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CB orders immediate conversion of foreign currency earnings to rupees
The Central Bank has ordered importers, exporters and those engaged in receiving funds for ‘goods and services’ provided abroad, including professionals, to convert their foreign currency earnings to rupees forthwith and for commercial banks to ensure the transactions are done each month.
In a move that has sent shock waves among the business community, professionals and banking circles, the directive orders the foreign currency proceeds of ‘goods and services’ provided outside Sri Lanka be immediately informed to licensed commercial banks and converted mandatorily to local rupees within 180 days. Certain authorised deductions are permitted for imported inputs and loans, business travel and few other exemptions.
The directive also includes individuals who provide professional, vocational, occupational or business services overseas.
Sri Lanka is over-regulating the foreign exchange sector by ordering to convert all or most foreign earnings into rupees, and this could also affect billions of dollars in remittances by migrant workers, according to experts. They say this is a textbook case of encouraging local businesses and individuals retain funds abroad rather than bring them in so that they can carry on their overseas operations without disruption as the commercial banks are running dry of foreign exchange. This will only aggravate the chronic foreign exchange crisis facing the country.
The Central Bank (CB) directive to convert all foreign exchange earnings to rupees with effect from November 1, is also expected to affect FDI (foreign direct investments) and global rankings as a ‘business friendly nation’.
For the first time, the Central Bank’s latest regulations apply to services which would impact the forex earnings of IT companies, Business Processing Outsourcing (BPOs) and Knowledge Process Outsourcing (KPOs) companies mostly in the IT sector, and legal services among other service sectors. The move could likely induce more Sri Lankan migrant workers to send their money through unofficial channels (known as ‘Hawala’) to get a better rate in the unofficial exchange market in Colombo, than through recognised commercial banks.
“The biggest problem is that the US dollar is not properly valued and controlled by the Central Bank. That has a huge impact on export earnings and a general reluctance by some exporters and also professional service providers to bring back their earnings,” said a financial expert at a large export venture.
While the dollar is artificially pegged at Rs. 202-203 for many months now by the CB, the dollar buying rate, according to one money exchange dealer, was Rs. 235 on Saturday. Asked for the dollar buying rate, the dealer said they do not have any dollars to sell, reflecting the acute shortage in the market.
Across various industries including garments and export services, officials said while there is a lot of ambiguity over the latest regulations and they are awaiting a response from banks to explain the ‘confused regulations, the recent CB decisions give the impression that Sri Lanka is becoming an over-regulated market. They also said the new rules would discourage remittances rather than encourage those earning foreign exchange for their services to bring back the money, as there is no record of their earnings.
“Such a thing should not happen in a free market and would raise questions among would-be foreign investors,” a non-garment export company CEO said, adding: “We need to structure our foreign debt instead of bringing in these regulations which give wrong signals to investors.” CB regulations governing export proceeds are largely to tackle dwindling foreign reserves which stood at US$ 2.7 billion at the end of September 2021, barely enough for two or three months of imports.
Over the past few months, the CB has been issuing directives to exporters and banks aimed at ensuring that all export earnings — for the first time now, services have been included — are brought back to the country and converted to rupees.
Large scale exporters through various industry bodies have expressed concern over CB allegations that exporters are parking their dollars overseas in anticipation of the exchange rate rising, and not bringing them back to Sri Lanka. “Most exporters are bringing back their earnings as we have to meet salary payments and other costs and it’s unfair to label all exporters as hiding money abroad,” said a director of one of the largest garment export firms.
He said that under the new CB rules, exporters must have a dedicated account (opening a new one or using an existing account) where all earnings are remitted so that this account would be monitored by the banks acting on behalf of the CB. “This means the CB will know exactly the forex earnings per company but this is not a new rule since most Board of Investment (BOI) companies have to submit quarterly reports on export volumes and earnings,” he said.