FX Management Act flays rupee

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By 2017-11-21

By Paneetha Ameresekere

The new Foreign Exchange (FX) Management Act which came into effect yesterday, replacing the 65 year- old FX Control Act of 1952, had a deleterious effect on the benchmark 'spot', which saw it depreciate sharply by 15 cents to Rs 153.75/85 to the US dollar in two way quotes over Friday's close, market sources told this reporter.

'Volumes were huge,' they said. A weak rupee aids cost push inflation as Sri Lanka is an import dependent economy.
The new Act allegedly allows a citizen to repatriate US$ 200,000 as a once and for all benefit, with no questions asked. Previously, only $ 100,000 could be repatriated, but only with supporting documents. The new Act has however allegedly thrown such bureaucracy into the dustbin.

'As a result exporters were holding on to their dollars yesterday, while panicky importers pursued the greenback, resulting in the rupee depreciation', sources said. 'However, once the air is cleared in respect of the new liberalization laws, clarity will bring sanity to the disturbed FX market,' they said.
Meanwhile, market's net excess liquidity (NEL), boosted by exporter conversions on Thursday, was uplifted by 24.69% (Rs 5,361 million) to Rs 27,074 million yesterday. This was due to a settlement of US$ 65.16 million (Rs 10,012.52 million) of such export led proceeds that took place yesterday. Conversions are based on the closing benchmark 'spot' middle rate value of the dollar which was Rs 153.65 on Thursday.
Yesterday also saw Central Bank of Sri Lanka (CBSL) retiring Rs 4,651.52 million worth of face value (FV) Treasury (T)-Bills, thereby driving down FV money printing (MP) by an equivalent amount (11.80%) to Rs 34,777.04 million (0.3% of GDP) yesterday and with it, demand pull inflation. As a result, Government of Sri Lanka's (GoSL's) FVMP borrowing costs (BCs), yesterday over Friday, fell by 3.30% (Rs 19.93 million) to Rs 584.46 million.

$45.1M NFO
A year ago on Friday, 18 November, 2016, the country's/CBSL's foreign reserves were poorer by $ 45.08 million (Rs 6,660.46 million) due to GoSL's foreign debt servicing commitments.

Conversions are based on the then administered 'spot' price of Rs 147.75 to the dollar. The FX market is avoided to meet such obligations for fear that would cause depreciative pressure on the rupee. 'Spot' trades are settled after two market days from the date of trading.

On the other hand, market liquidity suffered a loss of Rs 6,660.46 million to meet this commitment. But, as GoSL was starved of rupee liquidity, CBSL printed Rs 15, 062.46 million (FVMP) to help GoSL to meet this cost plus other rupee obligations on 20 November, 2016.

As a result, GoSL's FVMP obligations (CBSL's direct T-Bill holdings), 18 November, 2016 over 17 November, 2016 increased by 12.33% to Rs 137,220.15 million, equivalent to 1.2% of GDP, thereby giving a fillip to demand pull inflation. However, year on year (YoY) as at yesterday, MP has declined by 0.9% of GDP.

Due to MP, market's net shortfall fell by Rs 8,402 million (14.97%) to Rs 47,714 million on 18 November, 2016. Nevertheless, YoY as at yesterday, NEL has increased by Rs 74,788 million (0.6% of GDP). Meanwhile, GoSL's MPBCs, 18 November, 2016 over17 November, 2016 increased by a massive Rs 535.04 million (14.97%) to Rs 3,099.57 million, aided in part due to the weekend, where such costs are prorated over three days instead of the usual one. Nonetheless, YoY as at yesterday, GoSL's MPBCs have declined by Rs 2,515.11 million (81.14%).

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