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Cash margin requirement on non-essential imports removed

03 Oct 2021

  • Requests importers not to stockpile extra inventories
  • Plans to introduce non-interest-bearing foreign currency accounts for export proceeds
  • No intention to default on upcoming debt obligations: Cabraal
  • Economy grows by 8% in H1 2021
    By Madhusha Thavapalakumar Announcing a roadmap for the next six months, Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal stated that the 100% cash margin requirement that was imposed on the importation of non-essential goods was removed with effect from last Friday (1). However, Cabraal requested the importers not to stockpile extra inventories as the Government has sufficient reserves to permit them to import those non-essential items. On the other hand, in order to encourage export proceeds to be repatriated and converted into Sri Lankan rupees, the Central Bank is planning to suspend interest rates on foreign currency accounts of export proceeds. “We are hoping to introduce dedicated non-interest-bearing foreign currency accounts for export proceeds,” he said. However, he added that no changes will be made to the personal foreign currency accounts. Commenting on the non-repatriation and conversion of Sri Lanka’s export proceeds, he stated that exports become an actual export only when it is converted to the rupee in this country. Accordingly, export proceeds that have been accumulated by exporters are required to be converted in accordance with the Central Bank requirements in the next six months. “There is, in some instances, a need for exporters to have some corresponding imports, which we recognise. At the same time, we expect the exports to materialise,” he added. Central Bank new Governor Cabraal, in his maiden speech, promised to unveil a six-month roadmap on 1 October. Delivering on that promise, Cabraal announced the roadmap last Friday, focusing on macroeconomic and financial system stability. The six-month roadmap is the first plan of Cabraal’s three-pronged framework strategy to strengthen the economy, which also includes a one-year horizon from January-December 2022 and another medium to long-term horizon. The roadmap mainly focuses on four main points, which are efforts for macroeconomic and financial system stability, near-term measures to ensure continued timely debt servicing, increase forex liquidity in the market, and create a framework for all enterprises to recover from the pandemic. Briefing the roadmap, Cabraal added that the Central Bank will take immediate steps to ensure the stability of the external sector by closely focusing on the near-term horizon, which is the next six-month period. “The rationale for this short-term focus is that, given the forex challenge and the debt service concerns, the proper management of this period will result in clarity and certainty being restored which will enable the economy to rebound,” he explained. By the end of this six-month horizon, the current efforts to enhance merchandise and service exports inflows will also show significant achievements, while a normalisation in tourism cashflows is also likely, added the CBSL Governor. He is optimistic of a jump in foreign direct investments (FDIs), with the Colombo Port City and industrial zones taking off. Adding that several key issues around government debt would need clear policy responses, Cabraal stated that the banking and non-banking sectors too require measures to address some of the issues they are facing at the moment, including the slow implementation of the consolidation programme. Cabraal read out a to-do list that requires to be ticked off if Sri Lanka is to achieve the objectives of the roadmap. Some of these measures have already taken off while others are still in the pipeline. The foremost measure in resolving debt and forex issues is to monitor forex flows (exports and investments) through the Presidential Task Force. Further, the Centra Bank targets to increase exports above $ 1 billion per month on average during the remainder of 2021. The second measure included arranging high-level discussions with respective governments to secure short to medium-term G2G financing to buttress inflows, which is an ongoing measure. This measure targets a short-term inflow of $ 1 billion and another $ 500 million within the next three months. Further, Cabraal also plans to publish Port City Commission by-laws to attract FDIs into the Colombo Port City and promote dedicated industrial zones for pharmaceutical and other industries in several areas to attract new FDIs. Other measures also include facilitating inflows from the implementation of the Tax Amnesty through the Finance Act, rebasing GDP without further delay to reflect the true size of the economy, and announcing a business-friendly budget with detailed financing strategies. The rebasing of the GDP is overdue by one-and-a-half years, according to the Central Bank. Cabraal added that licenses of foreign exchange houses that were cancelled in the past few years would be restored. He added that there are 27 people who got their licenses cancelled. On a different note, Cabraal noted that the Sri Lankan economy grew by 8% in the first half, which is “commendable”, as had we not been able to record this growth, Sri Lanka would have been in a recession given the growth contraction last year witnessed. He added that at the end of 2019, Sri Lanka had reserves of $ 7.6 billion. Thereafter, notwithstanding what people are saying, Sri Lanka had paid by $ 6 billion, and in 2021 had paid a further $ 5.6 billion so far. “Now the reserves are around $ 5 billion, which consists of about $ 3.5 billion in cash and a soft arrangement we have for another $ 1.5 billion. So technically, it would not have been possible if you are looking only at the reserves and saying ‘look, we are unable today’. Reserve management is not only dealing with the reserves we have, but dealing with the inflows as well. Criticisms that Sri Lanka will default are misplaced and we have already shown in the last two years that we can settle the debts,” he said. The budget deficit has been increased due to the pandemic by an additional Rs. 2 billion, which, according to Cabraal, is due to the ongoing pandemic. “We are maintaining inflation at a broad, comfortable level. The money supply had to be increased for good reasons, and again it has happened in other countries as well. A low-interest regime is a very important factor to make businesses viable. Sometimes we can’t maintain (and) that is why we need to co-operate to keep it at low levels. Extended debt moratorium was an important factor to ensure businesses’ survival,” Cabraal stated.

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