IMF asks Sri Lanka to lift curb on exporter proceeds


The International Monetary Fund has asked Sri Lanka to lift a rule requiring exporters to bring back proceeds early, saying the restriction could harm exporters and may amount to a flow management measure (CFM).

As a signatory to the IMF’s Article IV agreement Sri Lanka has to keep current transactions free but the IMF also discourages the use of capital controls to cover policy errors.

In 2015, under then Finance Minister Ravi Karunanayake and ex-Central Bank Governor Arjuna Mahendran, Sri Lanka imposed a 3-month requirement to bring back export proceeds which was later extended to four months.

Sri Lanka’s central bank triggered a balance of payments crisis in 2015 and 2016 by delaying rate cuts, cutting rates by printing hundreds of billions of rupees and scaring away bond investors leading to a currency collapse and high inflation.

Instead correcting policy and reducing credit, restriction were place on exporters.

"This repatriation requirement could potentially discourage exporters’ outward investments (capital outflows) by increasing the cost of outward payments and transfers, constituting a capital flow management measure (CFM), according to the Fund’s Institutional View (IV) on capital flows," IMF staff said in a report.

"The authorities are of the view that eliminating the measure at the current juncture could be premature as Sri Lanka remains vulnerable to shocks especially with international reserves remaining below the adequate level. Staff recommends removing this temporary measure as policy adjustments are implemented, for CFMs should not be used to substitute for warranted macroeconomic adjustment.

"The pace to phase out this temporary measure will be further discussed in the Article IV consultation in early 2018, together with Sri Lanka’s overall efforts to further liberalize the capital account and develop the FX market," the staff report said.

The rule does not require the dollars to be converted to rupees.

After 1978 the central bank printed money and allowed the exchange rate to depreciate, generating high inflation and helping create low wage jobs.

Conditions improved somewhat after 1995, when A S Jayewardene, a London School of Economics educated Central Bank Governor, moved policy away from Mercantilism towards economics.

Ironically the 2015/2016 BOP crisis and restrictions came when the country is attempting to become an international financial centre.

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