“Only repression of the gray market can solve the liquidity problem of the foreign exchange market in Sri Lanka”

TBS report

May 13, 2022, 11:15 a.m.

Last modification: May 13, 2022, 11:38 a.m.

A man counts Sri Lankan rupees at a currency exchange counter in Colombo September 4, 2015. REUTERS/Dinuka Liyanawatte

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A man counts Sri Lankan rupees at a currency exchange counter in Colombo September 4, 2015. REUTERS/Dinuka Liyanawatte

According to the governor of the Central Bank of Sri Lanka, liquidity problems in the foreign exchange market can be solved by redirecting foreign exchange flows to the formal banking sector.

Currently, more than 25% of foreign currency transactions take place outside the banking system, reports the Daily Mirror.

Although in the second half of last year, Sri Lanka took steps to discourage informal channels of foreign exchange transactions and thus attempted to redirect these currency flows – both inflows and outflows – through formal banking channels, but with limited success.

However, the latest measures such as the prohibition of open account payment terms and the tightening of import conditions via documents against payment (DP) conditions and documents against acceptance (DA) conditions are expected to further limit the possibilities informal channels such as Undiyala and Hawala, which have since flourished. the second half of last year when currency shortages first emerged in the country.

The new rules on open accounts, DA and DP conditions will come into effect from May 20.

“Even as we speak, about 25% of foreign exchange transactions take place through the gray market. What we believe is that repression of the informal market itself can control the national foreign exchange market more” , Central Bank Governor Dr. Weerasinghe said. Wednesday.

Meanwhile, the Governor again appealed to exporters as well as migrant workers to use formal banking channels at all times when repatriating their foreign currency earnings to curb the informal market and bring back the gray market premium to an acceptable level.

However, there is a serious trust deficit between the government and those who send foreign currency home and as a result they refrain from repatriating their foreign currency earnings.

Further explaining why everyone should use formal banking channels for their foreign currency transactions, Dr. Weerasinghe said that the informal market effectively becomes dysfunctional when it starts to restrict payment terms for open accounts.

Indeed, when demand for foreign exchange collapses via Unidiyal and Hawala, there is little or no reason for them to pay a higher rate and buy foreign exchange from those repatriating.

Sri Lanka is at a critical juncture after months of economic crisis caused by the shortage of foreign exchange which precipitated into a political crisis, which then turned into an absolute societal collapse since this Monday when some parties angered by the attack on peaceful protesters turned violent and resorted to rioting and vandalism.

Dr. Weerasinghe emphasized that economic development is not possible in a country where there is no law and order.

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