Central Bank cracks down on domestic dollar transactions
View(s):The Central Bank this week cautioned against the rising tendency among residents of Sri Lanka to make domestic transactions using foreign currencies.
This is seen as a flagrant violation of the law as highlighted by the Central Bank. In a recent clarification, it asserted, “all transactions executed between or among residents in Sri Lanka shall be made in Sri Lankan Rupees”.
It is mandated by the Central Bank of Sri Lanka Act, No. 16 of 2023, unless otherwise specified by the Foreign Exchange Act, No. 12 of 2017.
The statement further follows reports from various sources that some traders have been collecting foreign currencies from local clients, including the exchange of rupees from these clients to foreign currency and then loading it in foreign currency accounts through electronic fund transfer cards.
The Central Bank was unequivocal saying it has “not granted any authorisation for local merchants to receive payments” in this manner.
The legal consequences are severe. Any resident making payments in foreign currency to another resident or any merchant accepting such payments without authorisation commits an offence punishable by a fine of up to Rs. 25 million, imprisonment of up to three years, or both, it added.
While the directive is framed as regulatory enforcement, its economic significance runs deeper.
At stake is confidence in the Sri Lankan Rupee. Several economists told the Sunday Times Business that they viewed the widespread domestic use of foreign currency as an indication of “partial dollarisation,” in which individuals and businesses are seeking protection from currency volatility.
This is a systemic risk in a country still recovering from the 2022 balance-of-payments crisis. According to one leading financial analyst, “forcing the rupee to remain the exclusive legal means of payment in domestic transactions is highly relevant to monetary stability. When residents start regularly transacting with dollars, it compromises the capacity of the Central Bank to manage liquidity and interest rates to ensure that inflation is kept under control”.
This risk could be further amplified by Sri Lanka’s heavy dependence on imports. Increased local demand for foreign currency can place renewed pressure on scarce reserves and destabilise the exchange rate.
A depreciating rupee directly raises the cost of imported essentials, fueling inflation and eroding purchasing power, analysts pointed out.
The warning given by the Central Bank appears not only aimed at enforcing the requirement but also at conveying a message.
When the institution issued the announcement, the intent was quite clear. “The CB urges the general public and the business community to strictly adhere to these statutory requirements”.
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