CB stops hoarding of dollars by banks

The Central Bank, in a move to deter hoarding and speculative trading in a rising US dollar by commercial banks, on Friday sharply cut the daily limits on foreign exchange reserves in banks.

“This is due to a suspicion that as a result of a free market in the currency and no intervention by the Central Bank some banks were stock-piling dollars to be traded at a later date when the rate rises,” one dealer said.

The portfolio of each bank was reduced by 2/3rds. “If for example, a bank has $30 million, that now comes down to $10 million mainly to prevent speculative trad- ing which leads to a dollar shortage and depreciates the rupee,” the dealer said.

Immediately after the announcement on Friday morning, banks unloaded their excess dollars resulting in the dollar falling to Rs. 118 from Rs. 122 a dollar on Thursday. Later on Friday, it settled at Rs 120.50 a dollar.

He said the situation should stabilise next week and reduce any speculative trading.

Meanwhile, authoritative government sources said that while the Central Bank was yet to decide on the balance $800 million from the IMF Standby Arrangement (SBA) loan, the general view was to take the money.“the discussion is continuing on what should be done but most are in favour of taking this balance from the $2.6 billion loan,” one source said.

He said the IMF team which came here recently on a review mission is due to submit its report to the Fund board, by the end of this month.

“Before the board meeting, Sri Lanka has to send an LOI (Letter of Intent) which has been the practice in all the tranches that we have got so far.

At that point the government has to either request or decline the $800 million, and this decision has still not been reached,” he said, adding “Either way – whether we want the money or not, an LOI is sent to the board.”

The balance instalment comes at a higher interest rate than what was received earlier, which is the reason for a delay in the ‘receiveor-not’ decision, among other issues as to the reserve position, etc. In the meantime, the source said the government would be floating new development bonds to repay four to five bonds which mature this year.

Last week the Sunday Times reported that the Cabinet had approved a proposal to raise $600 million dollars for payments for development and other foreign dues.

The source said there was around $400 million in development bonds maturing this year and new bonds would be floated to pay back depositors on maturity.

“This is the usual practice in the past where we borrow afresh to pay back bonds when they mature,” he said.