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High cost of mandatory currency conversions on Sri Lanka’s ability to earn foreign exchange

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Garment factory workers in Sri Lanka

Politics and economics are concepts that are fundamentally intertwined. Yet the unprecedented economic crisis of 2022 highlighted the complex challenges of aligning short-term political goals with long-term economic strategies.

While the sharp appreciation of the Sri Lankan rupee in recent months has been roundly welcomed by most sectors of society as a positive signal, this optimism overlooks the nuanced factors influencing our currency’s strength and the medium-long-term challenges that could arise from volatile fluctuations in the price of the rupee.

While a stronger rupee certainly promises cheaper imports of essentials like petroleum, electricity, food medicine and other essentials in the short term, as a nation that is surviving on borrowed time and foreign currency, we cannot afford to ignore the other side of the equation – exports.

Dynamism at a time of unprecedented volatility

Already, Sri Lanka’s manufacturing and services sector exports have underperformed in the first quarter of 2024. The tentative recovery that we have seen in the first quarter also needs to be considered relative to the major setbacks of 2023 and 2022, which left no industry undisturbed.

While the tourism and exports sectors were the most adversely affected, they persevered and found strategies to deal with the dual impact of local and global challenges. The economy was stripped of foreign reserves for the purchase of raw materials and external pressures caused serious buyer dissatisfaction and changing priorities of customers.

These impediments were compounded by post-Covid recessionary effects on world markets, the Ukraine-Russia war and fluctuating world petroleum prices, which in turn, resulted in reduced orders for Asian manufacturers and as the data shows Sri Lankan manufacturers in particular. The war in the Middle East now presents new challenges both in market sentiment and costs of moving goods from East to West.

Wedged between these challenges, the export industries in Sri Lanka, with apparel leading the charge, rallied their industries and met these challenges head-on. Sri Lankan exporters were flexible and drove product diversification while simultaneously exploring new markets. Manufacturers sought quality through innovation, value addition and sustainable manufacture, instead of depending only on traditional markets. Moreover, export manufacturers including the apparel sector, have actively contributed to and aided the government in garnering the support required locally and internationally for the negotiations of Free Trade Agreements, especially in emerging markets such as India and China.

Parallel to these developments the Rupee has been buoyed by improved worker remittances and a booming tourism sector. However, it must be reiterated that this boom which has contributed to an appreciated Rupee has been artificially sustained by policies such as the mandatory conversion of export proceeds. Initially implemented in 2021 as a temporary measure to stabilize our economy, the policy’s continued enforcement is now undermining the very competitiveness of Sri Lanka’s exports.

If Sri Lanka is to sustain long-term economic success the role of goods exports cannot be understated nor dismissed.

A period of painful readjustment

The Government of Sri Lanka, steering the country amidst the worst economic crisis the island had faced since independence, put in place a mandatory foreign exchange conversion policy. This required that all export proceeds once received can only be retained in USD for specified payments as identified in Gazette No.2251/42, while the remaining foreign exchange in earnings must be converted into Sri Lanka Rupees by the 7th of the following month.

The purpose of the policy was to conserve the rapidly dwindling foreign exchange reserves. In fact, even before the policy was implemented, at the peak of the crisis the apparel sector supported the country with the provision of foreign exchange to meet urgent payments that had to be made for the supply of fuel and medicines. In a time of grave national need when the tourism sector and remittances collapsed no one can accuse the export industries and the apparel sector in particular of failing to rise and serve the national interest.

The issue with the aforementioned gazette is that “the mandatory conversion policy especially affected export industries like apparel, which brings in over half of all export revenue into the country. Despite the harshest challenges, the apparel industry withstood the turbulence and managed to bring in revenue and much-needed foreign exchange of up to USD 5.9 billion in 2022. The impact of the policy and other geopolitical occurrences were felt in 2023 when apparel earned USD 4.5 billion in 2023, which saw a dip in nearly 20 percent in earnings, as the post-Covid bubble burst and global apparel imports slumped.” Yohan Lawrence, Secretary General of the Joint Apparel Association Forum (JAAF), explained.

