Sri Lanka bars banks’ forward contracts of forex for three months: Economy Next

COLOMBO: Sri Lanka has barred commercial banks from selling or buying foreign exchange for three months as the currency came under pressure amid high levels of excess liquidity, Economy Next reported.

“In view of the need to avoid excess volatility in the foreign exchange market and the impact on banks’ risk management, licensed commercial banks are hereby informed to refrain from entering into forward contracts of foreign exchange for a period of three months with immediate effect,” Central Bank Governor W D Lakshman said in a direction, cited by Economy Next.

Sri Lanka rupee has fallen from around 185 to close to 200 to the US dollar over the past month and forward premiums have inverted as dollar yields overtook rupee yields, Economy Next reported.

The inverted forward premiums had discouraged exporters from selling forward.

Since Jan. 1, excess liquidity in money markets has been allowed to fall from 266 billion rupees to 117.5 billion rupees mainly due to unsterilized dollar sales, but the central bank itself has mopped up some liquidity.

Falls in liquidity will tends to tighten the credit system and eventually strengthen the soft-peg with the US dollar.

Sri Lanka’s rupee closed around 196.00/199.00 to the US dollar in the spot next markets Monday after moving in intra-day trade, while bond yields remained unchanged ahead of a 75 billion rupees bond auction on Tuesday, dealers said.

A steady drain on reserves, particularly after credit downgrades hurt confidence, has shown that interest rates are mis-aligned, analysts say.

Sri Lanka’s stock, however, are booming to record levels.