United Federation of Labour urges CBSL to publicise action taken against non-compliance of forex repatriation rules

United Federation of Labour (UFL)  is calling on the Central Bank to make public the steps it has taken for non-compliance of its regulations on foreign exchange transactions including repatriation of export proceeds.

It said the Section 9 (2) of the Monetary Law Act of 1949 (as amended) gives the Monetary Board of the CBSL expansive powers which includes directly accessing offshore accounts and enforcing repatriation of residual incomes of exporters who violated repatriation requirements. 

“We urge CBSL to take action against non-compliance by directly enabling the Foreign Exchange Department of CBSL to access offshore accounts of the exporters and repatriate export incomes held outside the domestic banking system,” the UFL said in a statement.  

“We further urge the CBSL to take action against offending Companies and hold them accountable under the law for flouting CBSL regulations which has threatened the economic sovereignty of Sri Lanka,” it added. 

UFL statement was on behalf of Ceylon Bank Employees Union, Ceylon Teachers Union, Dabindu Union, Engineers Services Professional Association, Mass Movement for Social Justice, Movement for Land and Agricultural Reform, National Fisheries Solidarity Movement, North South Solidarity Group, Professional Centre for People’s, Protect Union, Red Flag Union, Sri Lanka All Telecommunication Employees’ Union, Stand Up Workers’ Union, Textiles Garments and Clothing Workers’ Union, United Fishermen’s and Fish Workers’ Congress, Young Journalists’ Association, Young Lawyers’ Association, Professor in Economics Sumanasiri Liyanage, Political Economist and PhD Student Amali Wedagedara and Economist and PhD Student Kalpa Rajapaksha.

The following is the full statement.

Foreign exchange liquidity shortage in the domestic financial system has led to a crippling scarcity of imported essentials like fuel, medicine, food and fertiliser, stoking inflation of nearly 70% and food inflation of 95% by September this year. The unavailability of foreign exchange is shrinking production; Sri Lanka’s Industrial Production Index collapsed 14.3% by August 2022. 

It is leading to rising unemployment hand in hand with hyperinflation, a situation which economists call stagflation. As a result, a large section of the population is facing food insecurity, a crisis in healthcare and a devastating collapse in living standards. Working people hard hit during COVID-19 pandemic are now facing a subsistence crisis and acute malnutrition in the face of unbearable living costs, collapsing real wages and shrinking employment opportunities. 

Despite the fact that foreign exchange needed to secure essential supply of imports and reduce living costs is critically low, Sri Lanka recorded its highest ever merchandise export income of $ 8.9 billion in Jan-Aug 2022. Furthermore, foreign debt servicing costs declined sharply following the sovereign default in April this year. Against this backdrop, a trade surplus of $ 21 million in June 2022 was also recorded. 

Including the services exports income of approximately $ 2 billion and $ 2.2 billion inflow of workers’ remittances the total non-debt foreign exchange availability of Sri Lanka amounts to nearly $ 13.1 billion against the lower total import bill of $ 12.8 billion in Jan-Aug 2022. Sri Lanka also received a $ 4.2 billion emergency credit line from India during the period. 

Nevertheless, CBSL’s foreign exchange reserves diminished to $380 million by September 2022 excluding the $ 1.4 billion Chinese swap facility that is subject to conditionalities on usability. The domestic financial system is therefore facing the worst foreign exchange shortage since independence while export incomes are the highest in history alongside minimal foreign debt servicing costs.

A devastating foreign exchange shortage is created while export revenues are at their highest and foreign debt servicing costs are low as a result of non-repatriation of residual export income by exporters. Although we do not attribute the current multi-faceted crisis to this factor alone, it would be imperative to address this issue without a delay as a necessary step to take the country out of its present impasse. 

New rules under Gazette Extraordinary No. 2251/42 dated 28 October 2021 stipulates that residual export income should be fully repatriated to the domestic financial system within 180 days from the date of shipment or provisioning of services. In instances where this condition is violated the Director of the Foreign Exchange Department of CBSL has the authority to take necessary action against non-compliance (Section 8 of Rule No.5 of 2021).

In this connection Governor of CBSL Dr. P. Nandalal Weerasinghe revealed on 25 July 2022 that less than 20% of the export incomes are being repatriated. Banking sector professionals assert that currently repatriation is well below 10% of the declared export incomes. The Governor also pointed out that repatriation was 65% in mid-2021. 

In a report titled ‘Trade-Related Illicit Financial Flows in 134 Developing Countries 2009 – 2018’ by the Washington based global research organisation Global Financial Integrity it is estimated that over $ 40 billion was transferred out of Sri Lanka by exporters and importers through trade mis-invoicing (over-invoicing imports and under-invoicing exports) between 2009 to 2018 which is undeniably the principal long-term factor contributing to the ongoing collapse of the Sri Lankan economy.

Economists call this situation a ‘foreign exchange liquidity trap’ where the changes in domestic monetary instruments such as the interest rate, exchange rate and the money supply are incapable of adjusting capital flows to reach equilibrium in domestic goods and labour markets. That is to say the demand for foreign exchange with respect to the value of the currency and the domestic rate of interest has become infinitely elastic leading to a market failure in the external sector. 

This in turn results in crippling shortages of essentials, hyperinflation, unemployment and a devastating collapse of living standards. The situation demands direct intervention by the State to ensure the supply of essential imports while reducing the price of essentials. 

In light of this we demand the CBSL make public the steps it has taken for non-compliance of CBSL regulations on foreign exchange transactions including repatriation of export proceeds. We also assert that Section 9 (2) of the Monetary Law Act of 1949 (as amended) gives the Monetary Board of the CBSL expansive powers which includes directly accessing offshore accounts and enforcing repatriation of residual incomes of exporters who violated repatriation requirements. 

We urge CBSL to take action against non-compliance by directly enabling the Foreign Exchange Department of CBSL to access offshore accounts of the exporters and repatriate export incomes held outside the domestic banking system. We further urge the CBSL to take action against offending Companies and hold them accountable under the law for flouting CBSL regulations which has threatened the economic sovereignty of Sri Lanka.