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Falling of forex and restrictions on remittances 

13 Dec 2021

  • An overview and critique of Government responses/solutions to our foreign exchange crisis 
BY Sumudu Chamara  Even though the Covid-19 pandemic has subsided to some extent, some of the crises the pandemic created have been worsening and persisting during the past few months. In fact, some of these crises have led to multiple national level issues.  Dwindling foreign reserves is one such issue, and it is worsening at a pace that is difficult for the country to manage. To make matters worse, it has affected all sorts of imports, and also exports and domestic production. According to official data, by mid-November 2021, Sri Lanka’s foreign reserves had plummeted to $ 1.5 billion, and various parties have pointed out the importance of finding a prompt solution while also claiming that the failure to do so will result in an unmanageable crisis.  As a measure to obtain more foreign currency revenue, especially through the earnings of migrant workers and Sri Lankan residents providing services or goods to foreign clients, the Government took several decisions during the past few months, which have not received positive responses. As a result, there is now a discussion about sending foreign currency earnings, converting money, and taking action against those failing to adhere to regulations in this regard.  Sale and purchase of USD  The Central Bank of Sri Lanka (CBSL), last week, issued notices to four authorised money changers, who had been found to have failed to comply with the directions issued under the provisions of the Foreign Exchange Act, No. 12 of 2017, to adhere to those provisions within a specific period of time. The four institutions, based in Colombo and Wennappuwa, had been subjected to spot examinations during the last month and this month. In a statement, the CBSL said: “In response to several complaints that certain authorised money changers are engaged in activities which are not in compliance with the directions issued under the provisions of the Foreign Exchange Act, the CBSL is conducting a series of spot examinations at the places of authorised money changers, thereby strengthening the monitoring and supervision of the authorised money changers.” In the event the errant authorised money changers fail to rectify the issues communicated through the notices, the CBSL will be compelled to suspend and revoke the permits issued to such authorised money changers. The public is also informed that authorised money changers have no authority to transact foreign exchange at rates higher than those offered by the banks to such money changers, the CBSL added.  As action against money changers who fail to adhere to CBSL-issued guidelines continues, several money changers explained to The Morning how the prevailing situation pertaining to USD has affected their business and customer base.  Several foreign currency exchange service providers based in the Colombo and Negombo areas lamented that the crisis situation surrounding the lack of USD has affected their business to a considerable extent during the past few months because it is one of the most sought after currencies.  When queried about the availability of USD, one service provider said: “There is nothing much to complain about the USD situation. However, overall rates in the market have gone up, and the demand for USD, on the other hand, is on the rise.”  Another such service provider said that the demand for USD seems to be increasing, which he attributed to the increasing number of people leaving the country for different purposes. He also said that while customers seem to be resultant to purchase USD as freely as before, the number of people selling USD to foreign currency changers has decreased significantly. “Unlike before, people are not willing to sell USD now, because they think that the rates will go further up in the coming few months. They think that USD is an asset of which the value will continue to increase, and they refrain from selling the USD they have because buying USD in the future would be more difficult than it is now,” he added.  Foreign currency earnings  While the sale and purchase of USD within the country is facing the said challenges, those earning foreign currency from Sri Lanka are now concerned about converting their earnings into local currency.  An extraordinary gazette notification issued by the CBSL on 28 October imposed rules with regard to the receipt of export proceeds into Sri Lanka and the conversion of such proceeds into Sri Lankan rupees. These rules, known as the “Repatriation of Export Proceeds into Sri Lanka Rules, No. 5 of 2021” were imposed under Section 10 (c), read with Section 68, of the Monetary Law Act, No. 58 of 1949 as amended. It says that every exporter of goods and services should, “mandatorily receive the export proceeds in Sri Lanka, in respect of all goods exported or services provided outside Sri Lanka, within 180 days from the date of shipment or the provisioning of the services, as the case may be” and “immediately upon all and every receipt of export proceeds being received, forthwith submit all related documentary evidence on each and every receipt of export proceeds, in respect of every export of goods and services to the respective licensed commercial bank or a permitted licensed specialised bank that receives such proceeds in Sri Lanka”. Adding that all licensed banks are required to strictly and mandatorily monitor the receipt and conversion of export proceeds as stipulated, and have and present them to the CBSL officials, the gazette notification further read that the Director of the CBSL’s Foreign Exchange Department shall have the right to initiate action against any non-compliance with, or the transgression of the said rules, by any exporter of goods or services or a licensed bank. However, it allows exporters of goods or services to make authorised, necessary payments.  This gazette notification was criticised by different parties including politicians, claiming that it is not right to force people to convert their money into Sri Lankan rupees. Samagi Jana Balawegaya (SJB) Leader and Opposition Leader Sajith Premadasa, recently urged the Government to withdraw the gazette notification, and expressed concerns as to how it would affect investments.  