SL to enter 2022 with double whammy of forex and rupee crunch: Dr. Wijewardena

Sri Lankans may be brimming with hope to welcome 2022 looking past all the hardships brought about by the pandemic and mishandling of its economy, but one may have to practice some self-restraint in having any optimism as the country is carrying forward the hangovers of some of the policy blunders it made during the last two years.  

According to former Central Bank Deputy Governor and well-known economic commentator Dr. W.A. Wijewardena, Sri Lanka is entering the new year with a double whammy of acute shortages in liquidity in both domestic foreign exchange and rupee markets, compounded by the soaring consumer prices as a result of the still dovish monetary policy stance of the Central Bank. 

“SL is to enter 2022 with double whammy: no forex & rupee liquidity in banks,” Dr. Wijewardena said in a twitter message sent out during the weekend providing a harbinger of what to expect next year. 

Sri Lanka’s foreign currency troubles worsened since June this year when the booming global commodities prices led by oil prices started putting pressure on the country’s import bill amid record liquidity injections and the loss of inflows from tourism, worker remittances and the direct investments which together accounted for roughly US$ 13.5-15 billion in both 2020 and 2021. 

As a result, the government had to utilise its foreign currency reserves to meet its foreign debt obligations, and in the past couple of months the Central Bank was forced to directly intervene in issuing foreign exchange out of the reserves to clear the shipments stuck at the port containing essential items due to forex shortage. 

This brought the country’s foreign exchange reserves slightly below US$ 1.6 billion, barely sufficient for a month’s equivalent imports triggering a downgrade of the country’s sovereign rating to ‘CC,’ signalling a potential default in the next few months. 

However, according to Dr. Wijewardena, the shortage in the domestic money markets which rose to Rs.355.55 billion at last week’s market close has also exacerbated the challenges as the Central Bank is now forced to meet that requirement daily under its Standing Lending Facility (SLF) rate at 6.0 percent. 

“CB must now fund both government and the commercial banks to keep system going,” he added. 

But, when the Central Bank raised its key policy rates by 50 basis points in August, they said they would be ready to provide liquidity required by licensed banks at the SLF window. 

Banks in total borrowed Rs.445.03 billion overnight under the SLF window on December 24. 
This is a bellwether for higher deposits and lending rates in the time to come, and rising inflation, which hit nearly a decade high in November at 9.9 percent, could complicate the continuation of the current dovish monetary policy stance by the Central Bank.

However, with the economy being at a recovery mode after the lifting of restrictions and the contraction seen during the September quarter, the Central Bank is at a difficult spot in maintaining interest rates at current levels.
When, the “money stock has increased by Rs.3 trillion net (between) January 2020 & October 2021(39 percent), (and) when economy has grown only by 2 percent; with limited imports, excess money will chase behind low supply of local foods devastated by a mad fertiliser policy,” Dr. Wijewardena said explaining the rationale behind the exponentially higher prices at present in the economy.

It was revealed last week that the paddy harvest would be lower during this ongoing harvesting season due to the overnight organic fertiliser pivot, but the officials assured that it wouldn’t threaten the food security of the country. 
Commenting further Dr. Wijewardena attributed the current outcomes in the economy to “controlling both interest rates & exchange rate artificially,” reiterating a stance held by economists. 

“According to reports, banks are acquiring 1 month spot SWAP dollars with a promise to receive 192.25 for 200 in 1 month implying $/Rs rate of 208,” he added.