Central Bank revokes remittance incentives

• Rupee depreciating over 35% within two weeks cited as reason
• USD selling rate hits Rs. 275
• Central Bank says exchange rates reached a level surpassing incentives

BY Shenal Fernando

The Central Bank of Sri Lanka (CBSL), by a press release dated 13 March 2022, announced the revocation of the additional incentive scheme introduced for attracting remittances of export earnings and foreign worker earnings, following the depreciation of the Sri Lanka rupee by over 35.5% over the past two weeks. 

The CBSL noted: “The current exchange rate provides a higher return on the foreign exchange remittances of expatriate workers and a higher rupee value on the net earnings of exporters. In view of these recent developments, the Government has decided not to implement the proposed scheme for additional incentives for remittances by expatriate workers and net earnings of exporters.”

Explaining further, the CBSL stated that following its decision to float the exchange rate, the exchange rate has now reached a level surpassing the level of incentives that was envisioned to be granted under the incentive scheme proposed to stimulate expatriate workers’ remittances and conversion of export earnings.

The CBSL on 7 March announced that it would give up on its attempt to fix the exchange rate at Rs. 203 and would be granting greater flexibility in the exchange rate with immediate effect. However, the CBSL also indicated that it expects the exchange rate to stay below Rs. 230. 

Parallel to this announcement by the CBSL on 7 March, the Cabinet of Ministers approved a proposal presented by Minister of Labour Nimal Siripala de Silva to increase the Rs. 10 per US dollar incentive allowance granted to foreign worker remittances to Rs. 38 per US dollar.

Simultaneously, the Cabinet of Ministers also approved the proposal presented by Trade Minister Bandula Gunawardana to introduce an exporters’ incentive scheme to pay an incentive of Rs. 30 per US dollar earned on export earnings earned over the previous quarter to companies that have achieved at least 10% export progress compared to the corresponding quarter of the previous year.

When these cabinet decisions were made, the ministers were unaware of the CBSL’s decision to float the Sri Lankan rupee and the exchange rate at the time was fixed at Rs. 203-200.

However, since these decisions were made, the exchange rate has fallen significantly by over 35.5% and currently, according to the average buying and selling telegraphic transfers (TT) exchange rates published by the CBSL, the selling rate of a US dollar stands at Rs. 275.0 while the buying rate of a US dollar stood at Rs. 264.7.

Therefore, considering the upward movement of the exchange rate, it no longer makes economic sense for the CBSL to grant such a massive incentive allowance to attract remittances to the country when considering the fact that the current official exchange rate reflects the actual market exchange rate.

This was recognised by the CBSL in its press release, where it stated that following the floating of the exchange rate, “the conversion of foreign exchange earnings through formal channels by expatriate workers and exporters have already shown a marked increase during March 2022, according to the latest official data”.