De Facto Rationing of Dollars Arising out of Forex Crisis

Published on The Sunday Times

While Sri Lanka is grappling with the ongoing foreign exchange crisis, ‘rationing’ is taking place amongst letters of credit as those who have the firepower get the benefit while others are deprived of dollars. This in turn is sucking up the amount of dollar liquidity from the market necessary to finance trade finance (imports).

Meanwhile the parallel market (black market) is running a massive show buying the dollars from inward remittances and selling them to parents who are desperately waiting to send dollars to their children studying abroad at a rate as high as Rs. 240 a dollar.

Last Wednesday the Sunday Times Business Club (STBC) organised a virtual discussion on ‘Sri Lanka’s Foreign Exchange Crisis’ where a veteran former banker, Rajendra Theagarajah and Verite Research Economist and Director, Deshal De Mel were the panellists.

Mr. Theagarajah said, “Even though the government settled US$1 billion of ISBs last month on time, where the dollar reserves dropped to $2.8 billion, the international rating agencies have seen it fit to downgrade Sri Lanka. This reflects the sentiment of international stakeholders not convinced about the sustainability of our policies rather than being convinced about cash flow management. Various policy makers state they manage the foreign exchange by managing the cash flow. If that belief was factored in, then we won’t be in this situation.”

With the downgrading and the perception the markets are having, the counterparty lines literally from every foreign correspondent in each local bank has been trimmed or chopped both in terms of size or value and in terms of the period. This has further caused the frustration on the banks and their own ability to support the demand for dollars, from importers, he added.

“Exports progressed while the imports were ballooning, which ended up in a deficit. Parking the deficit aside while the exports are there, how much of that is actually converted by exporters into rupees in banks? There is no point of those dollars remaining in those banks in an FCB or BFCA account, if the banks are not able to make use of them to support any importer. Exporters are anticipating a devaluation of the rupee and are holding onto the dollar as they are able to place it for nine months SDBs at rates as high as seven per cent. This tells us that the exporters are commanding on one side,” noted Mr. Theagarajah.

At the same time the parallel market (black market) is willing to buy a dollar at Rs. 230-235 from inward remittances who gets only Rs. 197-198 from the banks. In return the parallel market sells them to parents who desperately need dollars to send their children abroad where banks have run short of dollars, even at the rate of Rs. 240. This market is unfortunately to a great extent augmented because of the three tier structure which is taking place. It is a supply and demand structure where the market prevails whatsoever.

Mr. Theagarajah also stressed, “Is there really a shortage of dollars? There isn’t a shortage of dollars because in part of that surplus, two things have happened. Those who have the firepower and don’t need to borrow so much are deploying and locking those dollars into SLDBs and ISBs. That is sucking up that amount of dollar liquidity in the market necessary to finance trade finances.”

“There is a unanimity or synchronisation with every bank to say there is a balance between the amount of imports and exports they finance. There was a time where the interbank market swap used to take place between two parties to exchange dollars for rupees, which has disappeared now because the benchmark is the guideline given by the Central Bank. Today the one with enough dollars who doesn’t have the need for imports is holding onto the dollars while the one who needs the dollars is suffering. As a result of that effectively de facto rationing is happening,” Mr. Theagarajah noted.

Mr. De Mel in his remarks stated, “At the end of this month Sri Lanka will receive $780 million from the IMF, a special drawing right that goes out to all countries which will help keep our reserves probably between $2.5-3 billion till the end of 2021. The issue is that the problems don’t end this year. In 2022 as well we have $5 billion worth of sovereign liabilities that mature that we need to settle and a similar amount of $4-5 billion every year needs to be settled for the next five years. Our real problem is that we have the reserves at a very low level and at the same time we have recurring large maturities on sovereign debt.”

He added: “The sustainable way to get out of this situation is to improve our dollar liquidity and regain the confidence of global markets and that requires a way we rate our credit ratings from a triple C level back up to B level and keep increasing it from there. The issue for that is, we too need to have a credible plan which addresses our fiscal issues how we get out from a 14 percent budget deficit down to 6-7 budget deficit in the short term and bring it further down to 5 percent in the medium term. We need a credible plan that outlines that.”