Except for the most unviable and loss-making locations, the apparel industry worked tirelessly to retain most of its 350,000-strong employee base and continued to meet its sustainability and compliance targets with stoic resilience.

Gradually there was light at the end of the tunnel with the International Monetary Fund (IMF) striking an agreement for a bailout in 2022. With it came a battery of reforms aimed at weeding out corruption and establishing standards for greater structural and systemic efficiency in the economy.

Rising calls for exports-led growth clash with a stronger rupee

Aided by multilateral and bilateral grants and loans, the Government committed to floating the Rupee in 2022, which thereafter reflected more accurately the exchange rate and reduced its artificially inflated value. This made exports competitive and Sri Lanka apparel began to regain traditional and new buyers. This in turn helped us to maintain our hard fought position as one of the world’s top 10 apparel sourcing destinations, holding 1 – 2% of the global apparel market share.

In that regard, President Wickremesinghe himself lauded the Board of Investment, approved export manufacturers’ efforts and reiterated the need for an exports-led economic recovery. He stressed that the Government was garnering support for a favourable agreement on repayment of Sri Lanka’s external debt and working out a more comprehensive and efficient policy framework to encourage foreign direct investments into the country. He reiterated that the export industries would always be critical for the country’s economic prosperity.

Particularly in view of the recovery of the tourism earnings and sharp improvements in worker remittances, that have already at pre-COVID levels. State Finance Minister, Ranjith Siyambalapitiya, recently declared that Sri Lanka’s foreign reserves could hit the USD 5 billion mark by mid-year.

In such a backdrop, it is clear that the mandatory conversion policy which was introduced as short term crisis measure is no longer required and policy makers are urged to withdrawn it and allow level playing field in terms of timing of conversions based on commercial needs which will allow currency market to operate at optimum equilibrium based on market forces of both import and exports.

The export industries sustainability remains threatened among geopolitical and other external shocks and challenges. The World Bank predicts the country will grow at 2.4% this year. The export sector’s expansion is critical to meet the predicted growth targets. “External shocks and geopolitical phenomena may be beyond their control however, the Government is within reach of stemming the challenges faced by the export industries by removing the mandatory conversion policy,” Lawrence contends. “This will give export industries a breathing space to gain, even marginally, some benefit from their labour and efforts, even as the Rupee continues to appreciate and reduce price competitiveness of our exports in the global markets,” he reiterates.

There is speculation by monetary experts that the Rupee, presently appreciating amidst a controlled float and with the ban in place on the import of vehicles for personal use, and the suspension of payment of foreign debt, will soar when these variables change.

Experts forecast that the Rupee will likely settle at LKR 310 – 320 by the end of the year. In the interim, the Rupee’s gain against harder currencies is already reducing the competitiveness of Sri Lanka’s exports. The impact of these dynamics will be felt in terms of reduced export revenue, within approximately nine months – which is the typical lead time on apparel orders. This will ultimately be a difficult precipice from which to build back Sri Lanka’s most lucrative industries.

Continued reductions in export earnings could also see the real danger of exporters being forced to shed their workforce to stay competitive, agile, and cost-effective. The apparel industry presently employs over 15 per cent of the country’s skilled workforce. Retraining and re-skilling new workers in the future will debilitate Sri Lanka’s economy and disrupt its industrial output. The only way to stem these devastating projections is to create a more conducive policy framework within which to operate for the long-term benefit of the country and to ensure its prosperity.

The export industries, led by the Joint Apparel Association Forum, the Exporters Association of Sri Lanka, the National Chamber of Exporters, the Tea Exporters Association and the Sri Lanka Association of Manufacturers and Exporters of Rubber Products, have already appealed to the Central Bank of Sri Lanka and the Government to remove the mandatory conversion policy to enable stronger growth of export revenue into the country. The plight of export manufacturers will impact the larger players in the export sector, but will severely diminish the micro, small and medium exporters upon which many are dependent in Sri Lanka.

