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Paying in forex only: Feasible or impractical?

29 Jan 2022

By Yakuta Dawood  The Central Bank of Sri Lanka (CBSL) issued a mandate requiring all registered tourist establishments to accept only foreign exchange (forex) in respect of services rendered to a person resident outside Sri Lanka, under the Monetary Policy Review – No. 1 of 2022.  During the initial announcement, CBSL Governor Ajith Nivard Cabraal stated: “We will ask them (tourists/non-residents) to either pay with their credit card or they would be paying at the time of checkout in the currency of a foreign nation. If they encash, they would have to go to an authorised dealer and encash. Then they would have a receipt; they could show a receipt to that value.”   According to the CBSL, this new policy measure is anticipated to have a positive outcome on increasing the forex liquidity within the domestic forex market as the tourist hotels in turn are expected to deposit the dollars in banks within two or three days of receiving said dollars.  The Sunday Morning Business this week took the opportunity to examine the extent of this directive and the possible unfavourable consequences that could follow due to the quick implementation without any prior notification to stakeholders.   What do the associations have to say about this directive? Speaking to The Sunday Morning Business, The Hotels Association of Sri Lanka (THASL) newly appointed President Shanthi Kumar optimistically stated that this directive issued by the CBSL was “absolutely beneficial” for the industry stakeholders.  Explaining, he stated that even though the hotel industry would not benefit monetarily via this measure, the hotels which had obtained loans utilising foreign currency in the past years would now be able to reimburse the loan they had taken, in instalments.  According to him, another reason as to why this measure would be beneficial was that hotels catering to the tourism industry frequently imported certain food ingredients, housekeeping goods, and other essentials from international countries and now they could import this using the forex they had earned.  Expressing similar views, Tourist Hotels Association – Habarana Former President  K. Ranasinghe told The Sunday Morning Business that the directive implemented by the CBSL was very beneficial and easy to follow and could also result in efficiency if the Small and Medium Enterprises (SMEs) were able to give the balance to the tourist.  He added that some foreigners might feel this as a burden, since once converted, the currency would be in US Dollars and those travelling from England might see this as an insult, as they would have to pay in dollars when they typically use pounds to make payments.  We also spoke to the Sigiriya Tourism Association President O.K.D. Chaminda Jayantha who shared that regardless of the potential benefit through this directive, the Government should launch the process at a slower pace with proper implementation in order to prevent a similar experience to the fertiliser import ban. Sharing his experience on the subject, he mentioned that a problem in terms of efficiency could result if tourist places lacked sufficient foreign currency change to give the balance.   “If a payment is made in foreign currency, the hotel has to have money to give the balance in return. So, in the early mornings, these places will now have to have sufficient dollars if a tourist walks by. There are few practical challenges. Hence, the Government should progress gradually instead of doing things all at once,” Jayantha said.  Sri Lanka Eco-Tourism Association President Kelum Fernando also expressed similar views. “I don’t think we could continue this for a long term. Even tourists might get confused (when comparing the Sri Lankan Rupee against the US Dollar) when purchasing goods or services, and might rethink before making the payment in dollars,” Fernando concluded. Meanwhile, continuous attempts to reach the Sri Lanka Tourism Development Authority (SLTDA) proved futile.  Opinion of politicians  Responding to a query sent by The Sunday Morning Business, Samagi Jana Balawegaya (SJB) MP and Economist Dr. Harsha de Silva stated that regardless of the implementation by the CBSL, these kinds of “nonsensical parallel rate structures will never work” in Sri Lanka.  “How many rates are applicable now to change a US Dollar? This is a joke. It shows how incapable these policymakers are. Denial is not a strategy. The CBSL must wake up at least now and deal with this crisis they are making worse every single day,” Dr. de Silva stressed. Further, responding to an email query sent by The Sunday Morning Business, LIRNEasia Founding Chair Rohan Samarajiva stated that the Government should remove controls on the foreign exchange market.  “Efforts to keep the dollar at the artificial rate of Rs. 200 have already backfired with the principal source of dollars, namely inward remittances, which have been diverted to informal channels. This decree will cause damage to tourism revenues in the same manner. It appears that the Government’s misguided efforts to contain the effects of its price control policies are causing even more damage. I wish the Sri Lanka Tourism Chair would take a stand against this foolishness,” Samarajiva emphasised. Additionally, referencing the CBSL Monetary Law Act Section 4, a top official at the Advocata Institute revealed that through this recent implementation, the CBSL was trying to do the exact opposite of what the law stated.  “For years they have been passing regulations to prevent the dollarisation of the economy, but the recent directive is aiming to dollarise part of the economy. Besides the fact that the monetary law does not permit such a directive to be issued, how are they going to regulate this?” the official questioned.  Accordingly, the Monetary Act Law Section 4 (1) states: Every obligation of the following description, that is to say, every contract, sale, payment, bill, note, instrument, and security for money, and every transaction, dealing, matter, and thing whatsoever relating to money, or involving the payment of money or the liability to pay any money, shall, in the absence of an express agreement to the contrary which is not rendered invalid or unlawful by any other written law, be held to be made, executed, entered into, done, and had in Sri Lanka according to the Sri Lanka Rupee.  (2) In any case where any such obligation which is by agreement expressed in any monetary unit other than the Sri Lanka Rupee has, by reason that such agreement is rendered invalid or unlawful by any other written law, to be executed or liquidated in Sri Lanka Rupees, the necessary conversions shall be effected on the basis of the legal parties ruling at the time when such obligation falls to be executed or liquidated, or at such other time as may be specified in that behalf in the agreement. Moreover, the former Central Bank Deputy Governor W.A. Wijewardena expressed his sentiments on Twitter, stating that through this payment imposed by the CBSL, “Sri Lanka seems to be making one mistake after another, each time a bigger one. We had similar rules before 1977; forced diversion of US Dollars will simply make the kerb market more prosperous as experienced in the 1970s.”  He further added that through this directive, ordinary tourists would shun hotels in the future: “They will choose to stay with their families or friends instead of at hotels, diverting a potential flow to elsewhere.” Meanwhile, SLTDA tourism targets for 2022 are to achieve at least half of the arrivals recorded in 2018, which translates to around 100,000 tourist arrivals per month.  SLTDA Chairperson Kimarli Fernando at a recently held press conference stated: “In 2020 we had about 500,000 arrivals before the country closed, 1.9 million in 2019, and the highest tourist arrivals were recorded in 2018 at 2.3 million arrivals, which meant an average of around 200,000 tourists per month and 6,600 tourists per day. On the other hand, investments in the tourism sector in 2021 have increased beyond the pre-Covid-19 figures recorded in 2019 following recent efforts made by Sri Lanka Tourism to streamline the investment application process and at co-ordinating the approval processes with other line agencies.”  Speaking at the same event, SLTDA Director General Dhammika Wijayasinghe claimed that over 31,600 tourists arrived in the country during the first 11 days of 2022 and that the average stay per tourist had increased to 12-14 days from the previous 9.75 days due to increased attention to wellness tourism. 

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