Increasing regulations restrict remittances
8 months ago
The Sunday Morning Business Caption In a bid to attract foreign exchange, the Cabinet on Monday (1) approved a proposal to provide an additional duty concession allowance to migrant workers based on the amount remitted to Sri Lanka through official channels upon their arrival in the country PHOTO © INTERNATIONAL ORGANIZATION FOR MIGRATION Over: Foreign exchange dilemma Head: By Shenal Fernando It is common knowledge that Sri Lanka is currently experiencing the most severe economic crisis of its post-independence history as well as a crippling foreign exchange liquidity crisis which has resulted in islandwide commodity shortages. This foreign exchange liquidity crisis was largely created by the former Governor of the Central Bank of Sri Lanka (CBSL) Ajith Nivard Cabraal’s insistence on maintaining a fixed exchange rate of Rs. 200-203 for over six months. Consequently, foreign worker remittances fell by over 61.6% Year-on-Year (YoY) in 2021 to $ 5.5 billion from $ 7.1 billion in 2020. This trend continues in 2022, with foreign worker remittances down by 51.6% YoY to $ 1.6 billion from January to June 2022 compared to the $ 3.3 billion recorded during the equivalent period in 2021, as per CBSL statistics. As Sri Lanka’s foreign exchange liquidity crisis worsened over the past 12 months, the CBSL and the Government of Sri Lanka (GoSL) turned to the usual playbook of developing economies facing such a foreign exchange liquidity crisis. Accordingly, Sri Lanka introduced limitations on non-essential imports, introduced rules requiring mandatory 100% repatriation of export proceeds and mandatory conversion of repatriated export proceeds subject to certain exceptions, granted an incentivised exchange rate for foreign worker remittances, introduced mandatory foreign exchange sale requirements on Licensed Commercial Banks (LCBs), and reduced the limit of foreign exchange permitted to be retained in possession to $ 10,000 from $15,000. However, during the preceding week, Sri Lanka introduced a slew of more drastic measures in a bid to attract foreign exchange. This has created debate within the public and academic spheres regarding the suitability of these new policy measures aimed at addressing the foreign exchange shortage. New policy measures On Monday (1) the Cabinet of Ministers approved a proposal presented by Minister of Labour and Foreign Employment Manusha Nanayakkara to provide an additional duty concession allowance to migrant workers based on the amount remitted to Sri Lanka through official channels upon the arrival of the migrant workers to Sri Lanka and to facilitate the said migrant workers to purchase an electric vehicle. This proposal was based on the recommendations of an officers’ committee established previously in June 2022 to study foreign worker remittances and to make recommendations regarding the relief and incentives to be given to them in order to increase remittances. Explaining the methodology behind these incentives, Nanayakkara stated that these new duty concession allowances to foreign workers would be provided in addition to the existing duty free allowances of $ 187.5 to persons who returned in under 90 days, $ 625 to persons who returned within 90-365 days, and $ 1,650 to persons who returned after more than 365 days. This new additional duty free allowance is divided into three tiers – silver, gold, and gold plus. Foreign workers who send at least $ 2,400 through the official banking channels within a year will fall within the silver tier. Within the silver tier, if a person returns in under 90 days their duty free allowance will be increased to $ 787, if they return within 90-365 days their duty free allowance will be increased to $ 1,225, and if they return after 365 days their duty free allowance will be increased to $ 2,350. However, if a foreign worker remits $ 4,800 over a period of one year, their duty free allowance will be increased to $ 1,175 if they return in under 90 days, if they return within 90-365 days their duty free allowance will be increased to $ 1,585, and if they return after 365 days their duty free allowance will be increased to $ 2,710. The gold tier includes foreign workers who send more than $ 7,200 over a one-year period. Their duty free allowance will be increased to $ 1,627 in the case of persons returning in under 90 days, to $ 2,065 for persons returning within 90-365 days, and to $ 3,190 for persons returning after more than 365 days. Foreign workers who remit over $ 12,000 will fall within the gold plus tier. Within the gold plus tier, if a person returns in under 90 days their duty free allowance will be increased to $ 2,587, if they return within 90-365 days their duty free allowance will be increased to $ 3,025, and if they return after 365 days their duty free allowance will be increased to $ 4,150. However, if a foreign worker remits over $ 24,000 over a period of one year, their duty free allowance will be increased to $ 4,985 if they return in under 90 days, if they return within 90-365 days their duty free allowance will be increased to $ 5,425, and if they return after 365 days their duty free allowance will be increased to $ 6,550. The incentive of providing foreign workers with a licence to import an electric vehicle is also subject to several guidelines. Accordingly, if