Mandatory selling of converted forex

  • How could this impact the economy?

By Yakuta Dawood

The Central Bank of Sri Lanka (CBSL) Governor Ajith Nivard Cabraal, not just a week ago, implemented a new regulation where all the licensed banks (LBs) operating in Sri Lanka are now mandatorily required to sell 25% of all the US dollars (USD) converted by them to CBSL on a weekly basis.

Accordingly, the aforementioned new regulation represents a significant upgrade from the previous similar operating instruction issued by the CBSL on 28 May 2021, which required LBs to mandatorily sell 10% of all voluntary conversions of worker remittances on the strength of the additional Rs. 2 incentive provided by the Government on such conversions.

Therefore, since the announcement of the directive, several distressed views have been presented by the importing sector, economists, and other individuals in this regard. Thus, to understand the depth of the directive, The Sunday Morning Business this week spoke to the stakeholders involved.

It does not affect us: LBs

Speaking to The Sunday Morning Business, a senior official from a state-owned bank, who wished to remain anonymous stated that this measure taken by the CBSL is a good move as now LBs would be able to borrow USD from CBSL when necessary.

“This measure is taken to improve the reserve position in the country and the move taken by CBSL is very helpful at the present. For importers, this is beneficial as we can open letters of credit (LCs) as CBSL will help LBs now,” the official said.

When inquired if the bank is feeling “forced” to give money to CBSL, the official assured that the bank has no complications with the directive issued.

Further, the official noted that since LBs are only required to hand over 25% of the USD inflows, the new regulation does not have any major impact on the banking operations.

“It is important we safeguard our economy,” the official concluded.

Similarly, speaking to us, a source from another bank who wished to remain unquoted expressed similar views. Agreeing to the purpose of the directive, the source mentioned that this regulation will resolve the rapidly worsening foreign exchange liquidity crisis in the country.

Adding, the source assured that the directive will not impact the internal operations of the bank to a great extent. However, according to the source, there is a possibility of delays in issuing USD to the general public or LCs to importers, and other minor obstacles. 

On the contrary, another official from a leading bank in Sri Lanka, who requested to maintain anonymity, stated that even though the new regulation will not cause any hindrance nor impact to their internal banking operations, it will impact the importers severely.

“Unlike the small banks, we have sufficient dollars, therefore, this directive does not impact us as it is only 25%, but importers on the other hand will be required to wait for a longer period to get their LCs issued by the bank,” the official highlighted.

Challenging junctures ahead: Importers 

Sharing his insight, Essential Food Commodities Importers’ and Traders’ Association President G. Rajendran told us that the issue they are facing presently is “unknown” with regards to how it will really impact their importing of goods to Sri Lanka.

“There will be a very big challenge, especially to the bank because now they will have to allocate the remaining USD for essential food commodities after they hand over the said amount,” Rajendran expressed.

He noted that they will have to wait and see what is going to happen. Rajendran further commented: “The regulation has just been implemented, so it is very early to comment on the impact of this regulation right now.”

The Sunday Morning Business also spoke to individual companies that are involved in importing goods to the country. Firstly, an importing business, who wished to remain anonymous, stated that this implementation, by the next few months’ time, is going to impact them severely.

Explaining, the owner of the company stated that even though the CBSL imposed this regulation now, the real impact for importers will be felt once they go to banks to open new LCs to restock their goods.

“Majority of the lucky importers ordered their required products for operations in the month of December but the remaining importers who wish to import their products after this implementation will face a severe challenge as banks will take a longer time to issue LCs,” the owner said.

Elaborating further, the owner stated that the future of the importers in Sri Lanka is becoming “bleak” due to all the issues that are prevailing in the country as a result of the pandemic.

We also spoke with an owner of a medium-scale importing company. Expressing concerns on this subject, the owner stated that the company is in a “grave” situation.

“Due to the challenges such as global shipping price, etc. the cost of importing goods was already high. With this measure, it is very scary what might happen in a few months’ time. If the imports stop due to the delay in issuing LCs, the company will have to shut down its operation,” the owner expressed.

However, adding further the owner stated that they are hoping and depend on the Government to make the right decision that will benefit them and not in a closure of the business operation.

Meanwhile, attempts to reach the Ceylon Chamber of Commerce Import Section proved futile. However, when approached several other large and medium scale importers refused to divulge information.

The status of LC’s prior to implementation 

Prior to the implementation, it was reported that LBs have further limited the issuance of LCs for local importers, which is believed to be due to the limited foreign exchange reserves LBs hold in the face of an overall dollar shortage in the country.

Speaking to The Sunday Morning Business, a number of private LBs, which did not want to be named, denied the rumours that overseas banks are not honouring Sri Lankan LCs, and stated that their LCs were being accepted by foreign companies and banks but they have limited opening of LCs depending on the inflow-outflow analysis.

A senior official from one of the banks told us that banks have limited the opening of LCs based on the inflow of foreign exchange to the country. However, he said some foreign financial institutions have stopped lending to banks due to the downgrading of the country’s credit rating.

The official said that when LCs are open, there is a huge waiting list of importers in banks who are prioritised based on the type of goods imported. Moreover, he added that most of the banks now tend to open LCs for 90 days and above and not sight LCs.

Further, the official added the bank opens LCs depending on the priority of the import good items while importers of non-essential goods are prioritised depending on the customer relationship, while some are asked to wait for two months.

However, the official noted that education, medical, and insurance foreign exchange payments are prioritised.

The main issues for the recent lack of inflows, the official said, are the declined remittances over the past two to three months and exporters holding onto their dollars.

Sri Lanka’s foreign exchange crisis started with the Covid-19 pandemic in 2020, as the inflow of revenue from the tourism industry almost came to a standstill, but the issue worsened in the last three months as foreign remittances to the banking system gradually decreased.

This is mainly due to higher dollar rates offered in the black market compared to banks, which led to a decline in worker remittances recorded in the balance of payments.

“The downgrade in credit ratings of the country resulted in more lending conditions and rates for banks in borrowing foreign currency from certain companies and banks outside the country,” the official stated.

In August, Standard and Poors (S&P) cut the outlook of Sri Lanka’s CCC+ rating to negative as foreign reserves fell below two months of imports.

S&P said that they revised their outlook on Sri Lanka to negative to reflect their views that the Government may face an increasingly challenging financing environment over the next 12 months.

“The negative outlook reflects our expectation that Sri Lanka’s financing environment may get more difficult over the next 12 months,” S&P said.