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Monday June 27th, 2022

Sri Lanka central bank tightens exporter surrender rules

ECONOMYNEXT – Sri Lanka’s central bank has further tightened surrender requirements for foreign exchange earned by exporters, specifying allowed deductions after the credibility of the soft-peg its paper money with the US dollar was lost due to money printing.

Money printing has also pushed down rupee interest rates below domestic credit demand, which is coming from a large budget deficit leading to a steady erosion of reserves when defending the peg against printed money.

The central bank has specified, imported inputs, loan repayments, travel costs.

Exporters could also use up to 10 percent of the proceeds to by dollar denominated Sri Lanka Development Bonds from the government.

The central bank said it was tightening rules in a ‘road-map’ presented earlier this month.

Any dollars surrendered to the central bank further weakens soft-peg and creates liquidity at a time when credibility has been lost (peg is on the weak side), analysts say.

However at the moment the central bank is keeping overnight liquidity short, though fully sterilized at 6.0 percent.

Sri Lanka has had foreign exchange trouble ever since a US ‘money doctor’ set up a Latin America style central bank in 1950. Almost all such so-called Prebisch-Triffin central banks styled after Argentina’s BCRA have ended up in dollarization or sovereign default or both.

Analysts have called for tight rules to block central bankers from money printing, abolishing the agency outright or setting up a currency board to free the country from monetary instability.

The Colombo Port City area and its denizens has been freed from the policy errors and monetary expropriation of the central bank.

Forced conversions of dollars had been ordered by many central banks including that of Zimbabwe.

However such rules can lead to under-invoicing exports and over-invoicing inputs to analysts say. Sri Lanka’s remittances have already fallen sharply over the loss of credibility of the peg.

Extracts from the orders are given below:

3. Every exporter of goods and services shall;

(i) mandatorily receive the export proceeds in Sri Lanka, in respect of all goods exported or services provided outside Sri Lanka, within one hundred and eighty (180) days from the date of shipment or provisioning of services, as the case may be;and,

(ii) immediately upon all and every receipt/s 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 Specialized Bank (hereinafter referred to as a “licensed bank”), that receives such proceeds, in Sri Lanka.

4. Every exporter of goods and services, who receives export proceeds in Sri Lanka, in terms of Rule 3 above, shall mandatorily convert residual of the export proceeds received in Sri Lanka, into Sri Lanka Rupees upon utilizing such proceeds only in respect of the below mentioned authorized payments, on or before the seventh (7th) day of the following month,

i. outward remittances in respect of current transactions of the exporter of goods and services;

ii. withdrawal in foreign currency notes or transfer of funds for travel purpose of the exporter of goods and services;

iii. debt servicing expenses and repayment of foreign currency loans and accommodations obtained by the exporter of goods and services, where such foreign currency loan and accommodation is a permitted borrowing in terms of the Regulations, Orders and Directions issued by the Central Bank of Sri Lanka under the provisions of the Foreign Exchange Act, No. 12 of 2017 or Banking Act, No. 30 of 1988, as amended;

iv. payments for purchases of goods and obtaining services by the exporter of goods and services, related to such export of goods and services including one-month commitments in foreign currency, thereof; and v. payments in respect of making investments in Sri Lanka Development Bonds in foreign currency up to ten per-centum (10%) of the export proceeds, so received.

5. Such date of conversion mentioned in Rule 4 above, shall not be a date later than the date before which the export proceeds shall be received in Sri Lanka, as required by Rule 3 (i) above (i. e. , not later than one hundred and eighty (180) days from the date of shipment or provisioning of services).

6. All licensed banks shall be required to strictly and mandatorily monitor the receipts of exports proceeds in Sri Lanka, within the period stipulated in Rule 3 above and the conversion of such proceeds as required in Rule 4 above and shall at all times, maintain all necessary documentary evidence relating to, or in connection therewith.

7. All licensed banks shall submit reports and/or statements to the Director of the Department of Foreign Exchange of the Central Bank of Sri Lanka, as may be required from time to time and shall provide unencumbered access to the officers of the Central Bank of Sri Lanka, as may be authorized by the Governor or the Deputy Governor, as the case may be, to inspect or examine the records maintained under Rule 6 above, and review all actions taken by such licensed banks in ensuring full and strict compliance with these Rules

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