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Non-BOI exporters delaying forex conversion 

29 Sep 2021

  • Apparel sector likely to continue to evade forex repatriation 
  • However notes repatriation would increase by 15%
    By Shenal Fernando  CT CLSA Securities (Pvt.) Ltd. yesterday (28) claimed that some channel checks have revealed that Board of Investment (BOI)-registered companies are already complying with the repatriating requirements and that the issue regarding the failure of repatriation is largely limited to non-BOI companies. The report by CT CLSA came following the Central Bank of Sri Lanka (CBSL) announcing on Monday (27) that steps shall be taken to strengthen systems to ensure monitoring and implement measures for the complete repatriation of export proceeds within a reasonable period. According to CT CLSA, if the proposals introduced by the CBSL regarding the $ 4.7 billion in export earnings, that have not been repatriated or converted, are implemented, it shall lead to significant inflows into the domestic economy. However, CT CLSA pointed out that textile exporters would largely evade such repatriation by pointing to the need to possess US dollar funds at their buying offices as those offices purchased from Sri Lanka-based companies. Moreover, CT CLSA noted that as per market sources, the CBSL shall increase the current mandatory conversion requirement of export proceeds from its current level of 25% to 40%. Such a measure will prove to be effective in increasing US dollar inflows to the domestic market as exporters have been reluctant to convert export earnings beyond the mandatory 25% limit due to speculation regarding the further depreciation of the rupee. In addition, exporters have found it more lucrative to borrow and import to meet their input requirements taking advantage of low-interest rates, as opposed to converting their foreign currency earnings. According to CBSL data, during the period from January to August 2021, the average monthly merchandise exports stood at $ 985 million. However, the monthly average repatriation of export proceeds reported by banks during the period from January to August 2021 stood at only $ 640 million. Therefore, over the period, exporters haven’t repatriated around $ 2.8 billion ($ 345 million*8). Moreover, during the same period buildup of foreign currency deposit balances within the local banking sector due to non-conversation of export proceeds amounts to $ 1.9 billion as per the CBSL. Therefore, over $ 4.7 billion in export proceeds during the period from January to August 2021 is yet to enter the domestic market. However, CT CLSA acknowledged that it might not be possible to repatriate or convert a significant portion of the identified $ 4.7 billion reserves due to practical difficulties in running an export business that requires US dollar-based working capital. According to the CBSL, this significant gap of $ 345 million, between the average monthly merchandise export figure and the average monthly repatriation of export proceeds figure, raises the question as to whether exporters were acting in contravention of the CBSL regulation requiring the 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. Speculations 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. However, this move 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.


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