CBSL opens itself for litigation
11 December 2016Government of Sri Lanka's (GoSL's)/Central Bank of Sri Lanka's (CBSL's) skewed exchange rate policy may expose itself for litigation.
For instance, foreign investors who are currently exiting from the government securities market (GSM) in droves, find their local banks having to buy the required US dollars to service such exits at the current, discounted and administered 'spot' rate of Rs 147/95 to the dollar in interbank trading, whereas individuals such as local students pursuing foreign courses/studying overseas, patients seeking treatment abroad or the ordinary consumer here, will have to buy the required imported good or service at a premium.
Currently, the market determined rate of the dollar, which, as at Friday, 9 December, was Rs 148/90 to the dollar in banks' 'spot next' trades, a premium of 95 cents (0.64%) compared to the present, administered and discounted 'spot' rate of Rs 147/95 to the dollar.
Meanwhile, the average selling price of the dollar to the ordinary consumer such as the aforementioned student, patient and importer on Friday was at a high of Rs 150/60 to the dollar according to CBSL's published rate as at that date. Sri Lanka is an import dependent economy. Therefore, rupee depreciation causes inflationary pressure on the economy.
These high, real market exchange rates are because banks, which re-sell such dollars to the real economy purchase such in interbank, market trades. They don't sell discounted dollars obtained from CBSL's foreign reserves at subsidized rates to the real market. That prerogative is only enjoyed by exiting foreign investors from the GSM. Banks, whose customers are such foreign investors, allegedly keep a small margin such as three cents (Rs 147.95 + 0.03=Rs 147/98) when they sell such dollars to the exiting foreigner, banking sources told this newspaper.
The reason behind CBSL's/GoSL's skewed logic of favouring/subsidizing foreign investors exiting from the GSM as opposed to its own citizens is three fold. Firstly, CBSL deals in 'spot.' And, the required dollars to service such foreign exits are met from CBSL's foreign reserves and not from the market. So, such transactions have to be in 'spot.' This is done to prevent depreciating pressure on the rupee, if, in the event the required dollars are purchased from the foreign exchange (FX) market.
Secondly, foreigners exiting from the GSM would want their money as soon as possible. Globally, the more popular trading instrument in FX markets, devoid of exchange controls is 'spot', where such transactions are settled after two market days from the date of transaction. 'Spot next' trades are settled after three market days from the date of transaction.
Therefore, foreigners may want to have their currencies in 'spot' trades, which is after two days from the date of transaction and not three.
However, because of the weaker market rate of the exchange rate (ER) over that of the administered 'spot' rate, that also means local consumers are placed at a disadvantage when buying imported goods here as he has to spend more rupees, compared to a foreigner exiting from the GSM indulging in the same exercise in Sri Lanka, where, after he buys dollars at subsidized rates here, would afterwards be able to convert those dollars at a 'premium' (compared to the subsidized rate at which he purchased such dollars earlier) to rupees. Such a distortion may expose GoSL/CBSL for litigation on the charge of human rights/fundamental rights violation by a citizen of Sri Lanka due to unequal treatment in the eyes of the law.
In fact IMF's Mission Chief to Sri Lanka Jaewoo Lee speaking to reporters in Colombo via a video conferencing facility from IMF's Headquarters in Washington DC on Friday cited this distortion in GoSL's/CBSL's ER policies, though, not advocating litigation, but pointing out that these skewed policies translate to foreigners exiting from the GSM obtaining their dollars at discounted or subsidized rates.
His solution to tide over this state of affairs was for the GoSL/CBSL to maintain a flexible ER (therewith, ipso facto a flexible 'spot' rate), build CBSL's foreign reserves by making outright purchases from the FX market and increasing GoSL's revenue portfolio, which Lee said was one of the lowest in the world.
"Reserves have been falling since mid October, therefore steps need to be taken to boost reserves," said Lee.
He said that the current outflows, especially from the GSM was not peculiar only to Sri Lanka, but was a global phenomenon. He attributed this to expectations that the Federal Reserve System will raise its policy rate this week and said that these outflows will continue, inferring that this week's expected Fed. hike will certainly not be the last, thereby spurring more outflows in the future, due to 'repeated' hikes.
Such expectations have resulted in the increase in sovereign bond yields. He further said that as a result, since the middle of last month, currencies in emerging markets had depreciated, but in Sri Lanka it has had remained unchanged.
'Spot' the popular instrument in the FX market, i.e. in economies which are devoid of exchange controls, is however administered by CBSL, currently at the Rs 147/95 rate to the dollar, an administered depreciation of 20 cents (0.14%) since the middle of last month.
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