CB warns of return of grey market due to open account exemptions

• When restrictions were first imposed, CB says black market premiums started to come down
• However, with exemptions that came in after lobbying by some traders, black market premiums have started going up

The grey market for foreign exchange is making a comeback, rendering the efforts taken to put a restraint on the operation of the informal channels futile and thereby causing it to thrive again, the Central Bank warned. 

Central Bank Governor Dr. Nandalal Weerasinghe said that they are seeing the re-emergence of the grey market, after the government exempted certain imports from the requirement to adhere, under the restrictions imposed on the use of open account payment terms from May.  Effective from May 20, the restrictions on imports under the open account payment terms or consignment account terms were imposed with only exemptions provided for the exporters and their local suppliers, who supply goods for those exporters by making payment for importation of such supplies using foreign currency.

Since the restrictions came into force, the governor said they observed the black-market premiums were coming down all the way closer to the Central Bank’s guidance level for foreign exchange, which was started issuing from May 13 onwards.  

 But a few traders had lobbied the government and got themselves exempted from the restrictions, which again have given rise to a thriving grey market activity.  

“Recently, there was pressure from some of the people who engage in Hawala and Undiyal in Pettah and all other areas and (from the) people who do open account imports, claiming that they import essential items,” Dr. Weerasinghe said. 

“They had a strong lobby and got the Finance Ministry authority to get some items exempted from the restrictions we imposed on open accounts. As a result, we can now see that Hawala and Undiyal business again coming up and thus the black-market premiums going up,” he added.

“So, what we say is that we do not recommend that,” he said. 
He further shrugged off the concerns made by some quarters regarding the unavailability or the inadequacy of foreign exchange in the formal banking channels for the traders to import their items.  He said during the period under which the restrictions were in full force, the country didn’t have a shortage of essential food items as some of the people claim.  

However, he warned that the rising black-market premiums by allowing the grey market to thrive, could inflict further pain on the consumers, as the traders price their products incorporating the higher than official exchange rate for their imported items, which would be passed on to the end consumer as higher prices. 

Sri Lanka has already got caught up in hyperinflation, as the consumer prices surged by 55 percent and the food prices soared by 80 percent in June. 

Dr. Weerasinghe also warned that a thriving grey market would also drain the limited foreign exchange into financing non-essential imports, leaving less foreign exchange for the essentials such as fuel imports.