Sri Lanka’s central bank controls dollar deposit rates amid currency crisis

ECONOMYNEXT – Sri Lanka has linked the rates paid on foreign currency deposits to rupee yields using the powers of a monetary law devised by an American money doctor, as a currency crisis triggered by injections of Record liquidity seized the country.

The maximum interest rates that will be offered or paid by an approved commercial bank and the National Savings Bank on foreign currency deposits (FCY) of less than one year would be 150 basis points lower than the yield on the auction of the bonds. one-year treasury or 5%, whichever is greater.

Deposits longer than one year will be “based on market behavior,” the central bank said.

Special deposit accounts can be paid at a higher interest rate.

“The auctions for the above average rate calculation will be selected based on the auction date falling in the corresponding calendar month, not the settlement date,” the central bank said.

“The maximum interest rates for the coming quarter are calculated on the last business day of the current quarter. “

In August, the central bank imposed a cap rate of 5.0% on dollar deposits, discouraging active deposit hikes by banks.

Sri Lankan dollar yields rose sharply as liquidity tightened after the downgrades and counterparty risks increased.

Sri Lanka is currently facing a currency crisis due to low interest rates imposed by cash injections.

During the ousted “Yahapalana” administration, when the currency collapsed from 131 to 181 in two crises, deposit rate controls were imposed on unlucky savers after printing money to break the bank. peg the currency and drive up inflation.

The rupee is now pegged at 200 per US dollar, which has lost credibility and parallel exchange rates are around 250 per dollar.

In 1950, a classic analyst writing in London magazine The Banker warned against creating a discretionary central bank with money printing power.

“It will be evident from this summary that the new Monetary Council is going to be given almost unlimited power of control over Ceylon’s banking system – power which, if misused, could cause irreparable harm to life. of the island.
economy, ”the analyst wrote.

“The experience of the next few years will be watched with interest to see whether the experience of Ceylon will indeed show the rest of the Empire the path that a developing economy must take to free itself from the
unmeasured drawbacks of the Currency Board system or whether it will simply provide another example of the tangled web so often woven by those who left with the good intention of making finance “the servant instead
of the master of the people ”. (Colombo / jan02 / 2021)

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