Exporters remain increasingly reluctant to repatriate and convert earnings: CB

• Speculation on exchange rate movement and low rupee interest rates cited as key reasons
• Says foreign exchange buildup at banks rose by US$ 1.9bn between January and July

Despite the requirement on 100 percent repatriation of export proceeds, exporters in an alarming trend have become more reluctant to convert export earnings driven by speculation on exchange rate movements and low rupee interest rates.

In an information note published yesterday, the Central Bank (CB) raised concerns on a possible non-compliance  on mandatory 100 percent repatriation of export proceeds imposed on exporters.

Compared to the monthly average exports as reported by the Customs (goods flow) during the eight months of the year and the monthly average repatriation of export proceeds during July/August period as reported by banks (financial flow), there had been a significant gap of US$ 345 million between these two figures.

“Based on the above past statistics in general, and the experience during July/August 2021 in particular, the monthly average gap between the conversions of export proceeds with an incomplete repatriation and expenditure on imports has been quite alarming,” the Central Bank said.

The CB believes that if there had been 100 percent repatriation and 100 percent conversion of export proceeds, Sri Lanka would have been able to manage the trade deficit using ‘other foreign exchange inflows’ into the country.
“As per the data available, it would also be noted that if there had been 100 percent repatriation and 100 percent conversion of export proceeds, the monthly export foreign exchange flow into the domestic market would have been US$ 985 million, and with the average expenditure on imports of US$ 1,670 million, that would have resulted in a monthly average gap of US$ 685 million,” it stated.

Meanwhile, it was highlighted that exporters had become reluctant to repatriate and convert their earnings from early last year and up until last July, driven by undue speculation on exchange 
rate movements. 

As a result, the CB pointed out that it limited foreign exchange inflows to the local market and it resulted in a buildup of foreign currency deposit balances with the banking sector by a significant US$ 1.9 billion between January and July.

Further, low rupee interest rates were also cited as a reason for exporters’ reluctance to convert their US dollars.
“… with low rupee interest rates, some exporters have found it more lucrative to borrow and import to meet their input requirements, leading to further tension in the domestic market,” it noted.

However, the CB Governor Ajith Nivard Cabraal last week said that exporters had realised the current foreign exchange crisis faced by the country and therefore, they were ready to repatriate export proceeds.