Sri Lankan rupee revaluation to 203 dries up dollar flows, exporters prepare for new checks

ECONOMYNEXT – Foreign currency inflows into Sri Lankan banks dried up after the rupee was administratively revalued to 203 from around 238 to the US dollar and exporters braced for more checks, stakeholders said. Marlet.

Conversions by exporters dried up after authorities wrote to banks asking for the rate to be revalued to 203, despite the note-issuing bank producing reserve currency in large volumes after the stock failed. bonds, for which convertibility was gradually suspended as foreign exchange reserves declined.

In July, the net hedging of foreign exchange assets for the 1 trillion rupee monetary bases fell below 1%. Sri Lanka has since raised the reserve rate, which will increase the official reserve by about 15%.

Parallel exchange rates

The drop in remittances that began after money printing triggered parallel exchange rates eased further after the revaluation, market participants said.

Parallel exchange rates began to develop around June after controls were put in place on the interbank spot market and a ban on futures trading.

Sri Lanka’s remittances began to decline as the economy recovered, leading to credit and imports, and the central bank failed to stop the new money, leading to the emergence of markets parallels.

In the unofficial Undiyal market, dollars stood at around 245 rupees, discouraging conversions in the formal market, sources familiar with its operations said.

With the rationing of letters of credit and dollars in the midst of money printing and the suspension of convertibility for current transactions, a strong demand has come for Undiyal transfers out of the country.

Some imports are also paid for through informal systems at high premiums.

Last week, some banks were granting high rates in excess of Rs 230 to senders in the Middle East and elsewhere to attract foreign currency into the formal banking system, before the revaluation request came from the monetary authorities.

With flows drying up, banks will still need to ration letters of credit, bank officials said.

Focus on the exporter

Sri Lankan exporters are bracing for further checks after the regulator requested information on their dollar deposits.

Last month, banks were banned from paying exporters more than 5% for their dollar deposits.

Exporters say they also have dollar loans.

With the anchor’s credibility declining, some exporters say they are saving money to cover their loans, some of which are on moratorium, so they can pay back the banks later.

Many exporters were hit hard last year and put some workers on part-pay and kept them at home when export orders dried up.

In the stock market, exporting companies were sold after the “revaluation”.

With low rupee interest rates through money printing, exporters could also finance themselves with cheap rupees.

Sri Lanka is already targeting importers who have raised prices and for the first time, rice mills which were earning import substitution rents under the guise of trade restrictions were also targeted on Wednesday.

Emergency rule

Sri Lanka had already started action against importers saying they were “hoarding” after declaring a state of emergency.

The sugar stocks of five companies have been seized and are being sold at controlled prices, through a state retail network.

Rice mills, long protected by import controls to sell rice above world prices, were also raided for the first time on Wednesday.

When word of the emergency declaration and the sugar seizures spread, Indian banks began rejecting Sri Lanka’s letters of credit, financial sources said.

It is not clear whether the companies with sugar stocks had letters of credit reconfirmed by Indian banks or whether the emergency declaration scared Indian banks.

Some Indian banks had already stepped in to reconfirm import letters of credit, with Sri Lanka downgraded to CCC by rating agencies, as well as state banks.

Sri Lanka has been in the throes of currency problems since an American money specialist created a Latin American-style central bank modeled on Argentina’s BCRA in 1950 with an unreliable anchor.

Sri Lanka’s monetary anchor has no credibility due to the below-market policy rates applied with liquidity injections.

Over-sterilized non-credible ankle

In order to have a credible anchor, which does not depreciate, a monetary authority must engage in unsterilized or partially unsterilized interventions and allow short-term rates to fluctuate.

An ankle has a convertible monetary base requiring unsterilized interventions to maintain its credibility.

However, most of the cash injected in recent months has not come from sales of sterilized currencies but from failed ticket and bond auctions, which amounts to over-sterilization, analysts say.

Authorities have also imposed redemption requirements, despite the peg being weak, adding more liquidity.

In order to float an exchange rate and prevent its fall, a monetary authority must refrain from intervening and make the monetary base inconvertible.

Sri Lanka applies a flexible exchange rate, or recidivist IMF peg, which shifts from pegged to float and back to pegged (convertible to an inconvertible overnight monetary base), prompting the monetary authority to revert to l agency for bailouts.

Analysts have called for the lifting of price controls on bond auctions and allowing rates to rise. In order to lower the corrective rates, analysts have called for raising taxes and cutting state spending so that the expansion of economic controls can be halted and monetary stability can be restored.

External debt consolidation would also help keep the corrective interest rate low, analysts said. (Colombo / Sep08 / 2021)

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