Seek IMF help and float the dollar, professional group urges
View(s):A group of concerned Sri Lankan professionals has urged the government to seek IMF help to stave off the foreign exchange crisis and to allow the US dollar to settle at market-demanded rates, instead of a managed float.
The move however, according to economists, is unlikely to garner the government’s attention as its hierarchy, in particular Central Bank Governor Ajith Nivard Cabraal, is opposed to seeking IMF intervention and also allowing the dollar to float according to the dictates of the market.
The group, whose members declined to be named for professional reasons, met recently to discuss the forex crisis and has highlighted their concerns in a note prepared for discussion and moving forward.
The note is given below:
1. The forex situation is acute.
1.1. Commonly, exchange outflows on current account exceed exchange inflows, due to our large trade deficit.
1.2. The deficit has increased in 2021 despite import restrictions, due to high fuel prices, higher import costs caused by supply chain disruptions from the pandemic, and there being no revenue from tourism.
1.3. The Central Bank (CB) cannot inject USD, given the low level of its foreign reserves.
1.4. The situation is aggravated by the CB’s attempts to keep the rupee at 203 to the USD, when the black market has it at 235-250. Because of this:
1.4.1. Remittance flows seek channels outside the mainstream.
1.4.2. Exporters and importers make arrangements to exchange foreign currency at rates within the “black market” band.
2. What are the consequences?
2.1. There is no interbank market for foreign currency. Each bank has to manage independently.
2.2. Banks are not able to give customers USD for settlement of outstanding D/P + D/A bills. On unpaid D/P bills, customers cannot clear goods imported.
2.3. Banks have been unable to make:
2.3.1. Remittances of dividends,
2.3.2. Withdrawals of capital, and
2.3.3.Remittances of reinsurance premia to reinsurers.
2.4. Banks are cautious in accepting new commitments, so customers have difficulty in opening import LCs.
2.5. Banks are making supplementary charges on non- commercial foreign currency payments, and are seeking to impose value limits for those payments.
2.6. With widespread awareness of all this, Sri Lanka, its banking and insurance systems, banks, insurance companies and business entities are viewed skeptically and will fall into disrepute; reinsurers may refuse reinsurance of risks, and suppliers may seek payments upfront or want LCs confirmed by foreign banks. Not all banks can provide these confirmations, and if they do, increased bank charges apply.
3. How will this impact on the country’s credit ratings, which are already abysmal? (Ratings are currently S&P CCC+, Moody’s Caa1, and Fitch CCC.)
4. What are the solutions?
4.1. First of all, government’s acceptance of the reality (rather than constructing an alternative reality in which only they live).
4.2. Let the exchange rate move to where the market says it should be.
4.3. Impose controls needed to limit trade and service outflows, so the required balance can be achieved.
4.4. Bring the IMF in; this will help discipline in all related processes, and gradually restore order and prevent collapse of the economy.