The Government, in a dramatic late night move, has frozen a 1993 rule permitting exporters to keep their money overseas without restriction and ordered that all earnings must be immediately brought to Sri Lanka – or face the consequences. Even in the worst years of a foreign exchange crisis (2001 and 2009), the then governments [...]


Move to rush back export earnings

Govt. freezes 1993 rule to tide over foreign exchange crisis

The Government, in a dramatic late night move, has frozen a 1993 rule permitting exporters to keep their money overseas without restriction and ordered that all earnings must be immediately brought to Sri Lanka – or face the consequences.
Even in the worst years of a foreign exchange crisis (2001 and 2009), the then governments avoided such draconian controls, analysts said.

Friday night’s move, according to exporters, economists and tax experts who spoke to the Sunday Times on condition of anonymity, reflects the Government’s desperation to prevent the Sri Lanka rupee from sliding further and – another battle to secure foreign cash.

The rupee has seen a free-fall since the Central Bank in September 2015 reduced its foreign exchange intervention. The dollar then pegged at Rs. 135 per dollar, hit a record Rs. 150 and on Friday was traded at Rs. 145. The Central Bank (CB) despite all the lofty pronouncements on ways and plans of raising more dollars (IMF loan, etc), is showing signs of desperation with foreign reserves sinking. While export earnings annually are around $10 billion, imports cost almost double that at $19 billion.

The Friday night announcement by the Ministry of Finance surprised even the ardent of supporters of the Government, with one top exporter saying, ‘this issue should have been sorted out by discussion rather than drastic regulation.”

The latest crisis is exacerbated by wavering on the VAT implementation (and other taxes) in which the International Monetary Fund (IMF) has insisted that VAT should be implemented fully without exemptions – a per-requisite for balance of payments support – while the Government earlier this week announced exemptions to placate a restive population.

While the move is another reflection of the present regime’s inconsistent policy formulation, former Central Bank deputy governor and economist W.A. Wijewardena says it shows the Government seems to be desperate. “It will frighten everybody and force people to keep money abroad and under-invoice earnings (inserting bogus figures),” he believes.

The Ministry of Finance statement said that export proceeds retained abroad as at April 1, 2016 must be repatriated to Sri Lanka not later than May 1, providing less than a week to exporters to bring back their earnings. Any proceeds after April 1 must be repatriated within 90 days from ‘the date of exports”, cancelling an earlier March 1993 gazette notification which freed exporters from bringing back any earnings. Prior to March 1993, exporters were required to bring back proceeds within six months of the export.

A top exporter, who cited the latest ill-advised step as another “stupid move by the Ministry of Finance” and which is contrary to the Prime Minister’s policies, noted that: “Everyone knows that some 50 odd companies are responsible for 60-70 per cent of exports. You could talk to them and make this point (bringing back all the money) rather than bringing controls and creating uncertainty.”

Other exporters also said that since most exporters take bank loans for inputs, their earnings come back to pay off the loans. “There are times some exporters have remitted the earnings to another bank and not the bank that they owe money to. But banks are smart to this tactic and this practice is reducing,” one exporter of added value products, said.

“There is a crisis building up in defending the rupee (and preventing it from falling further). Hence this emergency measure,” said a tax expert, adding that the Government has also failed to implement many of the budget proposals.
Export earnings roughly US$10 billion are woefully inadequate to finance imports which are around $19 billion, and thus the difference is financed through borrowings.

The tax expert said that in a January 2016 ruling, the Government urged exporters and others holding foreign currency accounts overseas to park these funds in a foreign account in Sri Lanka through which money could be invested overseas or taken out without restriction.

Asked to comment, Sirimal Abeyratne, Prof. of Economics at Colombo University, said that while this appears to be a short-term measure the longer-term repercussion is that it will further erode the confidence of foreign investors creating “unpredictability in economic management”.

He said the pressure was building up on the rupee and implied that the expected back-up support from the IMF may be insufficient to tackle the foreign exchange crisis. The problem has been exacerbated by a fall in remittances from migrant workers in West Asia as declining oil incomes cuts jobs, wage hikes and limits the ability for residents there to employ more than one worker per household.

