SL cuts dollar surrender rule by half to 25% 

Following up on a comment made at the monetary policy press conference on April 8, the Central Bank had slashed the dollar conversion and surrender rule to 25 percent from the 50 percent levels, which was effective from the fourth week of March as the authorities attempt to shore up liquidity in the domestic foreign exchange market. 

The banks have been notified of the latest move last week, according to a dealer. 

Speaking at his debut presser on April 8, the new Central Bank Governor Dr. Nandalal Weerasinghe expressed his qualms about the severity of the rule although such rules are not uncommon around the world. 

For instance Turkey, which also has run into currency troubles in recent years, asked exporters to convert a quarter of their earnings to Liras to boost its reserves and support the local currency. 

Turkish Lira fell by as much as 44 percent in 2021 and has continued to weaken so far during this year.  Sri Lanka toughened up its conversion and surrender rule on foreign currency made from exports and remittances from the third week of March to rebuild its fledgling reserves to repay foreign currency borrowings. 

But it created shortages in the domestic foreign exchange market spilling into shortages in key commodities such as oil, gas, milk powder and many more as importers were left stranded for dollars.  With new personnel at the Finance Ministry and the Central Bank, Sri Lanka has decided to pause on foreign currency debt payments, as the new economic team is of the view that it would leave adequate foreign currency liquidity to fund essential imports and gradually ease the burden on people. 

Sri Lanka floated the rupee on March 7 firing inflation to nearly 20 percent in March and busted the rupee by 60 percent earning the dubious label of becoming the world’s worst-performing currency.  But, that didn’t end the shortages of dollars as continuously propagated by the mainstream economists.   Sri Lanka has over US$ 10 billion trade gap between imports and exports and no amount of higher rates and weaker rupee would let Sri Lankans to consume imported goods and services unless it raises its dollar earnings in the immediate short term through more borrowings and in the medium term through export incomes, tourism, and investments.   However, sky high rates and higher taxes on corporates and individuals which the same cohort of economists call for, would take any incentive for building new industries and resume consumption, causing the economy to sputter for years to come.