Non-residents will now have to pay in foreign currency in Sri Lanka, says central bank

Tourists travelling to Sri Lanka will now have to pay for their goods and services in foreign currency, the Central Bank announced on Thursday, as part of its efforts to inject more liquidity in the economy and build up the country’s depleted foreign exchange reserves.

The directives were taken by the Central Bank of Sri Lanka with a view to strengthening macroeconomic stability.

Consequently, the apex bank has instructed registered tourists’ establishments to accept foreign exchange only in respect of services rendered to persons residing outside Sri Lanka.

“All registered tourist establishments must accept foreign exchange only in respect of services rendered to persons residing outside Sri Lanka,” said the monetary policy review for the month of January, released by Sri Lanka’s Central Bank.

This comes in the backdrop of the Central Bank hiking the standing deposit facility rate and the standing lending facility rate by 50 basis points each to 5.50 per cent and 6.50 per cent respectively to control inflation rates, curb imports, and avoid a potential default later in the year.

In its statement, it said the "measures will curtail the possible build-up of underlying demand pressures in the economy, which would also help ease pressures in the external sector, thus promoting greater macroeconomic stability."

The pandemic has also dealt a blow to the economy dependent hugely on tourism, with the government estimating losses to the tune of $14 billion over the last two years.

The economy is also estimated to have contracted by 1.5 per cent in July-September 2021.

Sri Lanka has underlined its commitment to repaying the USD 4 billion owed to investors this year, even though analysts reckon it could face its first-ever default unless it increases dollar inflows.

"We want to give a very clear message that we want to see inflation being dealt with," Central Bank Governor Ajith Nivard Cabraal told reporters on Thursday.

He also ruled out an IMF bailout. "People have a fixation on the IMF. Our programmes have a huge amount of merit,” he asserted.

These measures come barely a week after New Delhi had announced a USD 900 million loan to Colombo to build up its depleted foreign reserves and for food imports amid a shortage of almost all essential commodities in Sri Lanka.

India on Tuesday announced a USD 500 million credit line to help Sri Lanka purchase petroleum products as the island nation struggles with a massive fuel and energy crisis.

Last week, Sri Lankan Finance Minister Basil Rajapaksa held talks with External Affairs Minister S Jaishankar during which the two ministers discussed projects and investment plans by India that would strengthen the economy of the island nation.

During the meeting, both ministers noted that the recent steps taken by Sri Lanka for jointly modernising Trincomalee Oil Tank Farms will boost the confidence of investors, apart from enhancing Sri Lanka’s energy security, it added.

Earlier this month, Sri Lanka signed an agreement with India to jointly redevelop the strategic World War II-era oil tank farm in the island nation's eastern port district of Trincomalee, in a new milestone in bilateral economic and energy partnership.

India’s extension of USD 400 million to Sri Lanka under the SAARC currency swap arrangement and deferral of A.C.U. settlement of $515.2 million by two months are key assistance in the current Sri Lankan foreign currency shortage situation, according to analysts.

Sri Lanka has also paid USD 500 million due on sovereign bonds from its depleted foreign reserves despite calls by experts to defer the payment and use the sum to import essential items and medicine.

Including the latest payment, Sri Lanka now has foreign debt obligations exceeding $7 billion in 2022, including repayment of another bond worth $1 billion in July.

The Central Bank said on Thursday that the gross official reserves stood at $3.1 billion at the end of 2021. This includes a currency swap in Chinese currency to the tune of $1.5 billion.

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