Why not use foreign currency account to open LCs?

By Imesh Ranasinghe

The Vehicle Importers’ Association of Sri Lanka (VIASL) is expected to present a proposal to the Ministry of Finance to allow foreign currency holders to open Letters of Credit (LC) for the importation of vehicles to Sri Lanka by converting their foreign currency, The Sunday Morning Business learns.

Speaking to us, VIASL President Sampath Merenchige said they expect to present a proposal to the Finance Ministry to allow the personal foreign currency account (PFCA) and business foreign currency account (BFCA) holders to use 50% of their money, when converting the foreign currency in accounts, to open LCs to import vehicles to Sri Lanka.

Last year in March, the Government imposed a ban on vehicle imports in order to control the depreciation of Sri Lankan rupee against the US dollar and to protect foreign reserves.

The Ceylon Motor Traders’ Association (CMTA) said in June 2021 that the ban in March resulted in the cancellation of 216 LCs involving 14,000 vehicles.

The gross official reserves were estimated at $ 4,060 million by the Central Bank at the end of June 2021, but this number would be even less at the end of July with the $ 1 billion development bond settlement.

According to Merenchige, the VIASL proposal would encourage foreign currency account holders to convert their money to the Sri Lankan rupee as most of the foreign currency account holders have now started to use their accounts as some form of investment with the depreciation of Sri Lankan rupee.

The Sri Lankan rupee, which stood at the Rs. 180 mark against the US dollar when the Covid-19 pandemic hit the country in March 2020, passed Rs. 200 by April 2021.

“Certain politicians and experts say that the US dollar would go upto Rs. 300, which means appreciation of the US dollar at least by 50%. So people think that as a saving for an investment someday, except for essential things, they have minimised the conversion of them to rupee,” he said.

He claimed that amidst a shortage of USD, Sri Lankans cannot even make use of the foreign currency which is languishing in their accounts.

However, Merenchige said that if their proposal is accepted, it will encourage foreign currency account holders to convert their foreign currency in order to import vehicles, as they will see a huge benefit in it.

He said the Government will also benefit from this in three ways: Firstly, 25-50% of these money will be added to the money circulation and to the dollar reserves; secondly, when vehicles are imported, the Government will be able earn a huge tax revenue; and finally, when a certain amount of vehicles are imported, the current prices of vehicles which have caused inconvenience to the Government will go down.

“We believe the new Minister of Finance, Basil Rajapaksa, will accept our proposal,” he added.

Further, Merenchige said that used vehicle importers bring 95% of their vehicles from Japan, but only vehicles upto three years old are allowed to be imported, adding that in countries like New Zealand and Australia, however, they will allow to import vehicles upto 10 years with regulation imposed on the vehicle condition and other documents.

“Similarly, if Sri Lanka would be able to extend the three years to seven years, and regulate the purchases, 70% of brand new vehicles can be bought at a lower price. In such a scenario, we can reopen this closed industry,” Merenchige said.

He said that even though some vehicle importers have started selling registered vehicles with the import ban, 75% of vehicles sales are closed.