FTZMA claims mandatory dollar conversion rule likely in breach of IMF member obligations

• Writes to CB highlighting concerns of both apparel and non-apparel exporters
• Trade chamber stresses BOI Enterprises (exporters) exempted from Exchange Control regulations as per written agreements with the BOI
• Questions the ability of banks to decide conversion rates under the regulation 

Sri Lanka’s Free Trade Manufactures’ Association (FTZMA) claims that the recently imposed mandatory dollar conversion rule is in breach of Sri Lanka’s obligations as an International Monetary Fund (IMF) member, and urges the Central Bank (CB) to take a more consultative approach on the matter, as it would place additional pressure on the country’s already struggling export sector.

In a letter to the CB Governor Prof. W. D. Lakshman on Friday, FTZMA representing BOI investor companies in the Free Trade Zones highlighted that both apparel and non-apparel exporters in their membership expressed their deep concerns on the recent regulatory measure that requires all exporters including foreign investors to immediately convert 25 percent of exports earnings immediately upon the receipt of exports proceeds.

In the gazette notification titled “Repatriation of Export Proceeds into Sri Lanka Rules No. 1 of 2021” on 25th of February this year, the Central Bank imposed rules requiring exporters to submit all related documentary evidence on each and every receipt of export proceeds with relevant banks and to convert 25 percent of exports proceeds into Sri Lankan Rupees immediately upon the receipt of the proceeds. 

However, FTZMA in the letter which was signed by its Chairman Jatinder Biala and Secretary Dhammika Fernando pointed out that these regulations are not in compliance with the member countries’ obligations to the IMF.

“Sri Lanka, meeting its obligation as a member country of IMF under Article 8 of its charter shall not engage in imposing or engage in certain measures such as restrictions on the making of payments and transfers for current account international transactions, discriminatory currency arrangements, or multiple currency practices, without the approval of the fund thereby having had no requirements imposed on the export sector, the FDI sector in particular for bringing in and surrendering export proceeds,” It elaborated. 

Expressing its surprise by the move taken by the CB, FTZMA noted that the trade chamber was engaging with the relevant government agencies to remove restrictive measures imposed on BOI companies through the new Foreign Exchange Act during the previous regime, extending exchange control regulations to the sector.

The trade chamber emphasized that the BOI Enterprises (exporters) are exempted from the Exchange Control regulations as per the written agreements with the BOI.

“Suddenly the subject change was brought in by you while we were working with the relevant government agencies through BOI and other industry chambers to remove those restrictive measures to reestablish the status quo to facilitate FDIs and Export-oriented businesses at this hour of need,” it stated. 

As the export industry is going through an extreme state of volatility, uncertainty, complexity and ambiguity (VUCA) grappling with a myriad of challenges related to the pandemic and US-China trade war, it pointed out that the new regulations would force exporters to convert their funds into rupees and then again to reconvert them to fund imports, significantly increasing costs and hassle and placing more pressure on an already struggling export sector.

Meanwhile, FTZMA noted that exporters usually require only less than 25 percent of their forex earnings in the local currency for their domestic payments, however, the CB claimed that exporters need to convert a substantial portion of forex earnings to meet their domestic payment obligations, hence, argued that the rule would not exert pressure on exporters.

“Most of our exporters also only need local currency to pay wages and other auxiliary requirements, which are usually less than 25 percent of their forex earnings and when the export industry is struggling this would increase costs and limit flexibility for business decisions in an environment already severely constricted by COVID-19,”FTZMA said.

It asserted that the industry needs intermediate goods to manufacture more exports.

In addition, it pointed out that the exporter is also likely to face rising finance cost due to the measure as foreign buyers seek long credits periods, hence, the exporters may have to source Rupee conversions to foreign currency for their import financing through bank facilities.

“In the hindsight, this measure might work counterproductive as unscrupulous elements and market players may tend to deal with foreign currency in dubious means which can give rise to the grey and black economies of the country,” it warned.

According to the new rules, all licensed banks are required to mandatorily monitor, strictly, the receipts of exports proceeds and to maintain all documentary evidence relating or in connection until now. 

Many exporters view that such requirements could cause serious delays in processing cross-border transactions. 

Furthermore, the trade chamber also expressed concerns on the ability given to banks through the regulation to decide the conversion rates. “Another concern of ours is that mandatory requirement imposed on the banks will adversely affect the account holders since many banks tend to decide the conversion rates arbitrarily depending upon the amounts and their policies naturally to their advantage. Therefore, either the CB needs to decide on favourable conversion rates or the commercial banks must be compelled to offer the best market rates to be negotiated with the exporter even for a small amount giving reasonable time laps for any market fluctuations,” it urged.

However, FTZMA urges the CB to engage with the stakeholders to reach consensus on the mandatory dollar conversation rule.

“We do fervently believe that our concerns and suggestions would be duly considered when deciding on the most competitive conversion rates for our inward remittance by taking a more consultative approach towards the exporters and “not to kill the golden goose with short-sighted policies”,” it said.

Under its new strategy to build up reserves with non-debt creating foreign exchange inflows, the CB targets to purchase US$ 1.2 billion worth of foreign exchange from export proceeds, amounting to 12.5 percent of export inflows this year, ahead of external debt servicing obligations.