- Ex-central banker Dr. Wijewardena urges authorities to seek IMF support
- Says if present short-term policy measures continued, rupee could even go beyond current black market rates
If the government and Central Bank (CB) continue to hold onto the current short-term policy measures, without honestly addressing the worsening crisis in the country’s external account, the Sri Lankan rupee is likely to come crashing down even beyond the current exchange rates prevailing in the black market, according to a leading economist and top commentator of economic issues in the country.
Dr. W.A. Wijewardena
Taking part in an online discussion organised by Advocata Institute last Friday, former Central Bank Deputy Governor Dr. W.A. Wijewardena outlined the urgency for the country to seek out the support of the International Monetary Fund (IMF) to resolve the current crisis in the country’s external account, which has led to shortages in dollars in the country’s banking sector. He pointed out that the gap between the official US dollar exchange rate and black market exchange rates widened to 12 percent as of last week, as the CB continues to hold the official exchange rate close Rs.200 artificially, which has caused a severe dollar shortage in the banking sector.
“This is a dangerous situation. When people go to banks, they cannot find US dollars at this minimum exchange rate. Even some importers were turned away by banks, asking them to source their own US dollars to open LCs. The exchange rate could jump above the current black market rate when everything explodes,” Dr. Wijewardena cautioned.
As the CB started to shore up US dollars to meet a billion dollar bond settlement later this month, he noted that the CB is not in a position to provide US dollars to the banking sector to meet the current demands of importers and others, including Sri Lankan students studying abroad.
By end-May, Sri Lanka’s gross foreign exchange reserves fell to US $ 4.03 billion, while the external debt servicing for the next 12-month period stood at close to US $ 7 billion (including private sector external debt servicing commitments). During the year up July 2, the Sri Lankan rupee depreciated against the US dollar by 7 percent. However, the US dollar was traded at around Rs.225 in the black market last week.
CB Governor Prof. W.D. Lakshman last week issuing a statement denied the shortage of foreign currency liquidity in the domestic market while claiming such assumptions were made due to political reasons.
In responding to the governor’s statement, Dr. Wijewardena stressed that the CB and government are still in false pretence that they would be able to maintain the rupee exchange rate at the current levels with the artificial measures imposed. Following Prof. Lakshman’s statement, he pointed out that the rupee further depreciated in the black market while the US $ 1 billion international sovereign bond, which is scheduled to mature on the 27th of this month, continued to trade at steep discount rates in the secondary market, indicating the CB’s failure to address the concerns of market participants.
Dr. Wijewardena recalled two previous occasions that the country faced similar crises in the external account. Those were, during the youth insurrection in late 1980s and the final stages of the civil war in 2008. He noted that the country was able to successfully emerge out of both crises, with the support of the IMF.
In 2008, he highlighted the role played by the current Money and Capital Markets and State Enterprise Reforms State Minister Ajith Nivard Cabraal, as then CB Governor, in securing funds from the IMF.
Therefore, he urged Cabraal to rise up to the occasion while insisting that it’s not an embarrassment to seek out the support of the IMF. “We are already late now. If we start negotiations with the IMF now, we can only receive funds by December. However, the current swap facilitates announced by the CB could keep the country running for the next couple of months,” Dr. Wijewardena said.
However, Dr. Wijewardena pointed out that the overall cost of swap facilities run up to around 6 percent of such facilities, while the IMF funds virtually come with free of interest. Meanwhile, Sri Lanka expects around US $ 800 million under the IMF SDR allocation in August. However, Dr. Wijewardena noted that the United States is yet to reach an agreement with the IMF to purchase the new SDRs issued by the IMF to its member countries. Hence, he opined that the anticipated SDR boost might become irrelevant, if there’s no one willing to exchange it for US dollars or any other major currencies. (NF)