State Banks drop Govt. decision to buy dollars from local market

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The proposal by the Government of Sri Lanka (GoSL) to buy dollars at higher prices in the local “open market” had to be abandoned as it would breach the current Central Bank of Sri Lanka (CBSL) policy of managing the exchange rate; State Bank sources told Finance Today.

Recently, Prime Minister Ranil Wickremesinghe said he hopes to meet the dollar requirements from the local “open market” to fulfil urgent import requirements of essential commodities including oil and food.

Accordingly, action was taken by GoSL to purchase foreign exchange through Bank of Ceylon and People’s Bank.

Sources said, the purchase decisions were, however, discarded not only because such purchases would not be in line with the current CBSL exchange rate management policy but also because the open market rates were high at near Rs 385 per dollar.

“One tea exporter had agreed to convert his US$ 20 million worth of export earnings at a rate of Rs 385 per dollar but the offer was dropped due to breaching CBSL rate management policy. CBSL is currently managing the exchange rate at around 365 -369 rupees per dollar,” they said.

According to CBSL’s recent statement its current exchange rate management policy is being implemented in consultation with market players since mid-May 2022.

The policy entails CBSL providing daily guidance on the degree of volatility to all licensed commercial banks based on the exchange rate determined in the interbank market on the preceding day with CBSL controlling the allowable two-sided variation margin.

“The implementation of this arrangement has brought greater stability in the exchange rate both in the formal as well as in the grey market thus far” CBSL stated.

According to CBSL, the arrangement has also minimised the excessive margins that prevailed in both markets and are expected to be reflected in the exchange rates quoted for customer transactions.

The success of the arrangement is attributed to complimentary action initiated by CBSL such as the restrictions imposed on open accounts and consignment payment terms that curtailed activity in the grey market by narrowing the gap between the official and the kerb rate. Accordingly, remittances by overseas workers via banking system have gathered pace while conversion of export proceeds have also improved.

This improved stability in the local foreign exchange market is expected to consolidate with the progress towards reaching a staff level agreement with the International Monetary Fund (IMF) on a funded arrangement, along with bridging finance from other multilateral and bilateral partners. CBSL is expected to review their current exchange rate arrangement from time to time with further flexibility allowed as the expected foreign exchange inflows to the country materialises.

By Ishara  Gamage