Speaking in this regard, SJB Parliamentarian and economist, Dr. Harsha de Silva, told The Morning that requiring people to convert their money is not a proper solution to the foreign exchange crisis Sri Lanka is facing, and that doing so is tantamount to an act of expropriation. He added: “Many Sri Lankans are doing freelance work, especially in the information technology (IT) field, and forcing them to convert USD they earn is not acceptable. This is their personal wealth, and it is meant for their own use.” He noted that even though the Government’s intention was fair and genuine, the implementation of such regulations should be carried out in a way that does not affect the people negatively: “If the Government has a national need to compel the people to do something, such as in the case of acquiring private lands to build roads, it is understandable. However, when acquiring land, the Government compensates them. If the Government is forced to take private property, it has to compensate for what it takes, and in this case, pay foreign exchange earners the market price for USD. In fact, the current market rate for USD is around Rs. 240, while the Government is saying that it will give Rs. 200. However, some reports claim that the rates are sometimes as low as Rs. 193.” Dr. de Silva further said that what the gazette notification is trying to do is an act of expropriation, which is completely wrong and unethical, even though it cannot be deemed illegal because there are laws in that connection. He also stressed that this is absolutely not a wise thing to do.  Moreover, speaking of the prevailing foreign reserves crisis, Dr. de Silva opined that the Government has to change its approach to resolve the crisis.  He explained: “The situation is extremely bad. It is too late to seek assistance from the International Monetary Fund (IMF), and I don’t think that it is possible now. However, had Sri Lanka sought the IMF’s assistance a year or at least six months ago, perhaps, we would have been able to get some kind of a stabilisation package, and Sri Lanka would have been able to come out of this crisis without facing issues of this severity. We have delayed it, and going to the IMF therefore, which some claim to be the solution, is not going to work. We had only around $ 1,900 million in cash at the end of last month. I assume now that it has further reduced. We have $ 1.4 billion of loan repayments to be made this month and the next month. The Government has to discuss with creditors, and find a way to restructure Sri Lanka’s debt repayments and perhaps delay payments.”  However, as The Sunday Morning reported on 12 December, the CBSL denied allegations that the gazette notification in question had led to forcible conversions of foreign currency earnings, and pointed out that the instructions pertained to export earnings and were in line with the law. Speaking to The Sunday Morning, the CBSL Deputy Governor T.M.J.Y.P. Fernando had stated: “If there are Sri Lankan citizens providing a service to an overseas customer or non-resident and receiving some income in foreign currency, that is an export of a service, and in that case, the rule that the CBSL recently issued on export proceeds – the requirement to convert earnings after setting off certain expenses – is applicable for such a person.” With regard to allegations that resident Sri Lankans who earn foreign currency salaries had been forced to convert their foreign earnings into Sri Lankan rupees, Fernando had noted that there is no forcible conversion, as this process is a law, adding that “In 2016, in relation to the export of merchandise goods, we required a person to bring the earnings to Sri Lanka within 180 days, a time period which was later extended. That rule has been there for a long time. Then, earlier this year, we wanted a 25% conversion for export proceeds of merchandise goods. Then, very recently, after the six-month road map was announced, the rule was changed further, taking note of the presentations made by exporters of goods, who wanted some foreign currency to fulfil certain expenses. Thus, the rule was changed to allow them to use those funds.”  Informal channels  After the CBSL set rates for USD, there was a rise in Sri Lankans living abroad sending money via informal channels, according to certain local media reports, which quoted a Sri Lankan expatriate as saying that sending money via such channels is more profitable than sending money via formal channels such as banks.  Earlier this month, the CBSL had also warned that it has received information that some Sri Lankans residing abroad send remittances to their dependents in Sri Lanka, knowingly or unknowingly, through various racketeers. “The CBSL is aware that there have been instances where certain brokers collect foreign currency from Sri Lankan employees in other countries and credit the accounts of their dependents in Sri Lankan rupees by way of cash or transfers through the financial system. The public may not be aware that they are committing offences punishable in terms of the law for the violation of the provisions of the Prevention of Money Laundering Act. Further, available information indicates that these transactions could be linked to drug trafficking and other illegal activities. Hence, the CBSL informs all Sri Lankans residing abroad and their dependents not to be victims of such illegal activities, knowingly or unknowingly. The CBSL emphasises the need for all concerned parties not to become victims of illegal operators and to ensure that they remit their foreign remittances to Sri Lanka only through banks and financial institutions which are supervised by the CBSL or other international banks and financial institutions.”  This situation is concerning not only to Sri Lankans who send the foreign revenue they have earned by working as migrant workers; those working for foreign clients based abroad from Sri Lanka also express concerns regarding the same.  Export proceeds, the abovementioned gazette notification said, include proceeds required to be repatriated into Sri Lanka under and in terms of the Foreign Exchange (Classes of Miscellaneous Capital Transactions) Regulations No. 4 of 2021, as well as payments received in foreign exchange by a person resident in Sri Lanka for the services provided including professional, vocational, occupational or business services provided to a person resident outside Sri Lanka.  With regard to these regulations, a person who provides consultancy services to a Europe-based online platform told The Morning that even though he understands the gravity of the foreign reserves-related issue Sri Lanka is facing, imposing rules and regulations on those who have been earning foreign currency for years is not acceptable. Also, he said that what the Government should do is to encourage, and not force people to convert their foreign currency earnings into local currency. He also noted that despite the legal situation regarding such regulations, those providing services to foreign clients and getting paid in foreign currency may tend to save their money in digital wallets instead of having the money sent via banks.  The foreign reserves crisis is becoming an issue that affects most essential imports such as crude oil, milk powder, fertiliser, and medicines, and the Government has expressed uncertainty regarding resuming other imports such as motor vehicles.  While this situation calls for prompt action, with a focus on boosting foreign earnings and reducing expenses on imported goods and services, hasty decisions can be counterproductive. As was noted by those who spoke with The Morning, poorly planned measures can deter those earning foreign currency, instead of encouraging them.


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