Sri Lanka official forex market see ‘black market’ as rupee tumbles

August 15, 2007 (LBO) – Sri Lanka’s forex markets are defying fundamental economic principles with bids creeping above offer prices in what analysts see as the latest in a series of perversions that have hit financial markets in the country. Sri Lank is now floating a 500 million dollar international sovereign bond to ease pressure on the local market and shore up reserves.

For over a week bids for spot dollars in Sri Lanka’s interbank forex markets have gone above the offer price of a state name that usually acts for the country’s central bank.

The spot dollar closed at 112.00 Monday despite a state bank offering dollars around 111.96 and 111.97 Tuesday, dealers said.

Bids are routinely seen above the state bank offer since last week.

Moral Suasion

Sri Lanka’s forex markets, one of the last markets to function well, saw volumes almost halved under a heavy dose of moral suasion after the rupee slipped rapidly below 111 to the dollar as dealers stayed off the market to escape the wrath of the monetary authority.

Terrified dealers are now bidding above the state bank offers and trying to buy foreign exchange from other parties as they do not want to face the consequences of buying dollars from a state bank