Mayhem in markets!

Wednesday, 8 September 2021 00:00 -     - {{hitsCtrl.values.hits}}


  • CB move to unofficially peg rupee to dollar at a fixed rate rattles forex and capital markets
  • Monetary regulator seeks active and tangible co-operation from banks to ensure dollar exchange rate is maintained at “formally agreed” rate range of Rs. 200-203 as opposed to rates between Rs. 225-235 in official forex market
  • Stock market dips; forex market hardly active with no dollars; bond market frozen
  • Banks told to ensure rate does not deteriorate beyond agreed range
  • Governor effects moral suasion in writing to CEOs; critics claim it is “immoral suasion”
  • CB tells banks to serve greater national interest first
  • Stresses during critical times banks should not work in silos safeguarding private interests
  • Mixed reactions as different stakeholders argue pros and cons of the move
  • Move lowers value of  SL’s foreign debt; favours importers and reduces cost of dollars available and cost of living; minimises export competitiveness and challenges CB to have  more dollars to defend the predetermined rate

By Nisthar Cassim

Central Bank Governor Prof. W. D. Lakshman 

Forex and capital markets were rattled yesterday, leaving the private sector confused and concerned, after the Central Bank unofficially pegged the rupee to the dollar at a fixed rate.

The fixed rate of the dollar and reasons for the move were conveyed by Central Bank Governor Prof. W.D. Lakshman to all bank CEOs in writing.

“As responsible members of the financial community of this country, I most categorically require and request your active and tangible co-operation in order to ensure that the exchange rates is maintained at the formally agreed rate range of Rs. 200-203 per dollar and, correspondingly, to ensure that the rate does not deteriorate beyond this agreed rate range,” said the CB Governor in his letter. He also categorically told banks to comply and cooperate in the greater national interest while efforts are underway to boost foreign inflows.

Prior to yesterday’s move the US Dollar was quoted by banks between a low of Rs. 225 and a high of Rs. 235. This was despite the Central Bank repeatedly communicating that the indicative rate was Rs. 203. In the black market, dollars were expensive between Rs. 240-250.

The forex market was largely inactive as importers and traders found dollars unavailable at the lower rate with banks not keen to open LCs. The move is helpful for importers provided dollars are in adequate supply, while experts opined importers would now have to wait painfully longer for their requirement.

Investors in the Colombo stock market also had concerns since recent bull run was on the premise that reserves crisis meant greater attractiveness for listed companies which have significant dollar earnings.  Market dipped partly because of this as well as profit taking following all time high share prices until last week. 

For foreign investors an appreciation of the Rupee should be good news though the CSE has seen net foreign outflow racing to over Rs. 41 billion year to date on top of Rs. 50 billion last year. 

The CB action also sent shockwaves within the export community which was hoping for a realistic official rate. With a fixed rate expected to last till end-December, exporters will now be forced to convert their earnings rather than delaying on speculation of further depreciation. After 25% mandatory conversion, exporters were holding on to cash in in tandem with speculator high rates. Some feared mandatory conversion might be increased to a higher percentage if the situation warrants post yesterday’s CB move. 

Exports were up 29% to $ 5.7 billion in the first half of this year and original target was around $ 12 billion. Imports on the other hand jumped by 30% to $ 10 billion despite restrictions.

Among benefits are the value of the country’s debt stock coming down overnight and imports being cheaper and import-cost-push inflation reducing thereby the cost of living. On the other hand, the Central Bank will need more dollars to defend the rate at this predetermined level. Markets are also awaiting reactions from rating agencies and global investment banks on Sri Lanka’s latest currency move.

Analysts said for several weeks that the economy couldn’t sustain the two or three-tiered forex market, with the Central Bank maintaining one rate, banks quoting another and black market a different rate. Some labelled yesterday’s Central Bank action as “immoral suasion” and questioned whether the foreign banks which are active in international trade financing will toe Central Bank’s line. Some foreign continued to quote higher rates yesterday than those directed by the Central Bank. 

CB’s letter to bank CEOs

In his letter, Governor Lakshman drew the urgent attention of bank CEOs to the fact that the prevailing conditions in the country, troubled as it is by health concerns associated with the spread of the COVID-19 pandemic, do not at all warrant excessive foreign exchange volatility and any further depreciation of the exchange rate. 

Following are excerpts from the CB Chief’s letter to the commercial banks:

Within this year, the currency value has adjusted from Rs. 185 to Rs. 203 per dollar. Excessive speculative behaviour is observed amongst certain market participants bringing in more pressure on the value of the currency. This is seriously inimical to the interests of the people of this country and its long-term sustainable development.

It is therefore vitally necessary that all of us work in collaboration in the greater national interest, thus continuing our recent efforts to maintain the rupee exchange rate within the already agreed range.

Whilst the Monetary Board of the Central Bank of Sri Lanka (CBSL) has already taken several measures, we are ready to use whatever instruments and tools available at present to maintain the exchange rate at the agreed range. As you are aware, the excessive volatility in the exchange rate results in adverse adjustments in domestic prices of essential goods, leading to extremely negative and undesirable effects on living conditions of the general public.

The CBSL and the Government, whose independent views have coincided in respect of maintaining the exchange rate within the agreed range, are acting in concert with each other, in order to urgently address this matter in the national interest. As such, we are collectively determined to work towards a resolution of this issue aggressively and proactively. Hence, I most unambiguously require the continuous cooperation of all bank CEOs to support these endeavours.

Needless to say, the CBSL has necessary tools and intervention instruments to be used to ensure that financial institutions duly comply in the greater national interest that is overwhelmingly paramount.

This critical period is certainly not one in which the banks should work in silos to safeguard their private interests. Instead, the banks must, as integral components of the financial system and, as vital stakeholders, view the economy and the foreign exchange market from a macro perspective. 

Banks and other stakeholders will also do well when the macro-economy is stable. By allowing the stability of the macro-economy to deteriorate, you will be contributing to difficulties also for yourselves.

In addition, I observe that there was an increase in the momentum of the country’s export growth in the recent past. As economic growth accelerates with such export growth, there will be some expansion in imports as well. The export growth that is taking place must help to finance this required import expansion. Hence the need for repatriation of export proceeds, which the banks must facilitate.

The financial sector community is assured that the international value of the currency will be further strengthened due to the recent receipts of SDR allocation from the IMF and through SWAP arrangements. Several other inflows of notable size are expected during the remainder of the year, gradually easing out the pressure in the domestic foreign exchange market. 

Furthermore, as you all know, the CBSL has been making some interventions as well, in the form of foreign exchange sales and affording access to foreign currency at the agreed rate range.



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