Exporters recognize the Central Bank’s positive move to meet their request to remove restrictions on the movement of foreign exchange between commercial banks. The export sector has weathered turbulent times and continues to reinvent itself to convert to lean manufacturing, diversify its offerings and to actively pursue new markets. However, for fair trade to persist and to enable these critical industries to continue to trade with the world and to retain their profitability, fiscal common sense and timely policy support through the immediate removal of the mandatory conversion of export proceeds is urgently required.

(Joint Apparel Association Forum)



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Oil prices hit $100 for the first time since May

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Oil prices hit $100 a barrel for the first time since May as the escalating conflict in the Middle East reignited fears over global energy supplies.

Brent crude – the global benchmark for oil prices – rose more than 6% on Thursday following several days of increases as the US stepped up military strikes against Iran.

Prices spiked after Houthi militia in Yemen attacked oil tankers in the Red Sea, threatening a key export route that Saudi Arabia has used to bypass the Strait of Hormuz.

Gas prices have also risen steadily over the past month, with the benchmark UK gas price currently at around 150 per therm, up from around 98p at the end of June.

Oil prices had been falling following a temporary ceasefire between the US and Iran.

They dropped back to levels last seen before the US and Israel began military action against Iran on 28 February.

However, the ceasefire has failed and this week US Secretary of State Marco Rubio said the people in charge in Iran were “not ready to make a deal”.

The ongoing conflict risks pushing up inflation for many countries, including UK and the US leading to higher prices for consumers.

Higher oil prices typically lead to petrol and diesel becoming more expensive.

While drivers are affected directly, households could also see prices of other goods, such as food, increase due to businesses passing on higher transportation costs to customers.

Inflation has fallen both in the UK – down to 2.6% in the year to June helped by slowing diesel and petrol prices – and in the US to 3.5%.

But questions remain whether the slow down will prove short lived due to the renewed conflict in the Middle East.

New data released on Thursday showed that UK petrol prices have risen by 5p a litre since the beginning of July, hitting reaching almost £1.56.

Diesel is at £1.72 a litre, on average, according to the RAC.

Average gasoline prices in the US have surpassed $4 a gallon once more, up from $3.92 a month ago, according to motorist advocacy group AAA.

“More expensive fuel and energy can ripple through the wider economy, increasing costs for businesses and ultimately feeding through into the price of food and other goods,” said Jonathan Raymond, investment manager at Quilter Cheviot.

“This creates another headache for central banks as they continue their battle against inflation.

“If energy prices remain elevated, policymakers may come under pressure to keep interest rates higher for longer or even raise them. This would come as a blow to mortgage holders and borrowers already feeling the strain.”

The Bank of England, which sets UK interest rates, has held them at 3.75% in its last four meetings.

Paul Dales, chief UK economist at Capital Economics, said he believed the Bank will “almost certainly” hold them again. But he said analysts still expected that interest rates could be cut next year if energy price rises ease.

Kevin Warsh, the newly-appointed chair of the US Federal Reserve, last week told Congress that the central bank had “no tolerance to persistently elevated inflation”.

US President Donald Trump had pushed Warsh’s predecessor, Jerome Powell, to cut interest rates.

Trump has made it clear he expects Warsh to fulfil his demand for reductions in borrowing costs for Americans.

But the Fed held US interest rates between 3.5% and 3.75% at Warsh’s first meeting last month. He also told Congress that he was committed to “restoring price stability” in the wake of the Middle East conflict impacting prices.

[BBC]

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SEC, CSE and CA Sri Lanka sign MOU to advance XBRL-based digital reporting for listed companies

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The signing ceremony at SEC from Left to right: Ms. Manuri Weerasinghe| Director Corporate Affairs, SEC, Tushara Jayaratne | Acting Director General, SEC, Ms. Nilupa Perera | Chief Regulatory Officer, CSE, Rajeeva Bandaranaike | Chief Executive Officer CSE, Senior Prof. D.B.P.H. Dissabandara,| Chairman, SEC, Tishan Subasinghe | President, CA Sri Lanka, Ms. Anoji de Silva | Vice President, CA Sri Lanka, Neranjith Gamage | Commission Member, SEC, Ms. Lakmali Priyangika | Chief Executive Officer, CA Sri Lanka, Ms. Rishdha Zarook Ishaq | Director Legal and Enforcement, SEC , Ms. Kumuduni Maduwanthi |Senior Manager Legal, CA Sri Lanka.

