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US Dollar inflows: Flowing in or stagnant? 

21 May 2022

  • Are Central Bank policies to encourage dollar inflows working? 
  • Expats continue to favour unofficial channels
  • Tourism inches ahead in March
  • Expedite debt restructuring negotiations to build confidence
By Tanya Shan The stringent policy measures being implemented by the Central Bank of Sri Lanka (CBSL) together with the Ministry of Finance to ensure an adequate flow of foreign exchange through regulated channels are yet to provide satisfactory results, with worker remittances recovering only at a ‘moderate’ rate.   Meanwhile tourism, a vital foreign currency avenue, has been wrecked by the economic crisis and fears of instability. Sri Lanka gets dollar inflows mainly through three methods – exports, worker remittances, and tourism earnings. These earnings are in turn used to finance Sri Lanka’s imports and external debt obligations.  However, the wide disparity between the Central Bank regulated rates at Licensed Commercial Banks (LCBs) for US Dollars and kerb market rates fuelled by the prevailing economic uncertainty have either discouraged workers from sending in their hard-earned money or pushed them to use ‘unauthorised’ methods of sending money to Sri Lanka, evading the regulated local banking system. Meanwhile, tourism earnings have dropped significantly in line with the local developments.  CBSL and Finance Ministry policies The CBSL together with the Finance Ministry has implemented a number of measures to increase the foreign exchange flow into the country since January, with gross official reserves falling to $ 1.5 billion as of the end of 2021 from $ 7.6 billion two years ago.  According to the Public Finance website powered by Verité Research, when compared with Sri Lanka’s regional peers during the pandemic, the decline in reserves appears to only have happened to Sri Lanka, while other Asian countries have seen an increase in their reserve balances. One of these measures taken was to float the rupee, after forcibly holding it below Rs. 200 for months, in the first week of March this year. The rupee today hovers at around Rs. 350. In addition to this, the CBSL also began cracking down on undial/hawala remittances, which are popular among importers and migrant workers.  Further, with a view to curtailing the outflow of US Dollars through unofficial channels when importing goods, the Finance Ministry issued a new gazette notification under the Imports and Exports (Control) Act, making it compulsory for all payments on imports to Sri Lanka to be made through the banking system early this month. As a temporary measure, imports that are being brought down through open accounts and Documents against Payment/Documents against Acceptance (DP/DA) terms of payments will be suspended after a short grace period, as payments for the two modes are made through the informal hawala system rather than through the banking system. Accordingly, only the use of Letters of Credit (LCs) will be allowed to facilitate imports after the end of the grace period. The CBSL even introduced an incentive package for migrant workers, which includes pension or superannuation benefits, accident or life insurance benefits, banking facilities including low-interest loans for housing, and self-employment upon return to Sri Lanka, along with duty-free concessions. It also launched a remittance mobile application called ‘SL Remit’ to attract more remittances.  In addition to this, the CBSL also opened a couple of bank branches at the Department of Immigration and Emigration, while cracking down on unauthorised money changers. How have exports fared? According to the CBSL’s latest available data, earnings from merchandise exports in March 2022 declined by 3.4% over March 2021 to reach $ 1,057 million. A decrease in earnings was observed in agricultural exports and mineral exports, while an increase was recorded in industrial exports. Cumulative export earnings increased by 9% from January-March 2022 over the same period of the last year, amounting to $ 3,249 million.  The export volume index declined by 1.6% (driven by agricultural exports) while the export unit value index declined by 1.8% (YoY), in March 2022, indicating that the decline in export earnings can be attributed to the combined impact of lower export volumes and prices. However, it should be noted that regardless of the YoY dip in March 2022, Sri Lanka’s exports have been recording over $ 1 billion in export earnings every month for the past 10 months now.  Meanwhile, earnings from merchandise exports in February 2022 grew by 14.7% over February 2021, recording $ 1,092 million, and in January 2022 by 17.5% over January 2021 to reach $ 1,101 million, recording the highest level of exports in the month of January. Have imports slumped?  Regardless of multiple measures taken to minimise import expenditure, imports into the country have grown by 12.1% during the period from January to March.  According to the CBSL, expenditure on merchandise imports, which has been falling on a Month-on-Month basis since January 2022, continued the decline, recording the first Year-on-Year decline since February 2021. Accordingly, import expenditure declined by 5% to $ 1,819 million in March 2022, compared to $ 1,926 million recorded in March 2021.  