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Sri Lanka caps forex forward deals to 90-days

March 01, 2012 (LBO) - Sri Lanka's central bank has capped forward foreign exchange deals with the rupee to 90 days to reduce speculation Governor Nivard Cabraal said. "It will reduce speculation overall," Cabraal said.

Sri Lanka reduced interventions in forex markets on February 09, allowing the exchange rate to be market determined and said about 850 million dollars needed to settle a part of the oil imports will be supplied by the Central Bank in the next two to three months.

Cabraal said the restriction was relaxed in March 2010 but has now been re-imposed until the foreign exchange market settle, responding to recent policy initiatives.

The restriction will not apply to forward contracts involving two foreign currencies or where forward cover is sought for shares or government securities.

In the first week of February the central bank has hiked rates, asked banks to limit loan growth to 18 percent 2012 down from 34 percent and cut back on interventions after excessive credit growth put pressure on a dollar peg.

The rupee has since fallen from 110 to 122 to the US dollar in the spot market.

State energy utilities which were selling below cost and funding losses with credit has also raised prices to reign in pressure on the currency brought about by a credit bubble.

In previous balance of payments crises, the Central Bank also narrowed overnight trading positions of banks, which can reduce market depth and worsen volatility.

This time around authorities have also refrained from raising taxes on specific goods like cars or everyday goods which bureaucrats and rulers deem to be a 'luxury' for the man on the street.

However a depreciation will increase both the price and taxes of all imports.

Raising taxes on one good can simply divert credit to another area.
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