CBSL Governor urges importers and expatriates to use banking channels

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In order to increase foreign exchange liquidity, Central Bank Governor Dr. Nandalal Weerasinghe urged importers and expatriates to use formal banking channels instead of informal methods for foreign exchange transactions.

 “Worker remittances have come down from around USD 6.5 billion per annum to USD 2.5 billion, which means large numbers of Sri Lankans working abroad are using informal channels for remittances. If we had all that money, we could have used it to import essentials like fuel, gas and medicines,” he said.

The Governor noted that certain importers are using informal channels, as a result of which many non-essential goods are still being imported to the country.

He added that the Ministry of Finance will issue a new Gazette, under the Import and Export Control Act, making all payments for imports to Sri Lanka compulsory through an authorised banking system.

He further stated that measures would be taken to restrict Customs clearance of goods for those who use informal channels.

“Informal channels of foreign exchange transactions have been in existence for over long time and in other countries too. But now, the premium in informal transaction is too high, affecting banking sector liquidity, that’s the reason we are taking such measures now,” he said.

However, the Governor requested banks to be flexible and provide dollars in small sums to be sent out of the country for medical needs or education purposes. “These are essential needs. If people can’t find dollars in banks for such needs, they may look to informal channels, something which we need to discourage.”

On the stability of the banking system, the Governor stated, “Banks are very stable in terms of Capital Adequacy ratio. As per monetary Law Act, if there are shortages in rupee liquidity, the Central Bank can pump liquidity to the banking sector through various measures like open market operations. The issue in the banking sector is foreign currency liquidity shortage and not rupee liquidity.”

He added, depreciation pressure on the rupee will decline along with a drop in imports. The Governor noted that once the dollar inflows start picking up to comfortable levels, restrictions on foreign exchange transactions would be eased.

On a question regarding tourists being asked to pay in dollars, the Governor replied, “Nobody can demand to pay in US dollars unless they have special permission under the prevailing law. Sri Lanka’s rupee is the legal tender, and any such practices where foreign tourists are being asked to pay in dollars would be abolished.”

When questioned regarding recent Chinese Ambassador’s dissatisfaction on choosing debt restructuring over refinancing, the Governor replied, “All creditors will be treated equally in debt restructuring including China, India, Paris Club, or Non-Paris Club. On this basis we will start debt restructuring negotiations with China as well.“

Dr. Weerasinghe stated, “the Finance Minister is expected to announce a fiscal consolidation plan by next week. Restructuring of State-Owned Reforms is expected to be on the cards, irrespective of whether it is an IMF demand or not.”

When questioned regarding raising inflation and interest rates, he stated, “The increase in headline inflation could be due to one off price increases of petrol and gas. Even if Headline Inflation rises to 30%, that does not mean that we need to raise interest rates to 30%. However, the under lying inflation is expected to come down in around six months time. What the Central Bank can do is to reduce demand by controlling monetary policies, thereby reducing inflation over a period of time.“

Speaking on the Rapid Financing Facility (RFI), the Governor stated, “RFI was initiated by IMF during the Covid-19 pandemic. RFI could be provided in a short period of time. So we have requested for RFI. However, there is a requirement that a member country should provide certain details with assurance that the debt is sustainable. We are working on that, however we are not yet sure if we would get the RFI facility. But with regard to Extended Fund Facility, it is more relevant to Sri Lanka, on the basis of macro policy reform measures.”

When questioned on meeting payments for importing essentials for the next few months, till an IMF facility is confirmed, Dr. Weerasinghe replied, “We have only utilised USD 250 million out of the USD 1 billion Indian credit line. USD 500 million swap has been extended using the Asian Clearing Union. Also, we are to receive another USD 500 million facility from India for fuel imports. The World Bank has also re-allocated USD 600 million in funds, which were committed for other projects, now to help poor people, who are vulnerable due to rising inflation, as measure of creating a social safety net.”

By Rajiesh Seetharam