The Securities and Exchange Commission of Sri Lanka (SEC), Colombo Stock Exchange (CSE), and the Institute of Chartered Accountants of Sri Lanka (CA Sri Lanka) signed a Memorandum of Understanding (MoU) to collaborate on the implementation of eXtensible Business Reporting Language (XBRL) based reporting for companies listed on the CSE.

The agreement marks a significant milestone in Sri Lanka’s efforts to modernise corporate reporting and strengthen the digital infrastructure of the capital market. The initiative aims to streamline the submission of both financial and non-financial information by listed entities, enhancing transparency, accessibility and investor confidence.

The MoU formalises the partnership, following the establishment of a joint SEC-CSE committee tasked with driving the initiative. With the in-principle approval of the SEC, the committee has been working closely with CA Sri Lanka to develop the framework required for the successful rollout.

XBRL is the internationally recognised standard for digital business reporting, developed and maintained by XBRL International, a global non-profit consortium. The standard enables financial and business information to be reported in a structured, machine-readable format, facilitating more efficient analysis, comparison and interpretation of corporate disclosures by regulators, investors, analysts and other stakeholders.

The introduction of XBRL reporting is expected to deliver several key benefits for both listed companies and users of financial information. These include reducing reliance on manual data processing, improving the accuracy and consistency of reported information, supporting more advanced data analysis, and lowering long-term reporting costs. The flexibility of the XBRL framework also allows organisations to tailor taxonomies to meet specific reporting requirements. In addition, XBRL adoption will enhance market transparency and efficiency by enabling quicker access to comparable corporate information. It will also align Sri Lanka’s reporting framework with global standards, making the country’s capital market more accessible and attractive to international investors familiar with XBRL-based financial reporting.

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LOLC Insurance and Seylan Bank celebrate Bancassurance Excellence through “League of Greatness” 2025

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The Achievers of the Night

LOLC Insurance recently hosted the “LOLC Insurance – Seylan Bancassurance Felicitation Night 2025” under the theme “League of Greatness,” celebrating the success of its longstanding bancassurance partnership with Seylan Bank. The event marked another milestone in a strategic collaboration that has continued to grow since 2013.

The felicitation ceremony brought together senior management, sales leadership, branch representatives, and top-performing teams from both organisations to recognise excellence, appreciate contributions, and reaffirm the enduring partnership between LOLC Insurance and Seylan Bank. The collaboration currently spans 104 Seylan Bank branches across Sri Lanka, delivering accessible life and general insurance solutions islandwide.

Speaking at the event, Ramesh Jayasekara, Director/Chief Executive Officer, Seylan Bank PLC, stated, “Our partnership with LOLC Insurance continues to create meaningful value for customers while further strengthening the bancassurance proposition within the banking sector. The dedication and collaborative spirit demonstrated by both teams have been instrumental in achieving these milestones and sustaining the growth of this partnership. We look forward to enhancing our collaboration and delivering greater value to customers in the years ahead.”

Sharing insights during the event, Eugene Seneviratne, Deputy General Manager – Retail Banking, Seylan Bank, added, “The professionalism and operational efficiency demonstrated by the bancassurance teams have been instrumental in consolidating this partnership. Our branch teams continue to seamlessly manage day-to-day bancassurance functions with minimal operational escalations, reflecting the strength of a well-structured and highly efficient framework. This has contributed to a smooth and mutually beneficial working relationship, enabling the partnership to enhance coordination, execution, and overall performance.”

Addressing the gathering, Kithsiri Gunawardena, Chairman/Principal Officer of LOLC General Insurance and Director of LOLC Life Assurance, stated, “Successful partnerships are built on trust, shared values, and a common vision. The strength and longevity of this collaboration reflect the commitment of both organisations to delivering meaningful impact to customers while advancing the country’s bancassurance sector. The positive feedback and appreciation consistently received from Seylan Bank regarding the quality of service delivered and the steadfast support extended by the teams stand as a testament to the professionalism and service excellence upheld throughout the partnership.”

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