MAINTAINING DUAL EXCHANGE RATES IN SRI LANKA
Posted on December 10th, 2021

BY EDWARD THEOPHILUS

Recently, the Central Bank of Sri Lanka has announced it will pay Rs.10 more than the official buying rate for US Dollar remittances to Sri Lanka, and people working overseas are confused with the new practice because the new exchange management regime has not shown that currencies, which remit to Sri Lanka other than US dollars are eligible to claim additional local currency incentive in the new regime. The other aspect is whether the Central Bank will charge rupees 10 more than the official rate for the US dollars that going out for various payments. The detailed information is required because of the way FEECS system implemented between 1968 to 1978, new management regime insists in the country it will be helpful Sri Lanka to adjust with a new regime.

Sri Lanka had been maintained a dual exchange rate regime since 1968 until the FEECS system was removed in 1978 by the changing economic policies starting for a market economic system. After the independence in 1948, a significant influence on the exchange rate regime of Sri Lanka was the situation experienced after the Korean War in the early 1950s, which forced Sri Lanka to sign a Rubber–Rice pact with China, and the official depreciation of the foreign value of Sri Lanka rupee in 1967. The depreciation was essential part with the depreciation of British Sterling pound. Sri Lanka Rupee was linked to the British Sterling pound by the Currency Board System operated in the colonial era.  

Introducing the FEECS system in 1968 (Foreign Exchange Entitlement System) for foreign exchange buying and selling was a good policy decision on the advice of the International Monetary Fund. It was a dual exchange rate regime and successfully worked to control domestic inflation and foreign exchange outgoing.The new regime introduced by the Central Bank of Sri Lanka would be useful to  manage foreign exchange coming in an outgoing, however, many people in the country have no idea about dual exchange regime the best example for this point was the views of Mr.Eran Wickramaratne, who participated in a TV program, Pathikada.

From 1968 to 1978, the FEECS rate changed several instances, and despite the criticism of many left political parties, when Dr.N. M. Perera become the Minister of Finance after the 1970 Election, continued maintaining the dual exchange rate regime, most probably understanding the significance of a dual exchange regime for the country. When it independently analyses, it could see that the foreign exchange demand for various purposes had been in slower growth and people demanded foreign exchange for limited purposes. After 1978, foreign exchange demand for various purposes has been increased by liberal economic policies. The government policy has been supporting exchange demanding the import of goods and services that were conceived in the country. For example, many retail products and services could have originated domestically instead of importing, and Sri Lanka could provide education services domestically rather than sending kids overseas for education. Recent PANDORA papers disclosed that certain officers who worked in the Government Treasury misused the new regime after 1978 for gaining undue enrichment.

A dual exchange rate management despite the cry of many countries would be suitable to main a balanced economy and to build foreign exchange reserves. To stabilize the foreign value of the Sri Lanka rupee is a significant strategy and the market process should be applied when the exchange reserve would increase to the US $ 25 billion. If it analyses the way outgoing component of exchange it could be found the way how wasted the reserve and workout a good management regime.

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