a foreign worker has remitted $ 3,000-20,000, they will be eligible for a licence to import an electric motorcycle of a value equivalent to 50% of the remitted foreign exchange. If the foreign worker has remitted more than $ 20,000, they will be eligible to import an electric car of value equal to the amount remitted not exceeding $ 65,000. Furthermore, such motor vehicles should have an engine capacity of around 300-500 cc and should be charged through an off-grid solar power system. Reactions Speaking to The Sunday Morning Business, University of Colombo Department of Economics Senior Professor Sirimal Abeyratne stated that he was unsure of the exact rationale behind these decisions and pointed out that if they meant to provide an incentive to prompt foreign exchange remittances, there should be measures to make dealings with the official banking system easier and smoother. He further stated that there were increasing regulations restricting the foreign exchange market, which motivated people to keep the foreign exchange away from Sri Lanka’s domestic market. “People trust unregulated countries such as Singapore with their foreign exchange. What Sri Lanka should do is remove these restrictive regulations on foreign exchange in order to improve the confidence of people who earn foreign exchange or those who bring foreign exchange. The primary reason why people no longer save their foreign exchange in Sri Lankan bank accounts are these regulations on conversions which prevent them from withdrawing their foreign exchange as they wish,” Prof. Abeyratne explained. He stated that if Sri Lanka were to emerge from the prevailing foreign exchange liquidity crisis, the Government must ensure more liberal financial regulations to increase confidence in Sri Lanka which would inevitably lead to improved inflows of foreign exchange into the country. Meanwhile, University of Colombo Faculty of Arts Department of Economics Senior Lecturer Dr. Shanuka Senarath criticised these “non-market” policies by the Government to increase foreign exchange inflows, describing them as ineffective. Elaborating further, he stated: “This will have little to no impact. Why would anyone remit money through official channels when undial continues to provide them with a premium over the official rate? What do we have for sale at our duty free? Would any person remit money through official channels expecting a higher duty free allowance when they return? These non-market policies are funny measures, which will be ineffective in the long run.” Other measures introduced Minister Nanayakkara further revealed that Minister of Power and Energy Kanchana Wijesekera had also agreed to a proposal made by him to issue fuel passes at the airport to tourists, migrant workers, and dual citizens who were willing to pay in US Dollars, thereby allowing such individuals to avoid the fuel queues that had become a common sight throughout the country. However, this move was criticised by certain sectors of the public as a measure that would amount to unequal treatment of citizens. Speaking to The Sunday Morning Business, economist and former Deputy Governor of the CBSL Dr. W.A. Wijewardena stated that this was evidence of the dollarisation of Sri Lanka’s payment systems, noting that we had already observed the dollarising of the gem industry, the tourism sector, as well as fuel purchases in the export sector. He further provided that this measure could risk the decreasing of foreign exchange liquidity of the domestic banking system further. Elaborating further, he stated: “This measure will be advantageous to the tourism sector. However, in order to ensure that this doesn’t lead to negative consequences, the CBSL should supplement this with strict guidelines to regulate the process. They will have to designate only certain fuel stations to accept these fuel passes and they should be charged a higher rate for fuel due to the convenience. Such sheds must also be required to immediately sell back to the commercial banks thereby providing liquidity to the banking system. Alternatively, they should pay in US Dollars to the Ceylon Petroleum Corporation, which can use it to settle their arrears with State banks.” However, Dr. Senarath was more cynical regarding this measure, stating that this would have little to no impact in the long term as it did not represent an attractive incentive to tourists. Since providing a steady supply of fuel was a basic necessity for tourism, this measure added no value to Sri Lanka as a destination. “These mechanisms introduced to provide tourists fuel for US Dollars are again non-market mechanisms which do not address the root issues. This is similar to what is prevalent in North Korea, Cambodia, and Cuba, which are known for imposing such regulations relating to foreign exchange. None of these countries are developed countries. “Globally, we have a market economy. For tourists, Sri Lanka is just one of numerous other cheap destinations available to travel to. In such a context, considering the existing strict regulations on foreign exchange, we may see a short-term benefit as we will see increased dollar earnings from tourism. But in the long run, this will be ineffective. Why would tourists come to Sri Lanka considering these increased regulations on foreign exchange and the prevailing energy shortages?” he questioned.