Sri Lanka has imposed import restrictions to limit foreign currency outflows, while also borrowing more internationally to bolster its reserves.
CBSL (Central Bank of Sri Lanka) governor Weligamage Don Lakshman has announced he will step down on Tuesday (14 September) amid a deepening economic crisis and FX reserves shortage in the country.
Lakshman was originally planning to retire when he turned 80 next month, but on Friday (10 September) said he has decided to step down early due to “political and personal issues” and severe “mental stress” over the past ten days.
Last week, Sri Lanka’s president declared a state of emergency after most private banks ran out of foreign currency to finance essential imports and queues formed outside stores for sugar and rice.
The CBSL meanwhile imposed a 100 percent cash margin deposit for imports of non-essential and non-urgent goods such as mobile phones, televisions, and watches – effectively preventing banks from providing credit to finance such imports.
“The decision to impose the cash margin deposit requirement is expected to support the ongoing efforts to preserve the stability of the exchange rate and foreign currency market liquidity, particularly by discouraging excessive imports of speculative nature,” the CBSL said.
The government had already banned imports of cars, other goods and some cooking oils and spices in a bid to preserve foreign currency.
Sri Lanka’s gross foreign reserves had dropped to USD 2.8 billion in July following a USD 1 billion debt repayment, leaving it with only enough dollars to cover less than two months of imports.
Earlier this month, the MOF (Ministry of Finance) issued a request for proposals seeking foreign currency term loans denominated in USD, EUR, CNY or JPY to bolster Sri Lanka’s FX reserves.
Banks, investment houses and institutional investors were asked to submit proposals for fixed or floating rate term loans in minimum tranches of USD 50 million or equivalent. The loans will have to be a minimum of one year.
In August, Sri Lanka saw its forex reserves grow to USD 3.6 billion, after the country received SDRs (special drawing rights) worth about USD 800 million from the IMF (International Monetary Fund) and USD 150 million via a swap from Bangladesh.
Meanwhile, Sri Lanka has reportedly been printing money to pay state expenses such as salaries and to keep bond yields down.
The CBSL has separately instructed banks to maintain the exchange rate below LKR 203 per USD, the top of a maximum range agreed with banks, though there is no regulatory mandate for them to do so. The Sri Lankan rupee has lost 7.3 percent so far this year.
In a letter to bank CEOs last week, Lakshman said the CBSL has noticed excessive speculative behaviour among certain market participants that is adding pressure to the currency.
“I wish to draw your urgent…
Read More: CBSL Governor Steps Down as Sri Lanka Faces FX Crisis