On August 2, 2023, the Central Bank of Sri Lanka (CBSL) wishes to clarify certain misrepresentations of facts which are currently circulating in the public domain on Indian Rupee. From time to time, this agency authorises selected foreign currencies as designated foreign currencies with a view to facilitating international trade and cross-border banking transactions.
Commencing in May 1979, CBSL has occasionally recognised designated foreign currency. Currently, 16 currencies have been authorised as designated foreign currencies under the Banking Act and the Foreign Exchange Act, with the latest inclusion being the Indian Rupee (INR) in August 2022.
The Main Objective
The main purpose of authorising foreign currency as a designated foreign currency is to promote trade and investment relations between the two countries. Further, it will reduce the additional transaction costs associated with dual conversion and will support promoting trade transactions through the formal banking channel. The legal tender in Sri Lanka for domestic payments and settlements will remain as Sri Lanka Rupees (LKR)
India-Sri Lanka Free Trade Agreement
The Trade between India and Sri Lanka has grown rapidly after the Indo-Sri Lanka Free Trade Agreement (ISFTA), which came into force in March 2000. The basic premise for signing the ISFTA was the asymmetry between the two economies, local socio-economic sensitivities, safeguard measures to protect domestic interests and revenue implications so as not to impact high revenue-generating tariff lines in the short term.
The pact is aimed at further boosting the economic ties between the two countries by liberalising trade norms in the view of expanding economic activities between India and Sri Lanka particularly in promoting existing trade relations between the two countries on several occasions.
Designated Foreign Currencies
The CBSL has authorised the following currencies, which include the Australian Dollar, Canadian Dollar, Chinese Renminbi, Danish Kroner., Euro, Hongkong Dollar, Indian Rupee (INR), Japanese Yen, New Zealand Dollar, Norwegian Kroner, Pound Sterling, Singapore Dollar, Swedish Kroner, Swiss Franc, Thai Baht and the US Dollar
Interaction with Indian Monetary Agencies
The CBSL has communicated with the Reserve Bank of India and the Monetary Authority of India its willingness to authorise CBSL as a designated foreign currency in Sri Lanka. Accordingly, in August 2022, with the concurrence of the RBI, However, the use of INR as a designated foreign currency in Sri Lanka is subjected to any restrictions imposed by the RBI (Reserve Bank of India).
Potential Benefits to Sri Lanka
Authorising INR as a designated foreign currency would bring many changes and advantages to Sri Lanka, including the facilitation of smooth banking transactions relating to the INR, especially for small-scale traders and encouraging the traders to use banking channels for trade transactions over informal channels, reducing additional transaction costs associated with the dual conversion of INR into USD (Dollars) and thereafter into the LKR and vice versa.
Moreover, since India remains a large source country for tourism in Sri Lanka, authorising INR as the designated foreign currency for banking transactions would add more convenience for Indian tourists.
Word of Caution
The authorisation of INR as a designated currency does not make the INR a legal tender in Sri Lanka for domestic payments and settlements. Any transaction executed between or among the residents in Sri Lanka shall be in LKR (Sri Lankan Rupee), being the legal tender in Sri Lanka. Accordingly, the CBSL requests the public not to be misled by the misrepresentation of facts circulating in the public domain on INR (Indian Rupee).
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