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CBSL explains repatriation and conversion of export proceeds

25 Feb 2021

The Monetary Board of the Central bank of Sri Lanka (CBSL) recently issued a set of rules for the repatriation of export proceeds into Sri Lanka and the conversion of these funds into Sri Lankan rupees, and has also issued operating instructions to licensed banks on the same. These rules and operating instructions, which would supplement the repatriation requirement already in place, were issued to strengthen the foreign exchange situation of the country, and to dampen speculative activity that caused some excessive volatility in the exchange rate.  Since issuing these rules and operating instructions, there have been some media reports that argued that such rules will discourage Sri Lankan exporters from expanding their domestic businesses, noted the CBSL. These reports also alleged that the legitimate earnings of exporters were being usurped by the banking system and the Government. The CBSL clarified that many Sri Lankan exporters already repatriate a large share of their foreign exchange earnings into Sri Lanka. These exporters also convert a substantial portion of their foreign exchange earnings into Sri Lanka rupees, to meet their domestic payment obligations.  Therefore, the requirement to repatriate foreign exchange earnings to Sri Lanka, and to convert 25 % of these earnings into Sri Lanka rupees does not exert excessive pressure on exporters. Furthermore, the domestic value addition in export sectors varies from one industry to another, and the requirement to convert 25 % of foreign exchange earnings into Sri Lankan rupees will encourage domestic value addition in any export business that has not yet reached at least this level of value addition. Such repatriation and conversion requirements are not uncommon in other regional economies that have displayed strong export performance. In fact, the requirements are more stringent in numerous aspects in these countries, the CBSL noted.  The CBSL also emphasised that even after the conversion of 25 % of export proceeds, exporters will continue to possess the converted amount in Sri Lankan rupees, while being allowed to utilise the remaining 75% of foreign exchange earnings to purchase imported inputs, to save in foreign currency, or for further conversions, at their own free will. The requirement for licensed banks to sell, to the CBSL, 50 % of export proceeds converted into Sri Lanka rupees by exporters (12.5 % of total foreign exchange earnings) has been introduced to ensure that the country is gradually able to build its non-borrowed reserves to a high level.  Along with ongoing active efforts and fiscal and monetary policy support to promote foreign exchange earning sectors of the country, such absorption of foreign exchange by the CBSL, it stated, will help the country rely on its own resources instead of foreign borrowing, while strengthening Sri Lanka’s credit profile, enhancing exchange rate stability, and improving the resilience of the economy.


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