SL forex crisis impacts trade financing, squeezes importers

A large offshore trader heavily into trade financing on Tuesday received a 'positive' response from the Central Bank ( CB) through the Ceylon Chamber of Commerce ( CCC) to honour his international settlements, but other importers are left rudderless embroiled in a forex crisis with no end in sight.

With the liquidity crisis and the balance of payment deficit, the banks are refusing to service basic trade finance which is a critical element for cross- border trade. The movement of goods across borders, particularly in emerging markets, cannot occur without it. So, trade finance provides essential shortterm liquidity, and additional trade finance will be urgently required when demand for traded goods begins to recover, as per this offshore trader. This is facilitating exporters and importers in six sectors to enable their trade and business transactions smoothly.

The trader had to get US $ 5 million collectively from several Sri Lankan commercial banks and expressed concerns regarding the situation to the CCC last week and the chamber in turn had forwarded these concerns to the CB. The banking regulator had assured that what is going on is a temporary issue and commercial banks will clear/fund the imports on a priority basis. “Now about 30 per cent is cleared,'' he told the Business Times on Wednesday.

However, most importers are more than feeling the bite. The Pettah traders, one of the biggest contributors to the economy, cannot engage in trade finance as commercial banks are turning them away, a banker told the Business Times on Thursday. There is a lack of transparency and direction by the government while the credentials of the banking system are in question.

CB foreign exchange reserves dropped to US $ 4.01 billion at end-May, from US $ 4.4 billion at end-April forcing the CB to recommend a further six-month extension to the import ban from this month to minimise the potential risk in the foreign exchange market and maintain the stability of the financial system.

This is after the CB printed Rs.208.45 billion on Monday on the back of printing Rs.23 billion mid last month while struggling to sell the Treasury bills at its primary auctions and bridging the balance by buying government securities.

Trade Minister Bandula Gunawardane has said that the Sri Lankan economy is in its worst crisis since independence, as there was no tax money left for other expenses after the state sector workers and pensioners are paid every month. He also said that out of the Rs.1,373 billion of state revenues in 2020, Rs.794 billion was spent on state sector salaries, while another Rs.258 billion went for pensions, together making up to Rs.1,052 billion.

The Government is trying hard to bring in the greenback by facilitating local companies to raise foreign funds. The Colombo Stock Exchange (CSE) has submitted a proposal to list out the foreign currency denominated shares issued by the Sri Lankan registered companies on the exchange to get local companies to raise foreign funds in Sri Lanka. CB has considered factors such as increasing the interest of foreign investors in Sri Lankan listed companies, attracting foreign currency into the country and increasing its participation, reducing the pressure on the Sri Lankan Rupee, and making an alternative of Sri Lankan companies going abroad to get foreign exchange.