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Tuesday April 23rd, 2024

Sri Lanka forex shortages crippling businesses, IMF deal urged by Chambers

ECONOMYNEXT – Sri Lanka main business chambers say their importers, banks and are being crippled by foreign exchange shortages and some may have to relocate overseas and foreign investors will also be discouraged.

Sri Lanka is facing forex shortages and parallel exchange rates after rupee liquidity injections made to keep interest rates low had hit the credibility of a soft-peg with the US dollar. Enforcement of a 200 to the US dollar peg with partial convertibility had led to forex shortages.

“This will affect in maintaining the credibility of doing business with our suppliers and business associates with whom we transact in foreign currency,” the chambers said in a joint statement.

“At present we face the difficulties in obtaining foreign currency to finance much needed imports due to the prevailing situation with regard to the lack of availability of foreign currency.

“These range from not being able to obtain letters of credit to the inability to clear goods that have already arrived in the port due to delays experienced in honouring letters of credit.

“We are concerned that while the importers themselves will face immense financial costs in the form of demurrage and other logistics related costs, it will also affect longstanding relationships built with suppliers resulting in a serious and irreversible loss of confidence.”

Indirect exporters and firms providing support services for exports are also hit.

The chambers urged the government to finalize the negotiations for short term funds through swaps and other arraignments.

“If these actions as envisaged by the recently announced Roadmap by the Central Bank of Sri Lanka are not materializing within the anticipated time-frames, we earnestly request the Government to reconsider other alternative courses of action available to the country such as engaging with IMF to explore the funding options they can offer.

Analysts have said Sri Lanka will have to hike rates to slow domestic credit, suspend convertibility and float the currency to end forex shortages.

The full statement is reproduced below:

Joint Chambers express concern on the impact of currency shortage

We wish to draw the attention of the Government to the difficulties faced by our member companies and the broader private sector in obtaining foreign currency to finance much needed imports due to the prevailing situation with regard to the lack of availability of foreign currency.

This will affect in maintaining the credibility of doing business with our suppliers and business associates with whom we transact in foreign currency. At present we face the difficulties in obtaining foreign currency to finance much needed imports due to the prevailing situation with regard to the lack of availability of foreign currency.

These range from not being able to obtain letters of credit to the inability to clear goods that have already arrived in the port due to delays experienced in honouring letters of credit. Further, this impact is also felt by indirect exporters and firms providing support services for exports.

We are concerned that while the importers themselves will face immense financial costs in the form of demurrage and other logistics related costs, it will also affect longstanding relationships built with suppliers resulting in a serious and irreversible loss of confidence.

Importers are also unable to secure orders due to the inability to agree on a firm payment schedule as required by suppliers. This will seriously impede the availability of essential products especially during the upcoming festive period during which consumer demand is typically high for most products.

This can cause great hardship to the public at large and may result in a significant increase in the cost of living.

Further, the banking system will also face difficulties as a result of not being able to meet the needs of their longstanding customers and could eventually experience a serious loss of reputation if they are compelled to dishonor committed payments.

The Government will also experience a loss of revenue due to a drop in import duties at a time when increasing government revenue is of paramount importance.

While appreciating the efforts being taken by the Government to mobilse short term funding from a number of sources by way of swaps and credit lines, we urge the Government to finalise the negotiations on some of these arrangements and announce them with certainty as soon as possible with a clear indication when such facilities will become available.

If these actions as envisaged by the recently announced Roadmap by the Central Bank of Sri Lanka are not materializing within the anticipated time-frames, we earnestly request the Government to reconsider other alternative courses of action available to the country such as engaging with IMF to explore the funding options they can offer.

If these conditions that are critical for ease of doing business do not improve, we are concerned that it will result in many local companies looking to relocate their business operations overseas.

It will also seriously constrain our ability to attract Foreign Direct Investment(FDI) into the country.

Therefore, we wish to urge the relevant authorities in Government to take quick remedial action to avoid the negativeconsequences as outlined above and put Sri Lanka back on track to stage a strong post-pandemic recovery to reach vistas of prosperity and splendor as envisioned.

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Sri Lanka single borrower limits cut to 25-pct of bank capital, SOEs also included

ECONOMYNEXT – Sri Lanka’s central bank has issued directions limiting loans to a singe borrower or a group of connected customers to 25 percent of Tier I capital, with state enterprises which turned out to be the biggest borrowers, also included.

