Sri Lankan rupee dollar parallel markets intervene amid money printing and currency restrictions


ECONOMYNEXT – The Sri Lankan Rupee is barely traded on official interbank markets after total transactions were banned above an unreliable peg of 200 for the US dollar, but parallel foreign exchange markets come into play, as they had done so in previous episodes of money printing, the market participants say.

Sri Lanka’s interbank foreign exchange market saw isolated outright transactions over the past week and market-based swap deals, but activity had largely dried up after the ban on outright transactions by the Bank. central bank above 199.90 per US dollar.

The central bank printed large volumes of money to artificially maintain interest rates, making it difficult to maintain the exchange rate.

Banks should also not price more than 203 per US dollar to import customers or buy from exporters below the level.

Parallel market

However, some banks, including international banks, paid exporters more than the limit, which angered the companies’ original bankers, market participants said.

Regulators have made physical or on-site visits this week to check the rates at which dollars are being sold.

A parallel exchange rate above the 203 limit has emerged for capital outflows, market participants said.

To finance the outflows, some banks had bought on top of the allegedly existing cartel-type arrangement between the banks not to pay a higher rate to exporters following informal demands.

Meanwhile, the sidewalk market also saw a sharp drop to around 215 to 220 amid money printing.

The ban on interbank exchanges without stopping money printing had also led to the rationing of letters of credit by the banks.

“Regular meetings with key officials of the banking community are organized by the Central Bank, and the banking community has mutually agreed to manage their outflows in inbound, while prioritizing essential and urgent imports, and by discouraging orders of a speculative nature, ”Central Bank Gov. WD Lakshaman said in a statement this week.

“Overall, I would like to assure the media, the general public, the business community and the investment community that the currency liquidity conditions seen in the domestic market at present are temporary and are motivated by a excessive speculative activity. “

As a result, some importers who had previously gone through formal channels were forced to use the unofficial or “undial” net settlement system long used in Asia before the emergence of banks, at around Rs.220 to the US dollar or more.

Official payments are made through gross settlement systems, where each transaction is settled separately through systems such as SWIFT messaging.

what goes around comes around

Sri Lanka saw parallel official exchange rates in late 1968 with Latin American-style Foreign Exchange Right Certificates (FEECs) developed by the Dudley Senanayake Money Printing Administration instead of restricting, reforming, or abolishing the central bank.

Failure to restrict domestic central bank operations had resulted in currency shortages, currency collapses and repeated trips to the IMF.

“…[I]n May 1968, Ceylon implemented a double exchange rate (FEECS) which was commonly used in Latin America with tacit acceptance from the IMF, ”wrote eminent economist Saman Kelegama in a summary of the memoir of Gamani Corea, a Sri Lankan planner and central banker.

“The Fund was not completely satisfied but endorsed it saying it was ‘a bad step in the right direction’.”

Sri Lanka established a Latin American-style central bank in 1950 using elements of a cookie-cutter monetary law concocted by Robert Triffin, an admirer of the Argentine central bank built by Raul Prebisch.

Triffin, who headed the Fed’s Latin America unit, set up a series of central banks with unreliable anchors in the region that resulted in import substitution, parallel exchange rates and sovereign default.

Some have resulted in dollarization. Dollarization is also accelerating in Sri Lanka.

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In 1969, the Senanayake administration enacted Sri Lanka’s Import Control Law, without reforming or abolishing the central bank.

In the 1970s, Sri Lanka shut down the entire economy, making extensive use of the law, instead of restricting domestic central bank operations or abolishing it in favor of a credit union. program.

The law was used to curb many imports in 2020, which previously brought in disproportionate amounts as taxes in 2020.

The Import Control Law gives massive profits to rent-seeking import substitution firms that arbitrate taxes and declare large profits at the expense of consumers.

Meanwhile, low-taxed imports, deemed “desirable” by planners, rebounded as credit began to flow, including with printed currency.

Unlike the 1960s and 1970s, the activity of the central bank in Sri Lanka is now under closer scrutiny.

This week, a statutory paper transaction involving a usual reversal of provisional advances (a type of printed currency linked primarily to deficits in the past) via the issuance of overnight T-bills, drew widespread comments on Twitter.

However, this is an accounting transaction involving a provision of the original constitution of the central bank designed by the United States and does not actually change the reserve currency, and therefore cannot create monetary instability in the form credit, currency shortage or inflation.

This week, members of the public stormed Lebanon’s central bank after it halted withdrawals of foreign currency deposits, in a warning message to central bankers around the world.

In any case, Forex deposit withdrawals were only allowed at a parallel exchange rate below the market rate.

Foreign currency is released for oil at an even different parallel exchange rate.

The US Fed is again triggering a commodity bubble that can drive up commodity and food prices, hurting poor and rich alike through certain oil companies and can benefit from it.

Among the major central banks, the Fed has done the most damage in the world.

The Fed created the Great Depression with its roaring 1920s bubble, blew up the centuries-old gold standard and the Bretton Woods system of non-credible soft-pegs in 1971 with targeting the gap of production and generated a huge real estate and commodities bubble that ended in the Great Recession in 2008/9. (Colombo / June 30/2021)



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