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Central Bank warns exporters about forex hoarding

27 Sep 2021

 
  • Monthly average export earnings $ 985 m; only $ 640 m converted
  • $ 1.9 b foreign currency deposit balance builds up at banking system
  • B’desh, India, Indonesia, Pakistan-style repatriation rules considered
  By Shenal Fernando Amidst a foreign exchange crisis, the Central Bank of Sri Lanka (CBSL) has requested exporters to repatriate their export proceeds and convert them, hinting that failure to comply would leave CBSL with no option but to announce strict requirements akin to regional peers in order to ensure complete repatriation of export proceeds within a reasonable period of time.  The notice was issued yesterday (27) as over the period from January to August 2021, a monthly average of $ 345 million of export proceeds has not been repatriated, contradicting the true purpose of exports.  The CBSL stated that many emerging market economies have repatriation and conversion requirements imposed on merchandise and services exports. Country experiences vary, and over time, with the buildup of a country’s foreign exchange reserves through such non-debt inflows, countries have also gradually relaxed these requirements, it added.  “Regional economies such as Bangladesh, India, Indonesia, Malaysia, Nepal, Pakistan, and Thailand have export proceeds repatriation requirements currently in place varying from three months to two years of the export. Bangladesh, India, Pakistan, and Thailand have repatriation requirements on both goods and services export proceeds, while in Nepal, Malaysia, and Indonesia, the repatriation requirement is only applicable on goods exports.” Further supporting the consideration to announce the requirements, the CBSL added that Bangladesh, India, Pakistan, and Thailand have rules on conversion to respective local currencies in different percentages based on nature and the amount of repatriated export proceeds and their utilisation.  During the period from January to August 2021, average monthly merchandise exports stood at $ 985 million which is a 17.7% year-over-year (YoY) increase compared to the monthly average of $ 837 million recorded during the equivalent period in 2020. However, the monthly average repatriation of export proceeds reported by banks during the period from January to August 2021 stood at only $ 640 million. If 100% of all export proceeds over the period from January to August 2021 had been repatriated and converted, the average monthly foreign exchange inflow into the domestic market would have been $ 985 million and with the average expenditure on imports during the period standing at $ 1,670 million, that would have resulted in a monthly average gap of $ 685 million. Moreover, according to the CBSL, this could have been easily financed using the other available foreign exchange inflows into the country. The buildup of foreign currency deposit balances within the banking sector has increased exponentially during the period to around $ 1.9 billion according to the CBSL. The gap in repatriation of export proceeds and the reluctance of exporters to convert their foreign exchange earnings has resulted in a foreign exchange liquidity crisis within the county’s banking system. According to the CBSL, this significant gap of $ 345 million, between the two figures of $ 985 million and $ 640 million, raises the question as to whether exporters were acting in contravention of the CBSL regulation requiring repatriation of export proceeds within 180 days. According to the “Repatriation of Export Proceeds into Sri Lanka Rules” issued by the Monetary Board of the CBSL, exporters shall repatriate export proceeds within 180 days from the date of shipment and shall convert not less than 25% of such export proceeds into Sri Lankan rupees within 30 days of the receipt of such export proceeds into Sri Lanka. It further appears that due to speculation regarding the further depreciation of the rupee, exporters have been reluctant to convert export earnings during the period from January 2020 to July 2021.  Such speculation regarding exchange rate movements have been influenced by the wide disparity observed between the foreign exchange transaction rate published by the CBSL and the rates quoted by licensed commercial banks (LCBs) before September. Whereas the CBSL under its moral suasion strategy had called on banks to maintain the exchange rate below Rs. 203, according to reports, most local banks were quoting an exchange rate at around Rs. 210-220 and the kerb (black market) rate was around Rs. 240-250. Subsequently the CBSL issued a directive dated 6 September 2021, requiring all local banks to maintain the selling rate of the US dollar at a conservative range between Rs 200 and Rs. 203. This move has further discouraged exporters from repatriating their funds.  The CBSL further issued a directive dated 24 August 2021 which imposed a maximum interest rate of 5% on foreign currency deposits of LCBs and National Savings Bank (NSB) as a measure to eliminate the interest rate anomaly that prevailed in the domestic market between interest rates offered by banks on foreign currency deposits and rupee deposits. This measure was implemented by the CBSL in order to influence foreign currency earners, i.e. exporters, to convert their receipts into rupees. The forex condition of the country has been exasperated by the fact that the tourism industry in the country has been devastated over the past 20 months by the restrictions imposed due to the Covid-19 pandemic. Thus, depriving the usual inflows from tourism to finance the trade deficit. Additionally, worker remittance, which is a key inflow, appears to be declining, recording a 35.5% YoY decline in July 2021 to $ 453 million from $ 702 million in July 2020. While the influx of $ 787 million from the International Monetary Fund’s (IMF) special drawing rights (SDR) allocation and $ 150 million from the Bangladesh Central Bank under a swap agreement strengthened the foreign reserves to $ 3.5 billion in August, further inflows are expected in the form of the three-year bilateral currency swap facility amounting to ¥ 10 billion (approximately $ 1.5 billion) between the People’s Bank of China (PBoC) and the CBSL. Such inflows shall be largely reserved for servicing the Government’s $ 6.9 billion foreign debt which shall come due over the next 12 months. The objective of exports is realised only after the foreign exchange that is generated by the exports flow into a country’s financial system in the local currency. Currently, due to the actions of exporters, the true objective of exports is not being realised and it is consequently impacting the economy of the country. Therefore, according to the CBSL, steps must be taken to strengthen the monitoring systems to ensure that the gap between the foreign liquidity provided through exports and the foreign exchange liquidity demand for imports be reduced to levels which reflect the trade data published by the CBSL. 

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