In a 2007 direction, banks were allowed to give loans up to 30 percent of capital for a single customer and 33 percent for a group but the rules were widely violated in the case of state enterprises, which were used as off-budget vehicles to give energy and other subsidies.

Banks will have to limit exposures to 25 percent starting from January 2026.

According to transitional provisions published in the direction seems to indicate that some banks may have single borrower exposures of 85 percent or more.

They will be required to bring exposures down to 60 percent by 2027 and 25 percent by 2028.

Download the direction from here Sri-Lanka-single-borrow-limit-direction-2024

Energy utilities were made to borrow from state banks to run off-budget subsidies under plan avoid a price formula during the Rajapaksa regimes.

Sri Lanka’s state banks ended up with large debts to Ceylon Petroleum Corporation partly due to flexible inflation targeting (printing money to cut rates as soon as inflation fall triggering forex shortages) even when fuel was market priced in 2018, analysts have shown.

When rates were cut with inflationary open market operations, triggering forex shortages, CPC was barred from buying dollars and forced to get suppliers’ credit denominated in dollars.

The suppliers’ credits were later converted to dollar loans from state bank loans, usually after the currency collapsed from the inflationary rate cuts or inflationary open market operations to sterilize interventions or both, analysts have shown.

The CPC loans have since been taken over by the government.

Banks have also funded roads and other state projects.

“Licensed banks shall gradually reduce the exposures to Public Corporations to meet the maximum limit,” by December 2030 according to the direction.

“Public corporation shall mean any corporation, board or other body which was or is established by or under any written law other than the Companies Act, with funds or capital wholly or partly provided by the Government.”

Many of the newer state enterprises however have been suddenly set up under the Companies Act, unlike earlier where a specific act was passed by the parliament to set up corporation or a statutory authority.

Borrowings of CPC and CEB eventually hit the financial stability of state banks while actual bad loans were under-reported. Now the bad loans are being covered with a state capital injection.

Under an International Monetary Fund and World Bank backed program, the so-called ‘sovereign bank nexus’ is being severed to protect the banking system.

Government securities, central bank sterilization securities, loans guaranteed by multilateral lenders or high rated foreign banks are excluded. (Colombo/Apr23/2024)

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Sri Lanka exceeds tax revenue target by 6% in first quarter

ECONOMYNEXT – Sri Lanka’s revenue collecting bodies have outperformed and exceeded tax revenue target by 6 percent for the first quarter ended on March 31, State Revenue Minister Ranjith Siyambalapitiya said.

“After many years of difficult challenges, it has been possible to exceed the expected state revenue in the first quarter of 2024,” he said in a statement.

The government expects a revenue collection of 4,106 billion rupees in 2024.

“The reason for the economic crisis in the past period was the reduction in the level of government revenue. Considering the achievement of higher than the target in the first quarter of this year and the revenue pattern, the 2024 will become a year in which the revenue targets can be achieved,” he said.

The three tax revenue collecting bodies – Sri Lankan Customs, Excise Department, and Inland Revenue Department have collected 834 billion Sri Lanka rupees in the first quarter.

“It is a 6% higher than the expected revenue target of 787 billion rupees,” Siyambalapitiya said.

He said the Inland Revenue Department exceeded its target by 13 percent to 430 billion rupees compared to the target of 381 billion rupees in the first quarter of 2024.

He also said Customs Department has managed to reach the target of 353 billion rupees and the Excise Department has also achieved 96% of the revenue requests and earned 51 billion rupees in the first quarter.

The island nation has raised Value Added Tax (VAT), imposed new taxes, and increased personal income taxes to boost the revenue under an International Monetary Fund-backed reforms in return of a $3 billion External Fund Facility.

People have started to grumble over the government’s higher taxes without reducing some of the state expenditures. The government has been in the process to privatize some key state-owned enterprises. However, that process faced delays amid gradually rising protests against the move. (Colombo/April 22/2024)

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Air Asia, SriLanka’s FITS, Hayleys bid for SriLankan Airlines

ECONOMYNEXT – Malaysia’s AirAsia group, FITS Aviattion of Sri Lanka and Hayleys are among bidders for state-run SriLankan Airlines, a statement from the State-owned Enterprises Restructuring Unit said.

Dharshaan Elite Investment Holding (Pvt) Ltd, . Sherisha Technologies Private Limited and Treasure Republic Guardians Limited are the other bidders.

The responses will be evaluated to choose qualified investors.

International Finance Corporation, as Transaction Advisors for the divestiture of SriLankan Airlines Limited, will continue to advise the government, the statement said. (Colombo/April22/2024)

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