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Thursday, May 25, 2023

Forex Crisis: Sri Lanka’s Central Bank Is Looking For Information From The Black Market

Sri Lanka’s central bank has asked the public for advice on foreign exchange trading on the grey market because of the deepening of the currency crisis caused by the printing of new money to enforce low interest rates.

To buy, trade and exchange foreign currency in Sri Lanka, only banks and money changers licensed by the Central Bank of Sri Lanka (CBSL) are permitted. The monetary authorities made this claim. Foreign currency transactions will be restricted to just those authorized dealers or money changers as a result.

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People are going to unauthorized currency exchanges to exchange their printed rupees, which are generally given to state employees as a payment. Moreover, rates are rising because there aren’t enough dollars in circulation to match the amount of money being generated. Suspicious activities may be reported through phone or email to the central bank.

The Central Bank is requesting the public for any information they may have on unauthorized transactions in foreign currency. Only licensed banks and money changers recognized by Sri Lanka’s Central Bank can operate in the FX market. In addition to that, like it’s written on this page, foreign currency may only be bought, sold, and exchanged by authorized dealers or money changers. Unless authorized in advance by the Central Securities Depository Limited (CSL), foreign currency transactions are now prohibited under the Foreign Exchange Act No.12 of 2017.

Currency Crisis In Sri Lanka

Essentials like milk powder, cooking gas, and kerosene are in limited supply in Sri Lanka. Inflation in December rose to 12.1 percent as a result of cash constraints that have slowed imports of raw materials for manufacturing.

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An economy that relies largely on tourism and international commerce has suffered a $14 billion loss as a result of the coronavirus epidemic during the last two years. Central bank officials anticipate that during July and September of 2021, the GDP shrank by 1.5 percent in contractionary terms.

President Gotabhaya Rajapaksa emphasized the importance of Sri Lankans living overseas who provide money back to the country.

“I encourage all Sri Lankan expatriates to invest in their nation,” he said in a speech at an Independence Day celebration in Colombo. His address was followed by a colorful military procession.

The country’s primary source of foreign money, remittances, fell by about 60 percent to $812 million in December from the same month last year, according to official data. Remittances decreased by 22% to $5.4 billion during the year. Currency values fell as a result of government-ordered currency conversion and exchange rate regulations.

It is estimated that Sri Lanka owes $15 billion in foreign sovereign bonds. To repay its obligations, the government is restocking its reserves, according to official statements.

None of the current difficulties we face are long-term issues. With a positive outlook, we can find a solution to these problems,” Rajapaksa stated. “We’ve dealt with serious issues in the past, and we’ve come up with answers.”

By a statement from the country’s central bank, Sri Lanka has reassured investors that the government would not default on its debts.

According to Central Bank of Sri Lanka (CBSL) figures, Sri Lanka’s foreign currency reserves have plummeted to $2.36 billion.

Following recent rumors that Sri Lanka is on the brink of a sovereign default, CBSL’s attention was raised, it said. According to the CBSL, these charges are “completely unfounded.”

An official statement from the CBSL indicated that to meet its forthcoming debt commitments, it has secured alternative foreign currency inflows via bilateral and multilateral financial agreements.

It’s not necessary to begin talks with investors for debt restructuring because of the projected inflows of foreign currency and a corresponding increase in international reserves, the central bank stated.

Foreign currency reserves in Sri Lanka are dropping faster than projected, according to a report released by Citi Research on Monday.

International debts must be restructured by July, Citi Research says. That’s the worst-case scenario.

In the face of skyrocketing import costs, Sri Lanka has been scrambling to replenish its cash reserves and pay down its debt. Tourism and remittances, two of the country’s most important sources of foreign currency, have plummeted as well since the outbreak of the epidemic.

The Steps Against The Crisis

Fears are growing that Sri Lanka might become bankrupt in 2022 as inflation soars, food costs soar, and the country’s coffers run dry. President Gotabaya Rajapaksa’s government is on the verge of collapse, in part due to the immediate impact of the Covid crisis and a decline in tourism. But it is also being exacerbated by high government spending and tax cuts that are depleting state revenues, as well as massive debt repayments to China and dwindling foreign currency reserves. By printing money to pay off domestic and international debts, the government has fueled inflation.

This is the equivalent of five years of progress in eradicating poverty since the outbreak began, according to the World Bank.

Those who were formerly well-off are now fighting to feed their families, while basic necessities are now out of reach for many. Inflation touched a record high of 11.1% in November.


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