gilt yields as bond auctions failed.
The rate de facto rate has only been raised 10 basis points over the past two weeks. (Colombo/Aug18/2021)