by Neville Ladduwahetty Courtesy The Island

The headlines in the front page of the Daily News of December 7, 2022 states: GOVT. WILL FORMULATE LAWS TO REPATRIATE USD 53 BILLION”. Quoting Minister Dr. Wijedasa Rajapakse, the report states: Exporters who earn Dollars do not bring that earnings back to Sri Lanka but they deposit it in foreign banks. They bring limited amounts. We don’t have to face foreign exchange crisis if we can get this money back to Sri Lanka”.

Continuing, the headers state further: GOVT. LOOKING AT REMOVING LOOPHOLES IN THE LAW IN THIS REGARD”. The Minister had informed Parliament that In the last year alone, these exporters had not remitted their earnings worth USD 3 billion. The entire foreign loan component of Sri Lanka is USD 52 billion. This means, Sri Lanka could have been made debt free, if the country had received the above-mentioned forex income from the exporters”.

The material, relating to the report, is based on the findings of Global Financial Integrity (GFI), a Washington D.C.-based think tank that tracks illicit financial flows. Their report first appeared in the Sunday Times of Sri Lanka on July 10, 2022. According to GFI The sums of the ‘value gap’ in trade between Sri Lanka and all its trading partners, in USD billions, for the year 2009 was 2.65; year 2010 was 3.464; year 2011 was 4.398; year 2012 was 4.208; year 2013 was 3.345; year 2014 was 4.622; year 2015 was 4.855; year 2016 was 4.265; year 2017 was 5.026”. Thus, the total ‘value gap’ from 2009 to 2017 was USD 36.833 billion.

Another report, titled Call to repatriate illicit capital outflows and residual exports incomes immediately”, signed by over 15 prominent Trade Unions, Professor of Economics, Sumanasiri Liyanage, and two PhD students, was published in the Daily FT of 29 November 2022. This article states: In a recent statement, the Central Bank of Sri Lanka (CBSL) Governor, Dr. Nandalal Weerasinghe, accused exporters of refusing to repatriate residual export incomes. The Governor affirms that only 23 % of export incomes are currently repatriated by exporters, while 65% of export incomes were repatriated, up to July 2021…. The CBSL Governor also stated that there are accusations that the import and export sector corporate elite are stashing away $35 billion of foreign exchange inflows, in offshore accounts, since 2007, up to now”. Their primary demand is Immediately cease any move to privatize state assets and instead act in the national interest and take steps to repatriate foreign exchange flows, illicitly transferred out of the banking system…”.

DELAYED ACTION is UNACCEPTABLE

The ‘value gap’, as reported by GFI, up to 2017, was USD 36.833 billion It was on July 28, 2017, that the Foreign Exchange Control Act No. 12 was Certified. According to a report, in The Island of December 8, 2022, amendments were necessary to restore the authority exercised by the Central Bank in respect of regulations of foreign exchange before the enactment of the Exchange Control Act No. 12 of 2017”. If the intension is to restore the powers of the Central Bank to pre-2017 levels, as part of its response to the continuing financial crisis” (Ibid), how come the Central Bank permitted the outflow of USD 36.833 billion under the previous Exchange Control Act that was supposed to have had sufficient powers to prevent such outflows.

The only conclusion that the public could come to is that either the Central Bank failed miserably to exercise its authorized powers, or the previous Act was insufficient to prevent the USD 36.833 billion outflow. Either way, it is apparent to the public that the extent of the amendments needed should not stop at restoring to pre-2017 levels, but to go beyond, to what existed prior to the 2017 Act. This means that restoring the powers of Central Bank that had existed, prior to the 2017 Act, as intended by the Government, is totally inadequate. The Central Bank, therefore, should be the prime mover to recommend the needed amendments, in this regard, because the Central Bank, as the agent of the Government, is responsible for implementing the provisions of the Act the Government hopes to introduce.

Another unacceptable issue is that the findings of the GFI were published in the Sunday Times of July 10 2022. This means the extent of the outflow was known five (05) months ago. The Government, and in particular the Central Bank, owes an explanation to the public for the inaction relating to this issue. Over these five months, the Government, and the Central Bank, have spent an enormous amount of energy, engaging with the IMF to qualify for USD 2.9 billion, over four years. Additional energy and resources are being expended to restructure the debt. There is no indication whatsoever whether any of these efforts would be of benefit to overcoming the ongoing debt crisis. The priority of the Government, and the Central Bank, should, instead, have been to explore strategies to recover, if not the whole, at least part of the outflows, reported to be with the exporters. The fact that the Government hopes to remove the loopholes, that are exploited by the exporters, is a foolhardy exercise, because they are bound to find a way to work around them, as they have done in the past. The challenge for the Government and the Central Bank is to develop a strategy to recover as much of the outflows as possible, with which to meet debt commitments, instead of focusing on removing the loopholes as a priority.

CONCLUSION

Reports of the extent of funds from exports, retained in foreign instruments, were brought to Sri Lanka’s attention in an article in The Sunday Times of July 10, 2022, i.e., five months ago. The material in the article is based on the findings of a think-tank based in Washington D.C., named Global Financial Integrity. According to them, USD 36.833 billion are stashed away in foreign accounts by Sri Lankan exporters, over a period of nine (09) years, before the Foreign Exchange Act was revised and a new Act certified, in July 2017, wherein the powers of the Governor of the Central Bank are said to have been reduced.

The question for the Government, and the Central Bank, as the agent of the Government responsible for implementing provisions of the Foreign Exchange Control Act, is to decide the course of action that should be taken in respect of these funds. The government is planning to amend the existing legislation to remove loopholes”. This, however, would apply to future exports. What about the USD 53 billion that is reported by Minister Dr. Rajapakse already retained by Sri Lankan exporters, outside Sri Lanka? Since recovering whole or part of it would enable Sri Lanka to meet its immediate debt commitments, it would be prudent to prioritize the recovery of funds first, over amendments to the Foreign Exchange Act of 2017, to remove loopholes, because lessons learnt to recover funds would help legislation, relating to blocking loopholes.

A matter of deep regret is that the extent of funds, stashed offshore, was developed by a Washington D.C.-based think-tank and not by any of the many Sri Lanka-based think tanks, or a division within Sri Lanka’s Central Bank, or any other Institution, despite the fact that lack of foreign exchange is a reality that Sri Lanka lives with every day. Therefore, now that Sri Lanka has been shamed because it is not in a position to even check the accuracy of the facts cited by GFI, the need of the hour is to develop a strategy to recover as much of the funds, stashed in foreign accounts, with which to settle its debts, to amend existing Foreign Exchange Acts to remove the loopholes, and to create institutional changes to make procedures, relating to imports and exports, transparent. For all of this to function, for the benefit of the country, the Government, and the Central Bank, should work with the exporters and importers to develop an effective system change, with the capability to monitor itself.