Impact of Exchange Controls: Remittances Shrink After 13 Months
By Paneetha Ameresekere
Remittances earnings through legal channels on a monthly cumulative basis for the first time after 13 months shrank year-on-year (YoY) last month (August) impacted by a ‘dead’ interbank foreign exchange (FX) market, Central Bank of Sri Lanka’s (CBSL’s) data of Friday (17) showed. Consequently, remittances earnings contracted by 2.8 per cent (US$ 121.9 million) YoY to US$ 4,224.3 million in the first eight months of the year. The last time such a shrinkage occurred was when remittances earnings in the first seven months of last year shrank by 5.47 per cent (US$ 213 million) to US$ 3,682 million, YoY.
Complementing these developments, the interbank FX market has been dead for 97 market days to Friday due to exchange controls, reflected by artificially inflating the value of the rupee over the US dollar since 29 April at Rs 199/200 to the US dollar in two-way quotes, though the ER has been marginally, administratively depreciated to Rs 200/203 to the dollar in two-way quotes since. Also, since 29 April, Central Bank of Sri Lanka (CBSL) has been hardly selling dollars to the market beginning at the Rs 200 levels to the current control levels of Rs 203 to the dollar.
This has spawned illegal channels such as ‘undial’ and ‘hawala’ to remit money for better returns for dollars at the expense of legal channels such as the banking system and exchange houses. In additional controls imposed, CBSL since midnight on 6 September has administered bank-client FX transactions at Rs 200/203 to the dollar in two-way quotes. These measures have been executed to protect the country’s sparse FX reserves. Remittances since 2009 have been Sri Lanka’s single-largest FX earner.