By Skandha Gunasekara
Experts last week criticised the recent decision of the Central Bank of Sri Lanka (CBSL) to allow foreign currency payments by foreigners for tourism, pointing out that it would encourage black market trade of the dollar and discourage tourists from frequenting hotels. This is despite industry stakeholders welcoming the move.
The Government is banking on the tourism industry to bounce back quickly this year to boost foreign reserves after two years of the pandemic crippled tourism, causing estimated losses in the region of around $ 10 billion.
Earnings from tourism for years 2020 and 2021 mustered $ 1 billion while in 2019 – even with the Easter Sunday attacks – earnings were $ 3.6 billion. Prior to that, tourism earnings were $ 4 billion in 2018.
The CBSL Monetary Board last week gazetted new regulation making it mandatory for non-residents to pay in foreign currency and/or to convert via an authorised dealer.
THASL welcomes move
The Hotels Association of Sri Lanka (THASL) President M. Shanthikumar was optimistic about the CBSL decision, noting that it would help hotels pay back foreign currency loans they have taken.
“We see this decision by the Central Bank as a positive move. The hotels will get their dues in foreign currency. At the moment the hotels don’t get payments in foreign currency for the services they provide. Most of the hotels also have some foreign currency loans and they have no way of paying those loans back without collecting enough dollars. It will certainly help the hotel industry,” he opined.
He said the limited time to deposit such currencies at commercial banks would not be an obstacle.
Shanthikumar pointed out that hoteliers had been requesting this change for several years. “Now our requests have been granted and the Central Bank has made it mandatory and enabled such transactions in foreign currency.”
He also highlighted that it was commonplace globally for tourists to carry out their transactions in the relevant foreign currency and was hopeful that the move would draw more tourists, expressing optimism that it would contribute to an increase in the country’s foreign reserves.
“This will definitely help the hotel industry in a big way. It will also help the country more because all the foreign currency coming in will be accounted for when it goes into the correct channels, thereby the country will collect more dollars. This move will also incentivise foreign tourists to visit Sri Lanka more because it makes it easier for them to make payments,” he stated.
Minister of Tourism raises concerns
However, Minister of Tourism Prasanna Ranatunga raised concerns over the need to show receipts of foreign currency conversions each time a tourist needed to make payments for goods and services.
“From the stakeholder’s perspective, I spoke to the hoteliers and the travel agents – they are happy with the Gazette. My main concern is that when tourists come to Sri Lanka, they have to be able to travel freely but there is a clause that they have to show receipts where they exchanged the foreign currency at the hotel or wherever they go and spend money. That is not practical, in my opinion. I had a discussion with the Governor and he said to let him know the feedback on this. The Sri Lanka Tourism Board Chair will have a discussion with the stakeholders and prepare a report on the feedback. Other than that, there are no other issues.”
He said he hoped for more tourist arrivals but was aware that the pandemic could hinder growth in the industry this year as well. “There should be a growth to some extent because of this new policy, but tourist arrivals could be affected because of the pandemic. We are seeing Covid numbers rising in Western countries and the Middle East. The Indian sector too is the same. China and Japan have closed their countries. We have some issues that we will have to face depending on the situations in other countries.”
Central Bank’s reasoning
Meanwhile, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando explained the rationale behind the CBSL’s decision, noting that an informal market for foreign currency conversion may have prompted the move.
“Just because tourists come doesn’t mean we are getting dollars. How it happens is that tourists come with dollars and they sell it to the banks and then banks give them Sri Lankan currency. But with the dual exchange rate, there were instances where foreigners exchanged money through informal channels because they got a better rate. Then when they are leaving, they change Sri Lankan currency bought through the informal market via licenced banks and dealers at Rs. 200 or Rs. 203; the Central Bank’s reasoning behind this move is to prevent this from happening.”
However, he opined that it could have a negative impact on tourist arrivals as the added regulations could be seen as an inconvenience by tourists.
“Tourists don’t want to have restrictions; they are inconvenient. More options are what tourists prefer. This could discourage tourists and it is not good for the reputation of the country. Tourists could think that many other things can be done in Sri Lanka via the informal market at a better rate.”
Move condemned
Former Deputy Governor of the Central Bank and Senior Economist W.A. Wijewardena was highly critical of the Monetary Board’s recent regulations on tourists’ financial transactions, charging that a fixed exchange would hinder any expectations of additional dollar inflows via tourism.
