Sri Lanka’s rupee is being quoted in the kerb market at 225.00/226.50 to the US dollar as unusual demand for currency notes emerged over the past two weeks amid forex trading curbs in the formal market, participants said as money printing continued.
Generally known as the ‘nana’ rate, which is offered by money changers in Colombo for Middle East returnees and others rose dramatically over the past month after a Covid-19 control was lifted and foreign exchange rationing began for imports.
The kerb rate had been gradually picking up but jumped as devaluation speculation rose among banks last week, market participants said.
Of late some new intermediaries representing some new interests had suddenly started buying up dollars, pushing the price up, persons familiar with the matter said.
The kerb market usually offers a better rate for hardworking Middle East returnees than banks by trading between the banks two-way price.
Banks have a spread of around 5 rupees between buying and selling rates.
Banks in the past tended to offer a rate of about 2 to 3 rupees below the interbank spot for Middle East returnees, while the kerb market offered a rate that is at the spot rate or marginally (about 50 cents) lower.
The spread used to be about 50 cents to a rupee compared to 5 rupees for banks, market participants say, though it has widened now.
Banks in the airport are offering only around 197.75 for currency notes and a 2 rupee supplement for returnees.
The kerb market is a major advantage for hard-working Middle East returnees who are paying sky-high prices for tickets to change notes in the kerb market, analysts say.
More knowledgeable Middle East returnees could negotiate for a higher rate at some banks.
Some of Sri Lanka’s importers had also been paying suppliers through the ‘Undiyal’ system amid forex rationing by formal banks.
Importers have to settle import bills by the due date somehow to keep the word to their suppliers.
Sri Lanka is printing large volumes of money to keep interest rates down artificially and also finance a deficit which is creating forex shortages.
When importers come to the forex market armed with newly printed money paid by customers (usually state workers or others who had taken loans from central bank re-finance) there is insufficient dollars to match them (redeem) in the forex market.
The central bank has banned forward cover for customers after printing money and also barred interbank outright trading above 200 to the US dollar.
Reports said Sri Lanka is also planning to hike fine for breaking price controls on rice and other goods imposed as the currency falls and inflation picks up.
Analysts had suggested that the open market operations of the central bank be curbed to prevent monetary instability when money was printed earlier.
Sri Lanka set up a Latin America style central bank in 1950 leading to frequent currency collapses.
In 2018 when the central bank de-stabilized the monetary system by a combination of call-money-rate-targeting and flexible exchange rate analysts suggested dollarization or setting up currency board (hard peg) at 200 to the US dollar, devaluing the rupee a little.
The last administration gave full independence to the central bank, made no attempt to bring laws to control its domestic operations and was rejected by the people as the currency collapsed and output shocks emerged from so-called ‘stop-go’ policies.
“Sri Lanka can reform the peg into a hard one or float,” EN’ economic columnist Bellwether said in December 2018.
“But Sri Lanka can also dollarize and stop the central bank’s ability to de-stabilize the lives of the people of this country forever.
“By using 5.5 billion dollars, the reserve money can be dollarized at 185 to the US dollar (5 billion and 200 rupees) and use the rest of the reserves to repay urgent loans and set up a liquidity facility.
“That will end depreciation forever. Sri Lanka can have free trade, import cars, and not worry about gold smugglers making profits by hand carrying foreign currency from India.
“If more reserves are lost, it will not be possible to dollarize at these levels.”
The central bank’s gross reserves had now fallen to around 4 billion US dollars, which is not sufficient to cover the existing reserve money base of trillion rupees at 200 to the US dollar, net reserves are only around a third of reserve money even lower after deducting encumbered assets.
Sri Lanka however has decided to dollarize Colombo Port City, protecting the area from depreciation by the Monetary Board of the central bank.