Central bank control over the exchange rate impedes the import of necessities and raises the cost of living

November 27, 2021 at 6:32 PM

Colombo/Sri Lanka – Sri Lankan economy had to face several crises with the beginning of the Covid’s outbreak; the major one is the lack of foreign exchange.

The key reasons behind this were disruption of the tourist industry, decreased foreign investment, reduced remittances sent to Sri Lanka by migrant workers, etc.

This was also because of the significant drop in the country’s foreign reserves with the payments of foreign loan installments and interest payments for this year.

At the same time, the rupee’s value depreciated, and the dollar reached Rs. 201.00. Using legal powers, the Central bank is maintaining the value of a dollar at this level. 

For this, they can give orders to commercial banks, also, the Central Bank has introduced special rules for importers, exporters, and investors to reduce the impact on the exchange rate due to them. 

Restrictions on the issuance of latter of credits through commercial banks, rules to accelerate the conversion of dollar receipts into rupees, etc., were some of the methods they followed. 

However, due to these processes, recently, a large number of problems have been created in the country due to the shortage of imported essentials such as gas, crude oil, sugar, milk powder; building materials, etc., queues occurred to buy them. 

As a result, the cost of living and inflation is rising sharply. Due to the existing restrictions, importers cannot unload their goods from the port, and the goods are heaped up there. 

(Dr. Priyanga Dunusinghe, a senior lecturer at the Department of Economics, University of Colombo commented that the Central Bank and commercial banks are maintaining such low exchange rates artificially, as the banker of the banks and the Central bank has the legal power to do so.

As a result, the value of a dollar in the black-market increases, and importers are importing under the rising exchange rates. Once the importers open the later of credit, they will find it challenging to find the foreign exchanges under the government’s official exchange rates, thus it won’t be possible to release goods from the port, then the importers stop importing goods.

The reason for this is that it has been controlled artificially without allowing the depreciation of the exchange rate. 

The parliament-Samagi Jana Balawegaya (SJB member, Mr. Eran Wickramaratne, noted that: “In the near future, if we fail to pay for petrol and diesel, transportation will also be disrupted, Then there will be no electricity because fuel is used to generate electricity. This is how the people are affected.”

Meanwhile, Mr. Tissa Attanayake, parliament-Samagi Jana Balawegaya (SJB member added “If this process is followed continuously, we will not be able to import our essentials such as food, medicine, and fuel by next year”