Three commercial banks are separately planning to raise a total of US$ 800 million through foreign borrowings for local needs in the next few months in a move that should boost Sri Lanka’s foreign exchange reserves, officials said.
These loans are being raised under guidelines where the Central Bank (CB) allowed banks and private companies to independently negotiate foreign borrowings for their projects or lending purposes.
CB Governor Ajith Nivard Cabraal confirmed that three banks were raising these foreign funds but declined to name the banks.
“In addition some US$ 200 million has come in through Treasury Bills and bonds since December,” he told the Sunday Times.
The CB in December also permitted local firms to borrow upto US$50 million from abroad through local and foreign banks.
Last month, foreign companies were also allowed to lend to the Colombo stock market as margin traders, all designed to increase foreign inflows into the country.
In the CB roadmap for 2012 announced in January, expected inflows by permitting foreign borrowings are seen at more than US$ 1.5 billion through commercial banks borrowings for Tier II capital ($1 billion) and private companies ($500 million).
Meanwhile, in a departure from past practice, the CB on February 3, stopped costly-dollar intervention in the market, raised interest rates and issued strict guidelines on credit expansion to banks – all aimed at reducing import demand and adjusting the US currency to more realistic levels.
The move -- just as an IMF mission ended a visit to the island linked to the Fund’s $2.6 billion bailout package -- was cautiously welcomed by Mr Cabraal’s ardent critics like Opposition MP Harsha de Silva while others said these steps should have been taken a long time ago, instead of allowing foreign reserves to fall to US$ 5.9 billion in December last year from US$8 billion in August last year.
The sudden change in the money markets saw the US dollar gain by 70 cents, the sharpest ever –--or the worst depreciation of the rupee -- in recent times in a week, to trade at Rs 114.60 at the end of business on Thursday from February 3. The banks were closed on Friday owing to a statutory holiday.
While the Governor has gone on record saying there is no ‘immediate need’ to access the balance US$ 800 million in the IMF loan at a higher interest of 3.1%, a statement in Parliament by Senior Minister Sarath Amunugama on Friday triggered a new discussion that the government would take the balance money.
Explaining the Minister’s statement, the Governor said, “What he said was that the Government would sign a Letter of Intent with the IMF and for that a decision (whether to take the money or not) would be made later. This is what I have also been saying.”
In last week’s Sunday Times, Mr. Cabraal was quoted as saying, “The SBA (loan) technically ends on December 31, 2011. However the review may take a few months before the IMF review team’s report is presented to its board. So there is still time for us to draw this money in the next few months if the need arose. For the moment (as of now) there is no need.”
Mr. Cabraal said yesterday, “My personal view is that we don’t need it (right now) but we can only decide later after the review is over – and based on our reserves at that time on what should be done.”
He said the normal practice in the SBA is for a Letter of Intent (LOI) to be entered into (listing out various targets) every time a review is done by the IMF and this has happened now on 6-7 occasions.
“Thus the LOI is nothing new or like a new agreement. It is done after every review as per the original agreement.”
Since February 3, for the first time in three years, the CB has stopped enforcing a price band in the market. Earlier a price band (range at which the dollar is traded) was fixed every day which meant that if the dollar value fell below the range, the CBwould pump dollars or if the dollar was overvalued, the Bank would buy dollars to lift the rupee.
Currently there is no price band but a suggested rate and no intervention unless there are some petroleum bills that need a lot of dollars.