Following a comment made during the monetary policy press conference on April 8, the Central Bank had reduced the dollar conversion and redemption rule to 25% from 50% levels, which was effective from of the fourth week of March as authorities attempted to bolster liquidity in the domestic foreign exchange market.
Banks were notified of the latest decision last week, according to a dealer.
Speaking during his first presser on April 8, the new Central Bank Governor, Dr Nandalal Weerasinghe, expressed his qualms about the severity of the rule, although such rules are not uncommon around the world.
For example, Turkey, which has also experienced currency problems in recent years, has asked exporters to convert a quarter of their income into liras to increase its reserves and support the local currency.
The Turkish lira fell 44% in 2021 and has continued to weaken so far this year. Sri Lanka tightened its currency conversion and return rule from exports and remittances from the third week of March to replenish its nascent reserves to repay foreign currency borrowings.
But this created shortages in the domestic foreign exchange market which resulted in shortages of key commodities such as oil, gas, milk powder and many more as importers got stuck for dollars. With new staff in the Ministry of Finance and Central Bank, Sri Lanka has decided to suspend foreign currency debt payments as the new economic team believes this would leave enough foreign currency liquidity to finance imports essentials and gradually lighten the burden on people.
Sri Lanka floated the rupee on March 7, boosting inflation to nearly 20% in March and sent the rupee plummeting 60%, earning it the dubious label of becoming the worst performing currency in the world. world. But that did not end the dollar shortages as continually propagated by mainstream economists. Sri Lanka has a trade gap of over $10 billion between imports and exports and no amount of higher rates and a weaker rupee would allow Sri Lankans to consume imported goods and services unless it is not increases its dollar income in the immediate short term through more borrowing and in the future. in the medium term through export revenues, tourism and investments. However, exorbitant rates and higher corporate and personal taxes, demanded by the same cohort of economists, would rob any incentive to build new industries and resume consumption, causing the economy to plummet. for the coming years.