CB requests two state banks to curtail LCs
The Central Bank (CB) has requested at least two state banks to curtail opening letters of credit (LC) till next Tuesday to shore up reserves to meet the US$500 million sovereign bond payment due on January 17.
A top importer told the Business Times that recently a state bank refused to open a LC with 180 days usance credit to bring down some essential food items. “I had to cancel that shipment.” He added that despite the relationship he has with the bank with the shortage of $ the bank was doubtful the LC could be honoured. “It will fetch them a black mark if they cannot honour the LC by any chance.” Since the beginning of this year these two banks have not opened large LCs, another importer told the Business Times.
CB Governor Ajith Nivard Cabraal in a Twitter message said the country has already allocated the required funds to retire the bond this month. “The CBSL has allocated the required #Forex for the $ 500 million ISB that is maturing on 18 Jan 22. It’s a shame that some #investors lost out becoz of organized negative stories spread by certain vested interests.,” his Twitter message said on Wednesday.
A CEO of a big private bank told the Business Times that his bank isn’t opening LCs but only settling those processed two to three months ago.
A managing director of a smaller bank said that they are now opening one third of the LCs they used to do. “The 25 per cent of the inward remittance surrender rule has also dried up the $. We have curtailed the imports.”
Analysts pointed out that CB has gross foreign reserves of $1.6 billion with the usable reserves out of this, at less than $1.1 billion. “To make up the $500 million payment coming up in the next week the CB may be trying to get an additional $200 million from the state banks,” an analyst said. However, the CB has requested certain private banks to honour LCs for certain essential items such as pharmaceuticals.
A CEO of a medium sized private bank said that there is a waiting list for opening LCs, but his bank is processing them. Meanwhile the banks are doubling up their efforts to negotiate funding lines with development finance institutions to combat the dollar crunch. A second analyst noted that this will not solve any long-term commitments the country has. The CB must pay $ 7 billion for the year. There is a $1 billion payment coming up in July.
Economists said that the Chinese and Indian bilateral loans of $ 700 million are being renegotiated.
Amidst this catastrophe the calls to freeze and restructure the country’s debt has become deafening with many quarters pointing out that temporary borrowings are not the solution for the debt crisis. “The swaps and borrowings are not the best option right now. The pandemic should be treated as an opportunity for the country to go for deferment of loans,” an economist said. He referred to the current decision of authorities (not to go to the IMF among other matters) as ‘political blindness’.
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