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Sri Lanka’s forex reserves further hit by Bangladeshi move

Sri Lanka Rupee vs US Dollar

Sri Lanka’s precariously low foreign reserves suffered another blow this week after Bangladesh’s Central Bank, Bangladesh Bank, directed all banks in that country to only resort to cash deals and no credit with Sri Lankan banks under an international payment settlement gateway.

The move, according to local bankers, may have been prompted by Sri Lanka’s low forex reserves and Sri Lanka’s Central Bank seeking more time to make payments to  Bangladeshi customers, via their banks.

The sources who declined to be named said that the Bangladesh Bank on Wednesday directed the country’s banks, through a circular, to refrain from transactions with Sri Lankan banks through the Asian Clearing Union (ACU) system. “Sri Lankan banks are yet to be officially informed by our Central Bank of this move,” one source said. Central Bank officials were not immediately available for comment.

The first intimation of this directive in Bangladesh came in an October 27 report in the Bangladesh Business Standard newspaper which said a circular had been issued by its central bank asking banks to refrain from dealing with Sri Lanka through the ACU.

“If any Bangladeshi bank wants to settle a transaction with a Sri Lankan commercial bank, it can do that by ignoring the ACU system,” the report said.

Banking sources said the decision may have been prompted by delays by Sri Lanka’s Central Bank to help local banks settle outstanding dues to Bangladesh banks (often for goods purchased by Sri Lanka) during the usual three-month grace period for payments.

While the ACU is a platform where three months grace or credit is given to make a settlement and Sri Lanka may have required more time to settle its dues, the implication is that henceforth if Sri Lankan banks need to settle a payment in Bangladesh, it is forced to make a cash payment – through dollars from the Central Bank – without any recourse to credit. “If the Central Bank has to make immediately available cash from its dwindling forex reserves to make payments to Bangladeshi customers through our local banks, this would further erode the reserves,” a banker said, explaining the impact on Sri Lanka.

The ACU is a payment arrangement whereby the participants settle payments for intra-regional transactions among the participating central banks on a net multilateral basis. Bangladesh, Bhutan, India, Iran, the Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka are members of the ACU.

The banker said that it is believed that India has already stopped dealing with Sri Lanka through the ACU and this is a much bigger blow given the quantum of trade between the two countries.

Sri Lanka’s current foreign reserves are at US$ 1.717 billion which includes an untradeable $1 billion loan from China.

(Source: The Sunday Times)