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Forex crisis hits local businesses’ International ties

02 Jan 2022

  • Businesses unable to pay foreign counterparts in USD
By Imesh Ranasinghe  Sri Lanka’s foreign exchange (forex) crisis has impacted every aspect of life in the country, with import limitations creating shortages and an increase in cost of living, which people experience on a daily basis now. The Central Bank of Sri Lanka (CBSL) promised foreign reserves to be above $ 3 billion by the end of December from the $ 1.6 billion at the end of November. This promise was fulfilled last Wednesday (29 December), when CBSL finally received a $ 1.5 billion swap arrangement with China, which was inked in March 2021. However, the crisis has gone overboard as businesses in many sectors are trying to make their payments to international partners and hold onto their businesses. This in turn will have an impact on the revenue the government is to receive from them, which is much needed at the moment. Balancing the overseas suppliers The Ceylon Chamber of Commerce (CCC) Import Section President Niranjan Dissanayake said to The Sunday Morning Business that the delay in payments to the suppliers who are overseas business partners for local importers has an impact – as the suppliers would reduce the stock that they send to Sri Lanka and increase the prices of the material. He noted that especially during periods of crisis, importers and suppliers work purely on the basis of understanding and trust. Payments between the importer and the supplier happen through various modes; the importer can open a letter of credit (LC) – which is the most common mode, or document against acceptance (DA), or document against payment (DP). Dissanayake said that if it is a LC then the payment is handled bank-to-bank. However, at present, the banks don’t encourage importers to open short-term LCs but are insisting them to open 180-day LCs. “But if you negotiate hard and depending on the type of your business, you could get above 90 days, but it rarely happens now,” he said. He pointed out that the issues are on DA or DP terms, as the supplier sends the documents to the banks based only on trust, and when the importer accepts the document, the bank settles with the supplier. Yet at present, when the consignments reach the port, the banks don’t have sufficient forex to honour the payment, so the consignments remain in the ports until banks find enough forex, causing the importers to pay demurrage while the overseas suppliers get delayed payments, noted Dissanayake. Importers of essential commodities are still waiting for the release of 1,000 containers from the ports for which the banks have not yet paid dollars for. Trade Minister Dr. Bandula Gunawardana has sought assistance from CBSL Governor Ajith Nivard Cabraal to get the containers released through release of foreign exchange to the banks. But in this context, the CBSL issued a gazette earlier last week, for the banks to send 25% from the previous 10% of their dollar remittances to the CBSL to strengthen the reserves. Which means banks would have even less money to honour foreign exchange payments. “What we have told the Government is to find a short-term solution to address the current crisis to ensure that there will be sufficient forex available with the commercial banks to import the essentials and the raw materials, because for the production to go on you need the raw materials too,” Dissanayake stated. The Sri Lanka Shipper’s Council Chairman Russell Juriansz said to us that while importers are struggling with their business partners overseas to settle payments on time and maintain the relationship, the exporters are transferring and making payments to the shipping lines in dollars, as shipping lines have started to demand payments only in dollars. Last week it was reported that the world’s largest shipping company, Maersk Line, informed all Sri Lankan customers that they will be requiring all freight collection payments to be made in US dollars with immediate effect. Maersk said that the decision was taken due to the unavailability of US dollars within the domestic forex market, due to which they are struggling to remit freight collection payments to their principal on time. Therefore, considering the possibility that such challenges could adversely impact future space availability for local exporters, Maersk claimed: “After careful consideration and in keeping with the law, we are compelled to change the freight collection payments to dollars with immediate effect.” Chambers demanding Government focus Last week, a joint statement from the chambers in Sri Lanka requested the Government focus attention on its member companies and the private sector who are struggling to obtain forex for imports and other related overseas payments. “This will affect in maintaining the credibility of doing business with our suppliers and business associates with whom we transact in foreign currency,” the statement said. Also, it said that the forex crisis ranges from not being able to obtain LCs to the inability to clear goods that have already arrived in the port due to delays experienced in honouring LCs.  Further, the chambers said that it will impact indirect exporters and firms providing support services for exports. “We are concerned that while the importers themselves will face immense financial costs in the form of demurrage and other logistics-related costs, it will also affect long-standing relationships built with suppliers, resulting in a serious and irreversible loss of confidence, “ the chambers said in the statement. Moreover, the chambers said that the importers are also unable to secure orders due to the inability to agree on a firm payment schedule as required by suppliers, which will seriously impede the availability of essential products, especially during the festive period during which consumer demand is typically high for most products. The chambers urged the Government to finalise the negotiations on the swaps and credit lines planned by the Government and also requested to reconsider other alternative courses of action available to the country such as engaging with the International Monetary Fund (IMF) to explore the funding options they can offer. Capital transaction problems for IT industry The Sri Lanka Association for Software Services Companies (SLASSCOM) Vice Chairman Ashique M. Ali said that when it comes to outward transactions such as licence costs and subscription costs by the software production service exporters, there isn’t much of a challenge, as the exporters are allowed to pay them through their export proceedings. However, he noted that the only issue their industry has is related to some of the capital transactions, such as lump sum dividend payments for foreign investors, etc. for which they require a special permission from the CBSL due to the current forex shortage. “So, we have sought some clarity from the CBSL on how we can manage that because some of the local commercial banks are not very clear about how to facilitate that,” Ali stated. Moreover, he added that certain policy issues related to the industry are also being addressed at the moment with the Government. Usually the ICT/BPM industry brings about $ 1 billion export revenue to the country annually, which is about 8% of the total export share as of 2020. Local representatives struggling to send sales payment to airlines A spokesperson for Sri Lanka Association of Airline Representatives (SLAAR) said to us that remitting the local ticket sales to the respective principal airlines has become an issue to the local representatives. The ticket sales in Sri Lanka are collected in Sri Lankan rupees (LKR) which is deposited in the account of the local representative, after which the money has to be converted to dollars and then sent to the respective principal airlines. This has resulted in slow payments to the respective airlines especially in the past three months. However , the spokesperson said that the principal airlines have not issued any notice on collecting the money in US dollars despite the delayed payments. Emirates, Qatar Airways, Fly Dubai, Air India, Gulf Air, Rossiya Airlines, Singapore Airlines, Turkish Airlines, Saudia, Air Arabia, Oman Airlines, Air Asia, Air France, Etihad Airways, Jazeera Airways, IndiGo, Aeroflot, China Eastern Airlines, Edelweiss Air, Kuwait Airways, Azur Airlines, Air Astana, Lot Polish Airlines, Neos Airlines, and Vistara Airlines are the principal airlines currently operating from Colombo.

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