Dollar Crisis, attacking Undiyal and other monetary Issues
Posted on November 22nd, 2022

Chanaka Bandarage

The country is facing a severe foreign exchange crisis. Our real foreign reserves are extremely low now.

It seems the government has again resorted to keeping the Rs/US Dollar rate static (Rs 368 or around = US$1).  

For the moment, the government has no other option.

Sri Lanka being imports driven country, this artificial arrangement serves well. This keeps the inflation in check.

The irony is that moment the Rs is floated against the dollar (this is the accepted thing to do), inflation will sky rocket. 

Currently, we are the 5th highest in the world in inflation.  Will we surpass Venezuela and Zimbabwe? Let’s hope not.

We saw what happened in March 2022 – as soon as the Rs was re-floated, the dollar exchange rate shot from Rs 205 to Rs 360 (the dollar was fixed at Rs 203 for 7 months – since September 2021).

The correct monetary policy should be to allow the forex market to determine the dollar exchange rate.  If this is now allowed, the dollar may hit Rs 450 or more immediately.

The moment the Rs is re-floated, it will hit our banks very badly. 

When buying dollars, it will be very difficult for the banks to pay an additional Rs 80 – Rs 100 for them. Paying Rs 450 instead of the current Rs 370 is a big ask for the banks. Small banks do not have huge money reserves; historically they have made small profits (Sri Lanka has too many banks in the first place).

It will be almost impossible for the banks to sell dollars as well. Put simply, they do not have dollars to sell. This is the reason why imports are stuck – banks do not have dollars to open L/Cs.  Hundreds of shipping containers are lying in the port unable to be cleared due to this reason. Sometimes even oil tankers are stuck for days and weeks until dollars are found.

To the writer’s understanding the Central Bank still prints money; but, it no longer assists banks in liquidity problems.

If we do not safeguard our banks (like our two eyes), they could collapse one after another – like a pack of cards. People will lose all their life savings. Similar things have happened in Argentina and Greece.  Many innocent people committed suicide in those countries.

The Colombo Money Exchange Dealers (mainly in Fort) too do not have much dollars and other foreign currency to sell in exchange of SL Rupees. These days few overseas Sri Lankans and foreigners arrive in Sri Lanka; so fewer people to sell dollars to Dealers. 

Also, there is a heavy local demand to buy dollars. Lots of Sri Lankan overseas students have been affected as parents cannot find dollars to send their children studying overseas. Even people travelling on tourist visas to foreign destinations find it difficult to secure dollars from banks and Colombo Money Exchange Dealers.

Most of the Sri Lankan Diaspora (Sinhala and Tamil) now uses the Undiyal system to send money to Sri Lanka. Previously they sent remittances through the local banks.

How Undiyal works:

Eg: a Sri Lankan living in Melbourne who wants to send A$1,000 to a relative in Colombo would contact the Undiyal person in Melbourne and give him/her that money (A$1,000 in cash). Most of the time this Undiyal person is also a Sri Lankan living in Australia. The Undiyal person will instruct his/her agent in Sri Lanka to personally hand deliver the correct, equivalent amount in Sri Lankan Rupees to the Melbourne Sri Lankan’s relative in Colombo as soon as possible – most probably on the same or next day. Sometimes monies are electronically remitted to the Sri Lankan relative’s local bank account.

The Undiyal person pays a much higher exchange rate for the Australian dollar than the local banks and the Money Exchange Dealers. Eg: Instead of the local bank’s Rs 225 or Fort Money Exchange Dealer’s Rs 250; the Undiyal person will pay Rs 275 for the Australian dollar.

The Melbourne Sri Lankan will be very happy about this arrangement, as he/she is able to send the maximum amount to his/her Colombo relative, with least fuss. The only risk he/she faces is whether or not the Undiyal person would cheat him/her. 

What the Undiyal person does in Melbourne is an illegal act, if caught, he/she could be prosecuted in Australia for tax evasion (and other financial crimes). But, seldom have they been caught.

To the best of the writer’s knowledge, overall the Sri Lankan Undiyal persons wherever in the world have thus far conducted business without cheating their customers.

The Undiyal person directly undercuts the local Sri Lankan banks. Thus Sri Lanka suffers very badly.  We (our banks) used to receive at least US$8 Billion annually as remittances from our Diaspora. Now this figure is below US$3 billion.

What the Central Bank must do is try to stop the Undiyal Money transfer system. Yes, they can do this to a large extent. For this, the government must start arresting Undiyal agents in Sri Lanka. We are a close-knit society; it is not difficult to find the culprits.  They could be prosecuted under the exiting Money Laundering Laws (no new laws are required). 

There is another scheme that operates around tourist hotel/motel areas where foreign exchange dealers, money brokers, beach boys etc persuade foreign tourists to encash dollars (and other currencies including Indian Rupees) with them instead at local banks and Colombo Money Market Dealers.  Obviously, they offer much higher rates than the established financial services. These fraudsters can also be caught and prosecuted under our existing laws.