“We had a similar rule before 1977 where most of the tourists paid in foreign currency. This decision by the Central Bank shows the desperation of the Government to get dollars into its hands at the controlled exchange rate of Rs. 199 per US Dollar. What it means is that you are forcing a seller to sell it at the Maximum Retail Price (MRP). You can call this an MRP because it is a kind of price control and when you have a price control everybody knows that naturally it leads to a black market and it will find its way into the black market.
“What has been done is instead of allowing the rupee to reach its realistic value in terms of demand and supply in the market today, the Central Bank has forced the tourists to sell them at the MRP. Everyone knows that MRPs don’t work in the market. The solution is very clear – you have to allow the rupee to depreciate. We saw Minister Bandula Gunawardana try to control the price of coconuts and rice by imposing MRPs. What happened? He had to give it up. In the same way the Central Bank will have to allow the rupee to depreciate,” he explained.
He said the new move would discourage tourist arrivals. “What will happen is that even the tourists coming into Sri Lanka will stop coming; that’s another problem. Unfortunately Sri Lankan policy leaders may not be aware of the adverse repercussions of these policies prior to 1977. We are repeating the same mistake – mistake after mistake.”
When pointed out that the hoteliers had welcomed the move, Wijewardena asserted that tourists would avoid frequenting hotels and instead choose to stay at BnBs and smaller accommodations for convenience.
“What else can you expect from the hotel industry? They are dependent on the Government for handouts. They themselves will realise what will happen to them in the future. The tourists coming into Sri Lanka will not stay in hotels. They don’t have to stay in five-star hotels anymore because there are BnB facilities available. The entire tourist flow will be directed from the hotels to the other sectors. They don’t see what’s beyond the tip of their nose; that is the problem with Sri Lankans.”
Repeating mistakes
He revealed that international economists, too, had voiced their disapproval of the Sri Lankan Government’s economic decisions.
“An economist attached to the Adam Smith Institute in London has referred to this kind of policy and stated that the Government of Sri Lanka doesn’t know how the international economy works, nor does it know how the domestic economy works. This is actually against the basic principles of economics.”
He said the current administration was repeating mistakes of the past that had led to an economic depression in Sri Lanka and that policymakers must learn from such mistakes without repeating them.
“They don’t know how the international economy works or the domestic economy. Nobody can put wisdom into a brain which refuses to accept knowledge. It wants to live and get immersed in ignorance forever. They have made one mistake after the other, each mistake bigger than the last. Eventually the whole economy will crash because of the overload of those mistakes. This happened before 1977 where mistakes were made and the economy was crushed. Present-day policy leaders have not lived in that era, nor are they trying to understand what happened in that era and that is why they are repeating the same mistakes.”
According to Extraordinary Gazette (No. 2263/31):
- Hotel service providers registered with and licensed by the Sri Lanka Tourism Development Authority are hereby required to accept payments in respect of services rendered to persons resident outside Sri Lanka only in foreign exchange with effect from the date of these Rules
- Foreign currency so accepted should be sold to a licensed commercial bank or to a permitted licensed specialised bank or credited into a Business Foreign Currency Account of the hotel service provider within three business days from the date of acceptance of such foreign currency
- All payments made through electronic fund transfer cards should forthwith be credited into a Business Foreign Currency Account of the hotel service provider
- A hotel service provider may accept payments in respect of services rendered to a person resident outside Sri Lanka in Sri Lanka Rupees provided that such person submits original documentary evidence to the effect that such Sri Lanka Rupees represent the foreign currency brought into Sri Lanka by persons resident outside Sri Lanka and converted through an authorised dealer or restricted dealer
- A hotel service provider should endorse the original documents provided to him by a person resident outside Sri Lanka and retain copies of such documentary evidence for a period of six years or such other record keeping period imposed by law as may be applicable, from the date of acceptance of such Sri Lanka Rupees
- All hotel service providers should submit reports and/or statements to the Sri Lanka Tourism Development Authority with copies to the Department of Foreign Exchange of the Central Bank of Sri Lanka, as may be required from time to time, by the Director General of the Sri Lanka Tourism Development Authority and/or the Director of the Department of Foreign Exchange of the Central Bank of Sri Lanka
- All hotel service providers are provided unencumbered access to the officers of the Central Bank of Sri Lanka, as may be authorised by the Governor or the Deputy Governor, as the case may be, to inspect or examine the records maintained for the purposes of these Rules, and review all actions taken by such hotel service providers in ensuring full and strict compliance with these Rules
- The Director of the Department of Foreign Exchange of the Central Bank of Sri Lanka shall have the right to initiate action against any non-compliance with, or transgression of these Rules, by any hotel service provider