Foreign exchange swap discounts widen, fears of underworld grabbing kerb market

ECONOMYNEXT – Upside down rates in Sri Lanka’s rupee dollar swap discounts continued to widen last week and market participants lamented the movement of higher share of kerb market foreign exchange to the underworld after a crackdown on authorized money changers.

In the official foreign exchange market swap discounts continued to widen, reflecting low rupee yields and low dollar availability for funding purposes, market participants said.

The spot/one month was quoted -170/-150 cents this week.

The spot two months was -325/-275 cents

The spot/three months was -500/-450 cents

The spot/six months was -800/-750 cents

A swap discount of 750 indicates that a market participants who sells dollars today at (say) 200 rupees in the swap market will get it back roughly for 192.50 (a discount) in six months, despite continued reserve losses indicating that the peg is under pressure.

The central bank has also forced dollar earnings of exporters and service providers to be converted, indicating that dollar deposit growth will slowdown further, hurting the funding books of banks, analysts warn.

Sri Lanka’s state banks had been among key borrowers in the swap market. State banks have large dollar loans to state-run CPC in particular.

The CPC had been forced to borrow dollars when the central bank printed money to target a call money rate in the past as well creating forex shortages. Attempts are underway to get credit lines and further expand dollar borrowings of the CPC.

This week the central bank raided several authorized money changers who have been exchanging dollars at above the official non-credible peg of 200 rupees to the US dollar.

Sri Lanka’s authorized money changers are mostly long standing businesses which have operated across generations. Many belong to the Tamil and Muslim communities.

The communities had been engaged in cross-border trade from the British period and beyond.

“Most of my business is going to the underworld,” a traditional kerb market merchant lamented earlier this week after the first raids of authorized money changers took place.

Hawala operators may also get additional business discouraging people from bringing notes to the country, another said.

There was also a possibility of forged dollar notes being circulated as the underworld expands the business, market participant warned.

Sri Lanka is a country where there was hardly any forged dollar notes due to the screening done by the longstanding kerb market community which included authorized money changers.

Though international card fraudsters targeted credit cards and ATMs in Sri Lanka forged dollar note operators could not target Sri Lanka due to the business practices of the domestic kerb market, those familiar with the practice say.

Forged foreign currency notes operators are active in countries like Indonesia.