The Central Bank must also rule that the local Money Exchange Dealers are not authorised to pay for dollars (and other foreign currency) more than what the local banks pay.  This is something easy to monitor. Then, people will start trading with the local banks more. This will make our economy healthy again. 

If we are successful in obtaining at least US$6 Billion per year as remittances from our overseas brethren, that will go a long way in curing our economic ills.

Due to the Central Bank’s fixing of an upper limit for the dollar (about Rs 368), it is difficult to expect that the expatriates would start sending dollars (and other currencies) to Sri Lanka through local banks. As stated before almost everyone resorts to the Undiyal system. Undiyal currently pays about Rs 410 for a dollar.

Expatriates have become used to sending money through the Undiyal system and they will not give that up easily (unless very good incentives are offered to them).

The problem that the government faces is that Undiyal will always give a higher exchange rate than the banks.

Finding dollars is the solution to all present problems.  This has become an essential issue in everyone’s lives.

Sadly, the government seems to have no idea as how to tackle this problem. It is placing too much faith and confidence in the IMF.  

It is good if we are successful in obtaining IMF assistance; but that alone is not enough.

Every day the economy goes into deeper red.

There are many innovative ways of finding new dollars.  The government seems to be ignorant on this. Or is it more concerned about ‘fishing’ opposition MPs to their camp than focusing on improving the economy? 

A government’s primary duty is to give paramount consideration to its citizens’ welfare.

The government ought to know that if it does a good job people will reciprocate by re-voting for it at the following election. Rather than trying to woo opposition MPs, the government must give 100% commitment to rescue the country, especially when the economy is in such dire strait.

This government allowed expatriate Sri Lankans who have sent remittances to Sri Lanka to send an electric vehicle. True, this scheme encourages the overseas Sri Lankans to send foreign exchange here. But, the scheme does not seem to be successful. Who will send an electric vehicle here knowing well that we do not have sufficient facilities to charge the batteries?

After the 9 July 2022 Aragalaya, some stability has been established. The power cuts are less now and the fuel queues are gone. There is some night life in Colombo. These are good developments.

But, bribery, corruption, maladministration, bureaucratic inefficiency and stupidity are still rampant.  The productivity in government offices has not increased. It is still very difficult for the public to get any work done from a government office. Though the public servant salaries were increased, in many places, even the telephones are unanswered. Officials are very rude to the public, especially to the socially disadvantaged. All these factors are significantly contributing to the decline in the economy.

A strong leadership is needed to fix the country’s problems.

Lee Kuan Yew was a visionary leader.

At a time when vehicles cannot be sufficiently run due to lack of fuel, the government still wants to build new expressways (or finish the works that have already begun).  Everybody knows expressways are a good source for the politicians to earn huge illegal incomes. Millions of dollars will need to be borrowed for these projects.

As the country has declared bankrupt we are currently not paying off the loans (around US$55 Billion). This is a temporary big relief for us. But the foreign governments/banks will keep harassing us for their monies.

There is the saying that the crab can dance only until the water is boiled. It is possible that foreign nations and their banks could try to seize our overseas assets (eg: what happened to the Russian plane in Sri Lanka).

This writer previously advised how the government could officially declare bankrupt through our court system here (the country, Sri Lanka – a separate legal entity, that can sue and can be sued).

The advantage is that once legally bankrupt all outstanding foreign loans will be permanently written off. Because the bankruptcy is sanctioned by the Court, it has international legitimacy. After few years, say 3 (depending on the bankruptcy period), we can re-start obtaining foreign loans including IMF. As the US$55 Billion loans are permanently written off due to the legal bankruptcy, it will be a fresh start for us say in 2026.

It is important for the government to think ‘outside of the box’ – in the best interests of the people. The country is currently hemorrhaging.

Getting rid of these foreign debts permanently will be a big relief especially for the future generations. Why should they pay for our sins?

Currently the foreign dollar assistance does not come to us free of charge. They are all loans.  As it is obvious that we do not have the means to pay them off, we will end up selling most of our valuable assets to foreigners. Already we have recently given away precious lands to China (Colombo and Hambanthota), Trincomalee Oil Tanks to India, Kerawalapitiya LNG Electricity plant to USA, land in Mannar, Delft etc to India and thousands of fertile Wellassa lands to Singapore.  Now the foreign buyers want our Sri Lankan Airlines, Insurance Corporation, Telecom, CEYPETCO, Ceylon Electricity Board, Lake House, the precious lands in McCullum Road and many more. Are they also asking for the old Manning Market land?

There is a belief that this time most of the asset buyers will be the Tamil Diaspora.

All of the above mentioned ventures can be profit making under a government, provided that they are run with sound management sans briary and corruption.

Again, rather than selling state assets the government must concentrate on raising dollars. This writer outlined various new avenues of doing this in a previous article.

What we must realise is that all new dollar avenues, even small, would collectively add to a sizable amount.  ‘A drop of water makes a mighty ocean’.

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