Central Bank tweaks export proceed conversion rule for third time

• Re-imposes 25% conversion of export proceeds
• Says could be granting exemptions on case-by-case basis
• Maintains requirement to repatriate export proceeds within 180 days from the date of shipment

Amending the export proceed conversion rule for the third time via a fresh gazette notification published last Friday (28th), the Central Bank (CB) reinstated the earlier rule of requiring exporters to convert 25 percent of repatriated proceeds with possible exemptions up to 10 percent for specific export sectors or industries or individual exporters based on their import input requirements.

Intially, the CB in mid-February ordered exporters to repatriate their entire export proceeds within 180 days from the date of shipment and convert 25 percent of such dollars immediately, as part of its strategy to strengthen the county’s foreign exchange reserves through non-debt creating foreign exchange inflows.

Amidst concerns raised by exporters and issues faced by bankers in implementing the rule, as well as the improvements in the external account driven by rising export earnings prior to the emergence of the third COVID-19 wave, the CB in several subsequent gazette notifications amended the initial rules imposed in February. 
Notably, the CB in April amended the rule requiring exporters to convert 25 percent of repatriated proceeds to 10 percent.

However, with the emergence of the third COVID-19 wave, which compelled the government to impose stringent travel restrictions island-wide, the CB yet again has resorted to reinstate the 25 percent conversion rule on exporters in the latest gazette notification, while maintaining a possibility of granting exemption on a case-by-case basis for certain exporters or export industries.

“Every exporter of goods shall, within thirty (30) days upon the receipt of such export proceeds into Sri Lanka as required under Rule 3 above, convert not less than Twenty five percent (25 percent) from and out of the total of the said export proceeds received in Sri Lanka, into Sri Lanka Rupees, through a licensed bank.

The Monetary Board may however determine the specific export sectors or industries or individual exporters, who or which may be permitted to convert less than twenty five per centum of the total of the export proceeds received in Sri Lanka, if the Monetary Board is satisfied, in its discretion, that the export goods and processes of such export sector, industry or exporter, utilise a very high percentage of imported goods that cannot be sourced domestically. 

Provided however, that in no instance, shall any such partial exemption that the Monetary Board may grant in its discretion, as referred to immediately above, be below ten per centum (10 percent) of the total export proceeds,” the gazette notification stated.As stipulated in the initial gazette notification issued early this year, the CB continued to maintain the requirement for exporters to repatriate entire export proceeds within 180 days from the date of shipment.

CB noted that the 25 percent rule could be amended in future again based on developments in the foreign exchange market and the gross official reserve level, which have been under pressure during the year. 

“The Monetary Board may in general, having regard to the liquidity situation in the foreign exchange market and the Gross Official Reserve levels in Sri Lanka, determine from time-to-time, such other percentage as the case may be, of the export proceeds received in Sri Lanka, that shall be converted into Sri Lanka Rupees through a licensed bank as the Monetary Board may deem fit and appropriate in the prevailing circumstances.” 

In late July this year, the government faces the settlement of US$1 billion USD-denominated International Sovereign Bond (ISB) maturity.  The country’s gross official reserves stood at US$ 4.5 billion at end of April (excluding US$1.5 billion currency swap with China).

Meanwhile, the CB removed the earlier rule, which required licensed banks to submit reports and provide unrestricted access of the records maintained under the stipulated rules to CB officials to examine and review the actions taken by such banks in securing full and strict compliance of these rules. 

With the imposition of export repatriation rules early this year, the CB was targeting to purchase US$ 1.2 billion worth of foreign exchange from export proceeds, amounting to 12.5 percent of export inflows this year.