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CBSL highlights ‘host of benefits’ of forex conversion rules

09 Nov 2021

  • Points at forex liquidity issues as reasons for decision
  • Says not applicable to worker remittances
  • Improved conversion will ensure stability of ER, macroeconomy, financial system
The Central Bank of Sri Lanka (CBSL), in a press release dated 8 November, claimed that the new rules relating to the conversion of export proceeds will provide a host of potential benefits to the country and shall in no way apply to inward remittances by the Sri Lankans working abroad. The CBSL claimed that the recent liquidity issues that have plagued the domestic foreign exchange market have reinforced the need for Sri Lanka to increase its reliance on foreign exchange earnings over time to strengthen the economy, rather than relying on foreign borrowings. According to CBSL, the implementation of the new rules is expected to provide greater foreign currency liquidity to the domestic market, ensuring the availability of foreign exchange for essential payments at reasonable exchange rates, including the purchase of imported goods, overseas education, foreign travel, and health expenses. The CBSL justified the new export proceeds conversion rule, claiming: “This method, followed by several other countries, ensures that exports with a large import content are not penalised, while enabling exports with a higher domestic value addition to convert a greater percentage of proceeds, after meeting foreign currency financial obligations of such enterprises.” It further claimed that exporters enjoy various tax concessions and other advantages provided by the Government due to the net foreign exchange provided by their business operations and the resulting benefits to the country when such export proceeds are converted to Sri Lankan rupees. Therefore, the CBSL claims that these new rules merely facilitate the realisation of such expected outcomes of exports and thereby enabling the Government to continue providing such concessions to such sectors. In addition, the complete repatriation and conversion of export proceeds will assist in ensuring exchange rate stability and support the stability of the macroeconomy and the financial system. The CBSL further claimed that these new rules regarding conversion of export proceeds will assist in the identification of the exact value addition to the economy by each export sector via the different ratios of conversion as reported by banks. A key feature of these new rules relating to conversion export proceeds is that it applied not only to merchandise exports but also service exports. According to the new rules, “payments received in foreign exchange by a person resident in Sri Lanka for services (including professional, vocational, occupational, or business services) provided to a person resident outside Sri Lanka” shall be subjected to the rules as well. However, this definition of service exports clearly exempts the application of the said rules on the inward remittances of Sri Lankan expatriates. On 28 October, the CBSL, via Gazette Extraordinary No. 2251/42, introduced new rules with regard to conversion of export proceeds under which the previous minimum mandatory conversion rate of 25% was replaced by a total conversion requirement subject to certain exceptions. Under the recognised exceptions, exporters may utilise export proceeds for outward remittances in respect of current transactions, withdrawal in foreign currency notes as permitted, debt servicing expenses and repayment of foreign currency loans, purchases of goods and obtaining services including one-month commitments, and payments in respect of making investments in Sri Lanka Development Bonds (SLDBs) in foreign currency up to 10% of the export proceeds so received.


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