Government mulls higher mandatory exporter proceeds conversion rule

■ Cabinet authorizes study to explore possibility ■ Currently exporters required to immediately convert 25% of their export proceeds

The Cabinet of Ministers, concerned by the current pressure on foreign liquidity, which has been fast drying up, has decided to authorize a study to explore the possibility of further raising the amount of mandatory conversions out of export proceeds from the current level of 25 percent.

According to the existing rule, exporters are required to bring back the entirety of the export proceeds within 180 days from the date of shipment and convert a minimum of 25 percent into rupees with exemptions to come down to 10 percent as the government reinstated the original rule on May 28 after amending twice since it was issued first in February.

Since the reinstatement of the rule in its original form, the Central Bank had observed an improvement in the mandatory conversions in the month through June 28.

“With one month’s completion of the regulations (came into effect) by June 28, we saw some improvement in the mandatory conversions of which the Central Bank purchased 10 percent for reserve build up,” said Central Bank Deputy Governor N.W.G.R.D. Nanayakkara.

Under the rule in its current form, the Central Bank expects to purchase a total of between US$ 650 million to US$ 700 million from exporters, together with 10 percent from worker remittances, a rule, which came into effect from the fourth week of January.

In February, the Central Bank was targeting to collect at least US$ 1.2 billion out of mandatory conversions into reserves. While the Sri Lankan economy was off to a robust start during the first three months of the year logging an increase of 4.3 percent, the country’s economy and its external sector in particular fell into trouble after the virus controlling bureaucrats blindly recommended restrictions on the economy as exporters scrambled to meet full orders, visitors turned cautious and foreign investors became more concerned. As the country is now facing severe liquidity shortage in foreign currency, the authorities are resorting to various tactics to overcome near term pressures, including multiple bilateral and multilateral liquidity lines and harsher restrictions on outflows by migrants and companies with exemptions.

“I think there was also a Cabinet decision recently to the effect of the Central Bank to consider increasing this mandatory conversion rate from the current 25 percent to a higher level after certain studies. This (is) also conducted for the time being,” Nanayakkara noted.

According to him, although there is some pressure at present, the situation had been compounded by unwarranted speculation where the importers are front-loading imports while the exporters hoarding foreign exchange without converting into rupees, with the expectation of further weakness in the rupee against the dollar—a behaviour which is not entirely irrational as people often seek cover against potential losses while attempting to make conversion gains.