Sri Lanka seeks more dollars, inflation up

[TamilNet, Friday, 15 September 2006, 19:55 GMT]
Sri Lanka’s Central Bank has asked the country’s licensed money changers to increase collections to be allowed to continue in business but a new tax may be pushing more dollars underground, Lanka Business Online reported Thursday. Meanwhile, AFP reported inflation is running at 15%.

Licensed money changers are expected to buy foreign exchange from tourists and those who return from working abroad and deposit it in commercial banks.

According to their license, money changers cannot sell foreign exchange back to customers.

The Central Bank says money changers have to supply more dollars to the system in order to justify their being allowed to continue in business.

“You have to ensure that your own function and your own trade is made an indispensable trade. For that, you have to ensure that more and more money comes into the system,” Central Bank Governor Nivard Cabraal told Sri Lanka’s 60-odd money changers this week.

The central bank recently tightened regulations on money changers, while the newly introduced money laundering act also required them to report transactions above half a million rupees.

Customers also have to be issued receipts and a copy with their national identity card or passport number retained with the money changer.

But money changers told LBO increasing regulations are discouraging customers from coming to them, and some people send money through friends and relatives.

Dollar deposits from money changers climbed steadily to 180 million dollars in 2004. That it was around 8-10 percent of the country’s reserves and total inward remittances, LBO said.

But in 2005 deposits fell sharply in 2005to less than half that, about 70 million dollars, but has recovered somewhat to 65 million dollars in the first half of 2006, after a tax on gold was eased.

The tax on imported gold led to unofficial gold being hand carried through the airport, and the foreign exchange may have leaked for that purpose.

Another reason for reduced deposits is said to be falling tourist arrivals in the wake of the December 2004 tsunami.

Meanwhile, year-on-year inflation hit 15.3 percent last month, up from 10.9 percent a year ago, and is one of the highest in South Asia, AFP reported Thursday, relating the rise to Sri Lanka’s heavy expenditure on military hardware.

Sri Lanka's central bank is hoping the country will see economic growth of seven to eight percent this year but the 25-billion-dollar economy depends on up to one billion dollars in external aid, and any reduction of that figure could upset the balance sheet, AFP said.

Some analysts argue Sri Lanka’s black economy may be as big as the official one. Some also see it as a vital safety net cushioning many ordinary Sri Lankans from the high cost of living.

International ratings agencies Fitch and Standard and Poor's downgraded Sri Lanka's outlook to negative in April.