The recent move by the Central Bank to slash possession of foreign currency by a resident individual was hailed by economists as a sound measure to redirect forex to the formal banking system.
Senior Lecturer Department of Economics University of Ruhuna, Dr. Nandasiri Keembiyahetti said reducing the amount of foreign currency retained in possession by a person in, or resident in Sri Lanka from USD 15,000 to USD 10,000 is a commendable attempt to redirect the forex to the formal banking system.
He said following the Central Bank’s past unreasonable act of holding the exchange rate artificially at Rs. 202 per US Dollar until recently, black-market players as well as the public started holding foreign currency assuming that USD would hit Rs. 400 in the near future.
In the presence of unprecedented high inflation that causes the domestic currency to lose its real value, people opt to hold foreign currencies as a store of value.
“I guess the target of this restriction is to trap the speculators holding forex in black-market until the domestic currency further depreciates to earn undue profits. However, I am not sure whether the Central Bank has information to chase after such black-market players and enforce the law in case they disobey the directives because such black-market traders have collected forex not from the official channels and therefore, the amounts of currency holdings are reported nowhere,” Dr. Keembiyahetti said.
Owing to this decision, the most affected segment will be the small-scale industries producing for export markets which really need forex to import raw materials to run their business. When they find it difficult to obtain forex from the banking sector for their genuine import requirements, they might retain a part of their foreign exchange earnings abroad unreported or underestimate export bills and overestimate import bills, he said.
Overall, it is a good decision but I do not believe the government would be able to collect a significant amount of foreign exchange by enforcing this regulation. This regulation will by no means help to attract foreign exchange held in the form of black money earned through bribery and corruption, and probably not physically brought to the island, Dr. Keembiyahetti said.
Senior Lecturer - Department of Economics, University of Colombo, Dr. Priyanga Dunusingha said it is good move to get more USD to the financial system. It is a open secret that individuals (upper middle class and high income) and some firms holds some of their wealth in foreign currencies. In particular, such holdings have increased during the current crisis since many assume the exchange rate to depreciate.
It could be further assumed that some engaged in speculative transaction of buying or collecting USD since they could make big profit by selling at a higher rate when the currency is depreciated.
I am sure that there is a sizable amount of forex at hand right now. Even those who return from foreign trips/work tend to hold their wealth in foreign currencies. There is a restriction for foreign country holding by individuals (either take out of country or bring into the countries (in the form of notes and coins). Also, when individuals hold foreign notes and coins they can also avoid taxation as well.
The move by the Central Bank to restrict forex holding will discourage individuals/firms, at least, collecting foreign exchage from the illegal market for speculative purposes, Dr. Dunusinghe said.
The Central Bank slashed the limit of foreign currency possession by an individual from $15,000 to $10,000 in a move to shore up its fast-depleting forex reserve required to fund the import of essentials, including food and fuel.
The Central Bank at its last monetary policy review media briefing said the amnesty period to deposit/sell foreign currency in the hands of the public has been extended by the Finance Ministry by a month from August 15, 2022.
Those holding forex can deposit the foreign currency in into a personal foreign currency account or into a business foreign currency account or sell to an authorised dealer during this period.