CBSL noted that a decline in expenditure had been observed in the import of consumer goods and investment goods, while an increase was recorded in the import of intermediate goods. On a cumulative basis, total import expenditure amounted to $ 5,651 million during the first quarter of 2022, recording an increase of 12.1% (YoY).  Considering the continuous pressure on the external sector, the Government imposed several restrictions on selected non-urgent and non-essential consumer items during March 2022, such as import licence requirements, while increasing import duties.  Worker remittances and tourism earnings Sri Lankan migrants overseas started sending their US Dollars through ‘unauthorised’ channels in anticipation of earning at least Rs. 30-35 extra per dollar with the attractive premium rates offered by the kerb market. As a result, remittances have slumped considerably.  According to CBSL data, workers’ remittances amounted to $ 318 million during March 2022, in comparison to $ 205 million in the previous month and $ 612 million in the corresponding period of the previous year.  Remittances amounted to $ 205 million during February 2022, in comparison to $ 259 million in the previous month and $ 580 million in the corresponding period of the previous year. Total departures for foreign employment were recorded at 26,177 during the month of March 2022, contributed by the unskilled (7,803), skilled (7,661), and domestic aid (7,575) categories. On the other hand, tourist arrivals were recorded at 106,500 in March 2022, compared to 96,507 arrivals recorded in the previous month. India, the UK, Germany, Russia, and France remained the main source countries for arrivals in March 2022.  Earnings from tourism in the month of March 2022 are provisionally estimated at $ 192 million, in comparison to $ 174 million in the previous month and $ 12 million in the corresponding month in the previous year.  Reserves and other financial inflows Gross official reserves stood at $ 1.9 billion at the end of March 2022. This included the swap facility from the People’s Bank of China equivalent to around $ 1.5 billion, which is subject to conditionalities on usability. However, last week, newly-sworn-in Premier Ranil Wickremesinghe stated that the CBSL did not even have $ 1 million as of now and did not have a plan on how to avoid defaults or pay off debts. According to the CBSL, there were no transactions involving foreign investors in the Government securities market in March 2022. Cumulative net inflow from the Government securities market during the three months up to March 2022 amounted to $ 4 million, while the outstanding exposure to foreign holdings remained low at $ 9 million as of end-March 2022.  Meanwhile, the Colombo Stock Exchange (CSE), including primary and secondary market transactions, recorded a net inflow of $ 10 million in March 2022. On a cumulative basis, the CSE, including primary and secondary market transactions, recorded a net inflow of $ 95 million during the three months ending March 2022.  Are these measures working? As per the data provided above, exports have somewhat remained resilient and managed to record export earnings above $ 1 billion for the past 10 months. Imports too have largely remained under control with the Year-on-Year import expenditure from January to March recording a growth of a mere 12% despite increasing freight charges and other costs to the global supply chain.  Worker remittances have managed to record moderate growth but still have a long path of recovery to reach last year’s levels. According to economists, this has more to do with building trust in the economy amongst workers and less to do with the CBSL’s policy measures.  Tourism has taken a hit from the recent volatile environment in Sri Lanka and the recovery depends on the availability of fuel, uninterrupted supply of electricity, availability of food and medicine, and a stable macroeconomic and political environment, according to industry stakeholders.   Former CBSL Director Dr. Roshan Perera told The Sunday Morning that so far the Central Bank had been doing the heavy lifting of the economy but in addition to this fiscal policies too had to be taken in parallel in terms of State expenditure and State revenue to instil confidence in investors.  “Exchange rates were liberalised. Those days workers were using undial and hawala channels, but now they are getting similar rates from the banking system. Some of the actions that were required to be taken by the Central Bank have already been taken, but still there is a long way to go,” Perera stated.  She added that in terms of instilling confidence in Sri Lanka amongst investors, the country needed to swiftly engage in debt-related discussions and have a firm commitment from the International Monetary Fund (IMF) on assistance.  “These things too have to happen in parallel for the market to have confidence in the country and to indicate that Sri Lanka is on the right track. We need to have large inflows coming in,” she added.      Meanwhile, University of Colombo Department of Economics Head Prof. Sirimal Abeyratne told The Sunday Morning that the Central Bank had very little to do with the value of the US Dollar.  “Managing the exchange rate through intervention or managing the interest rates affects the depreciation of the rupee. Our dollar exchange rate I think is determined more by our dollar inflows and outflows, rather than the Central Bank’s macroeconomic policies. The Central Bank has very little to do with this,” Abeyratne said.  

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