ECONOMYNEXT – Negative net open positions in Sri Lanka’s banks were reducing in early July, while flexibility has been given to lenders given current crisis, Central bank officials have said as the country is gripped by the worst monetary crisis in seven decades.

“Given the situation we have given some flexibility for banks on prudential basis for them to manage without imposing strict NOP positions,” Central Bank Governor Nandalal Weerasinghe told reporters after the July monetary policy meeting.

“They can go negative or positive depending on the liquidity availability. They are given the flexibility in this kind of situation.

“They are using that space and going up and down. Some banks are going negative and again acquiring positive if they get liquidity.”

Negative NOP are least in foreign banks and but a found in higher volumes in state and private banks, market sources say.

Sri Lanka’s banks are facing the most severe currency crisis (soft-peg crisis) in the last seven decades with lenders forced to pay up on letters of credit and also repay foreign lenders or depositors with loans to the state or state enterprises sometime being repaid in rupees.

However there is some improvement in July.

“Overall there is a build up of NOP position by the banks these days due to conversion that are taking place,” Director of Economic Research, P K G Harischandra said.

In past forex shortages coming from the soft-peg bank NOPs have mostly been positive, and the central bank have issued rules to reduce them, sometime delaying rate hikes to curtail credit and outflows.

In the current crises some banks had problem honoring swaps and also letters of credit particularly to oil suppliers.

Imports are coming down overall, with higher interest rates curtailing credit.

The issue here is there are legacy payments,” Governor Weerasinghe explained. “Those are coming due. There are arrears coming due. The banking system has some arrears to be paid. Those are adding to the day to day outflows.

“That will have to be taken care of, or we have to seek extension of those credits going forward, so that we can manage the situation.”

Sri Lanka’s imports fell to around 1.4 billion dollars in May from around 2 billion dollars in late 2021 when large sterilized interventions were being made. (Colombo/July18/2022)