Interbank FX Market Dead for 100 Days
By Paneetha Ameresekere
The interbank foreign exchange (FX) market was ‘dead’ for the 100 consecutive market days to yesterday, with all trades in the FX market, ipso facto made worse by bank-client trades too since midnight on 6 September having to be executed under a controlled exchange rate (ER) regime of between Rs 200-203 to the US dollar, thereby aiding in the spawning of a black market. Even at the controlled ER of Rs 203, the ER will have had depreciated by 7.69 per cent (Rs 14.50) in the calendar year to Friday and year-onyear (YoY) by 9.70 per cent (Rs 17.95), thereby causing cost-push inflation, as Sri Lanka is an importdependent economy.
As at 31 December 2020, in the interbank FX market, beginning with ‘cash’ and going up to “one week’s forwards,” the ER was trading at a seemingly inflated value of Rs 187.50/188.50 to the dollar in two-way quotes due to CBSL controls, while a year ago due to lesser controls, the benchmark ‘spot’ was trading in the market at Rs 185.35/45 to the dollar in two-way quotes. Interbank exchange controls in the present dispensation first took root on 28 April at Rs 199/200 to the dollar, initially to control the weakening of the rupee due to demand and subsequently to protect the country’s sparse foreign reserves because at such low ER levels, no banks would want to sell their dollars in interbank FX trading.
What was worse was that previously in such situations/ controls, Central Bank of Sri Lanka (CBSL) used to sell dollars from the country’s foreign reserves for instance in situations at Rs 203 to the dollar. But in this instance, no such sales took place, at least on a consistent basis, thereby signifying the beginning of the current exchange-controlled regime, complemented by little or no intervention from the CBSL.
Another feature of the present exchange-controlled regime is that little or no outright purchases/sales of dollars are taking place in the interbank FX market due to the aforesaid reasons. Meanwhile, this moral suasion regime of Rs 199/200 to the dollar in twoway quotes in the interbank FX market started on 28 April continued till 10 May when on the following day 11 May, CBSL by moral suasion artificially weakened the ER to Rs 199.50/200.00 to the dollar in two-way quotes, before further weakening it to Rs 199.75/200.25 to the dollar in two-way quotes on 13 May, whilst once more weakening it to Rs 202/203 to the dollar in two-way quotes on 5 July, however, with little or no trades executed in the interbank FX market.
Meanwhile, in a tragicomic turn of events, on 7 September, CBSL artificially strengthened the ER to Rs 200/203 to the dollar in twoway quotes covering ‘bankclient’ transactions as well. Whilst continuing that way at least up to yesterday (Thursday, 23 September). Exchange controls spawn black markets, leading to the possibility of that seven-year era that dominated the economy from 1970-1977 replete with shortages, rationing, queues, nepotism, cronyism and corruption. The heart of the matter leading to such situations is that Sri Lanka is an importdependent economy.