Mr. Wijewardena, who has been forthright in recent years on economic management issues, says that in 1993 (when he was working at the CB), a decision was made to exempt exporters from bringing back earnings.

“This was part of good economic management and moving away from a controlled economic environment. Even in the worst of times of foreign exchange crises – 2001 (during Chandrika Kumaratunga’s regime) and 2009 (under Mahinda Rajapaksa), the Central Bank resisted pressure to control export proceeds,” he said adding that the 2009 period was critical with foreign reserves sufficient only for 3-5 weeks of imports. Those two periods were met with IMF bail-out packages.

He said most countries are moving away from controls with, for instance, the Maldives not having any regulation to control foreign exchange outflows. The latest move is contrary to Prime Minister Ranil Wickremesinghe’s November 5, 2015 statement in parliament on economic policy management. “We will make structural changes in the Central Bank, enabling them to engage in their work in a more independent manner. The tasks of managing exchange processes and managing the ETF will be taken out of their purview,” he said clearly implying that exchange control will be a thing of the past.

Taking a step further in this regard, Finance Minister Ravi Karunanayake said in the budget speech that, “I propose to repeal the present archaic and draconian Exchange Controls Act and introduce an investor friendly Foreign Exchange Management Bill (FEMB)”. On Friday, it was the same draconian law that the Government used.

Meanwhile, the Sunday Times reliably understands that a Hong Kong law firm is believed to have been drafted by the Government to prepare guidelines in moving out of an exchange controlled regime.

The latest move also exposes the government’s inability to provide clear predictions, and thereby policy implementation, in managing the currency and the economy. Mr. Karunanayake, in his last budget speech said: “With the enhanced inflows generated from exports of goods and services and investment inflows, I expect the official reserves of the country will increase to US$10 billion by end June 2016.”

According to latest figures released by the Central Bank, gross official reserves dropped to $6.6 billion at the end of February 2016 from $7.3 billion at the end of 2015 attributing the drop mainly to “debt service payments and the supply of foreign exchange to the domestic foreign exchange market largely to cover the demand arising from foreign investors who moved their funds away from the government securities market.” In laymen’s terms, the statement reflects an outflow of foreign exchange to pay foreign loans and local bonds purchased by foreigners. In the past few weeks, foreign exchange outflows have far outstripped inflows.

Also the finance minister’s plea in the budget for exporters to bring back their money has not worked, hence the reason for the latest stringent control. Mr. Karunanayake said in the budget that around 30 per cent or over $3 billion of export earnings were outside Sri Lanka, urging “all Sri Lankan exporters to remit their export proceeds in full with immediate effect”.

The Government is battling on all fronts with revenues sliding and foreign exchange reserves sinking. Due to conflicting views in the Government, political considerations are getting more attention than the need to raise desperately-needed revenue.

An example of that was the UNP-section of the Government proposing VAT including on some essential commodities. Opposition from the SLFP-section of the administration led by President Maithripala Sirisena led to VAT being re-worked to exclude items that impact on the consumer, putting revenue management in jeopardy and also the proposed bailout package from the IMF.

While the Government and the IMF are close to striking a deal in which Sri Lanka would be entitled to around $1.2-1.5 billion at 1.05 percent interest (according to local economists), extra funding from the IMF up to $3 billion is believed to be at a higher rate of 3 percent interest. While Sri Lankan negotiators would have a tough time in convincing the IMF on the reversal on VAT implementation, the cash-flow crisis makes it imperative for the country to access more expensive funds.

Since March 1993, exporters and service providers categorised as ‘export services’ have no restrictions in retaining their earnings abroad. However since there are tax concessions for exports based on receiving the concession only if earnings are remitted back to the country, a large segment of export earnings have come back.

The Exchange Control Act provides for penalties, fines or prison terms for offenders.

‘Panama Papers’: Deals and commissions
Many of the offshore accounts held by Sri Lankans are of those who have obtained commissions and secured bribes for brokering government contracts, informed sources said.The modus operandi is to act as the middle-man for a foreign agent and broker a government contract. The middle-man then opens an offshore account and the commission is directly transferred to this account by the foreign party.“The Government needs to stop this corrupt practice. The latest Central Bank ruling should cover all accounts (including for services rendered) held abroad, instead of only exports in the form of goods,” one source said.

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