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Sri Lanka’s central bank expects the falling trend in foreign remittances to reverse from this month as it believes the release of US dollars for importers have stabilised the exchange rate and reduced the price difference between dollar selling rate at banks and the kerb market.
Foreign remittances sent to Sri Lanka through official channels have halved from a year earlier to 353.2 million dollars in September.
Sri Lanka developed a multiple parallel exchange rates as the credibility of the peg operated by the monopoly note-issue bank deteriorated as it printed money (created more rupees) but declined exchange all of them for dollars (provide convertibility when they turn in forex markets.
The failure to provide convertibility leads to a fall of the currency of a note-issue bank.
Though the central bank ordered commercial banks to sell and buy dollars at around 200/203 rupees, importers and exporters were exchanging dollars around 225 to 230 and NRFC deposits were converted at around 2015, the kerb market topped 230.
Meanwhile Undiyal transfers were around 240 dollars at one point. However some level of convertibility has been provided of late.
If convertibility is provided through reserves and no new money is injected through central bank windows to fill the liquidity shortage from the dollar sale and rates go up, the currency peg stabilizes.
However money is still being injected at a 6.0 percent policy rate though Governor Nivard Cabraal has lifted price controls on bond auctions which had reduced liquidity injections.
“Black market occurs all over the world and we did see a huge difference at one point,” Central Bank Governor Ajith Nivard Cabraal told reporters.
“We were not satisfied with that. That’s why we provided sufficient dollars to ensure that banks do not trade at any other rate other than what is at the band. That is happening now. I can assure, at the banks, it is happening.”
“Even the exchange rate at which the grey market is operating has shrunk quite appreciably. We also keep on those numbers and find that it has dropped quite significantly,” he said without elaborating on the selling rate.
The kerb market dollar rose as much as 247 during the lockdown and fell to around a few weeks ago and has since risen to around 230/231 market participants said. The Euro is around 265.50/266 rupees.
Expatriate workers can get higher rates from informal channels driving money off banks which pay low rates.
“We have addressed it with greater stability of the exchange rate. So I think this month we would see a change in that situation,” he said.
He said a new remittance system was also started by banks and the central bank. However to re-establish the credibility of the peg bond auctions have to succeed and any central bank re-financing of the deficit has to be avoided.
However with every partially successful bond auction, the central bank is running out of ammunition to provide convertibility analysts say with net reserves negative.
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