Sri Lanka trims bank forex trading positions

Mar 02, 2012 (LBO) – Sri Lanka has trimmed the level of foreign exchange banks can keep overnight for trading to around a third of an earlier level, a day after curbs was placed in the forward market, dealers said. The rupee gained to 119.00/120.00 against the greenback in the spot dollar market from around 122 levels a day earlier as banks sold down their net open positions to comply with the new rules in early trade Friday.

The trimming of open positions comes a day after forward deals were limited to 90 days.

In previous balance of payments crises Sri Lanka has cut open positions, restricted forward trades, placed penal rates on exporter packing credit, increased deposits for letters of credit to import specified goods such as automobiles and also raised taxes.

Sri Lanka is prone to balance of payments crises from 1950 as the country has a so-called soft-pegged exchange rate where the monetary authority tries to target an exchange rate and also keeps a policy rate by printing money.

This time the curbs have come after several corrective steps taken to tackle the underlying problem of fast growing credit and too-low interest rates.

Energy prices have also been raised to reduce credit to state energy utilities.