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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » Sri Lanka orders banks to bring in cheap foreign money

Sri Lanka orders banks to bring in cheap foreign money

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Rapaport

Rapaport
Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics

* Interest rates under pressure amid low liquidity

* Foreign cash to ease pressure on interest, fx rates-cbank

* Balance of payments surplus to shrink-cbank

By Shihar Aneez

COLOMBO, Nov 16 (Reuters) - Sri Lanka will see "substantial" dollar inflows from a central bank directive to commercial banks to raise cheap foreign capital to offset a liquidity squeeze amid strong credit demand, the central bank said on Wednesday.

The central bank's order to banks comes as it has been defending the rupee currency exchange rate by selling at least $1 billion from foreign exchange reserves this year, despite concerns raised by the International Monetary Fund.

"There will be a substantial amount of dollar inflows through this," Central Bank Chief Economist K.D. Ranasinghe told Reuters in an interview. "Already two commercial banks have made arrangements to bring in $250 million foreign capital."

Ranasinghe declined to say how much is expected to come in, but the central bank in October said it was expecting $1 billion from foreign investors mainly into equities, corporate debt and banks.

The central bank in its November monetary policy review on Wednesday said approval has been granted to 12 private companies to raise debt capital of $63 million from foreign sources over the past two months.

Ranasinghe said excess market liquidity has now come down to 30 billion rupees ($272.2 million) from 100 billion a few months back, which currency dealers attributed to the central bank selling dollars to defend the rupee with a soft peg.

"There is an increasing demand for credit and there is a pressure on interest rates also. So the banks will have to go for foreign capital," Ranasinghe said adding that inflows will also reduce pressure on the rupee as well.

The central bank's rupee-defending effort has put pressure on the balance of payments(BOP), which was forecast to be a $775 million surplus by year-end.

"Reserves have declined in September somewhat mainly due to financing some oil bills," Ranasinghe said without elaborating. "The BOP surplus may not be that high and it will be around $300-500 million."

One private sector bank, which is now negotiating a $200 million capital injection from a Europe-based bank said the move will cut borrowing costs.

"There is heavy pressure on market interest rates and that's why we see T-bill yields are rising as both the private sector and government are competing for loans," a bank executive told Reuters on condition of anonymity.

"We will be using the foreign capital to boost our capital adequacy ratio." ($1 = 110.200 Sri Lanka Rupees) (Editing by Bryson Hull)

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