The importance of repatriation and conversion of export earnings for the stability of the external sector and the overall stability of the financial system
Department of Economic Studies
09/27/2021
Info series note
The importance of repatriation and conversion of export earnings for the stability of the external sector and the overall stability of the financial system
Sri Lanka’s merchandise export sector showed notable improvement in 2021 compared to the 2020 pandemic. According to the latest customs data, export earnings averaged US $ 985 million over the past eight years. months ending August 2021 compared to a monthly average of US dollars. 837 million in 2020, while the average earnings amounted to 1,064 million US dollars in June-August 2021.1 This is a welcome development as the merchandise export sector (comprising various products) is the main source of foreign exchange in most countries, including Sri Lanka.
Sri Lanka has had a trade deficit every year since 1977, and the gap between merchandise imports and exports is usually funded by other entries in the external current account (such as entries from tourism and other services as well. than workers’ remittances) and financial inflows (such as investments and loans).
Against this background, some recent developments in the forex market have raised several concerns, especially as some of these typical currency inflow pathways have been affected due to the pressures associated with the pandemic, as explained below:
- Compared to the average monthly exports declared by Customs (flow of goods) of US $ 985 million in the eight months ending August 2021, the average monthly repatriation of export earnings in July / August 2021 was 640 million US dollars, as reported by banks (financial flows). As a result, there was a significant gap of US $ 345 million between these two figures. This observation therefore raises the serious question of whether
1 Information for August 2021 is preliminary. Export and import data include adjustments made by the Central Bank to information obtained from Sri Lankan Customs.
whether exporters comply with regulations on 100 percent repatriation of export earnings.
- It also appears that due to undue speculation on exchange rate fluctuations, there was a reluctance to convert export earnings during the period January 2020 to July 2021, thus limiting inflows. on the domestic foreign exchange market, a situation which then led to an accumulation of foreign currency deposit balances with the banking sector for a significant amount of $ 1.9 billion. In addition, given the low interest rates of the rupee, some exporters have found it more lucrative to borrow and import to meet their input needs, which has increased tensions in the domestic market.
- From the available data, it should also be noted that if there had been 100% repatriation and 100% conversion of export earnings, the monthly flow of export foreign exchange into the domestic market would have been of US $ 985 million, and with the average import expenditure of US $ 1,670 million, which would have resulted in an average monthly gap of US $ 685 million. This could have been easily funded using other foreign currency inflows into the country.
- Based on past statistics above in general, and the experience of July / August 2021 in particular, the monthly average gap between conversions of export earnings with incomplete repatriation and import expenditure has been quite alarming.
It would also be fair to state that it is necessary for a country to ensure that the currencies generated by export activities are duly repatriated to the country and converted into its currency. In fact, many emerging market economies have repatriation and conversion requirements imposed on exports of goods and services. Country experiences vary and, over time, with the accumulation of a country’s foreign exchange reserves through these non-debt inflows, countries have also gradually relaxed these requirements. Regional economies such as Bangladesh, India, Indonesia, Malaysia, Nepal, Pakistan and Thailand have export revenue repatriation requirements currently in place varying from 3 months to 2 years after the export. Bangladesh, India, Pakistan and Thailand have repatriation requirements on export products of goods and services, while in Nepal, Malaysia and Indonesia the repatriation requirement does not apply. than for merchandise exports. Bangladesh, India, Pakistan and Thailand have rules for converting into respective local currencies according to different percentages depending on the nature and amount of repatriated export earnings.
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and their use. These repatriation and conversion requirements ensure that the demand for foreign currency is met, including imports of intermediate and investment goods directly required by the export sector, as well as the country’s essential fuel and medical needs, which are indirect contributions to all sectors, including exports. sector.
Therefore, it would be reasonable for the government (which supports the export sector through lower taxes and many other incentives) and the Central Bank (which should ensure price and economic stability as well as economic stability). financial system) take measures to ensure the full repatriation of export earnings within a reasonable period of time and the conversion of receipts of export earnings into local currency, including earnings already accumulated in exporters’ accounts, in order to that the true objective of exports is achieved.
As will be understood, an export will only achieve its purpose when it finally culminates in the flow of foreign exchange generated by the export into the country’s financial system in its local currency. This objective would obviously not be achieved if the final conversion of export earnings into local currency did not take place. Accordingly, steps need to be taken to strengthen systems to monitor and implement actions that lead to this goal. Only then would the gap between the foreign exchange liquidity provided by exports and the demand for foreign exchange liquidity for imports narrow to the level published in the Central Bank’s own reports.
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Disclaimer
Central Bank of Sri Lanka published this content on September 27, 2021 and is solely responsible for the information it contains. Distributed by Public, unedited and unmodified, on September 27, 2021 02:41:09 AM UTC.