By Asoka S. Seneviratne –

Prof. Asoka.S. Seneviratne

During a recent meeting by NPP politician Sunil Hadunneththi in Polonnuruwa they paved the way for criticism from UNP, SLPP, and SLFP supporters. Those criticisms show the supporters’ absence or lack of knowledge on the subject matter. This article facilitates that Hadunneththi’s insights are based on a sound understanding of the Foreign Exchange Act, No. 12 of 2017. This Act accommodates how to work with undeclared foreign exchange based on “promotion” and “regulation” of foreign exchange in Sri Lanka. Accordingly, the criticisms from UNP, SLPP, and SLFP supporters are baseless. Indeed, the purpose of the Act is convincing and promising. However, it is vitally important that authorities inform at least the volume of foreign exchange remitted into Sri Lanka after 2017 that the Act was effective.

Back Ground

Presidential Election is a popular subject these days. UNP, SLPP, and SLFP always seek opportunities to attract NPP because NPP is their common enemy. During a recent meeting with Bankers in Polonnaruwa, NPP politician Sunil Hadunneththi highlighted the potential benefits of undeclared foreign exchange. He emphasized that these resources if used systematically and productively, could significantly contribute to the country’s prosperity. Despite criticisms from UNP, SLPP, and SLFP, this vision for a future government with NPP is based on a sound understanding of the Foreign Exchange Act in Sri Lanka. This article aims to illuminate the positive implications of the Foreign Exchange Act, No. 12 of 2017, that Hadunneththi had in mind/explained.

Introduction

Foreign Exchange (FE) earnings and their timely declaration or repatriation are of utmost importance in maintaining External Stability of LKR or Exchange Rate on exchange reserve management. Only duly declared foreign exchange earnings will become part of foreign exchange reserves, allowing the Central Bank of Sri Lanka to perform its reserve management functions and generate the expected outcome effectively and efficiently. Among many, foreign exchange is required to maintain essential imports, meet foreign debt obligations etc. For the above, the government must borrow foreign exchange or US dollars if the necessary foreign exchange reserves are insufficient. Any borrowing will add to outstanding debt, gradually becoming a debt burden. This debt burden will grow to a foreign debt crisis which Sri Lanka is suffering now in many ways. Given the above, it is an unambiguous and timely declaration of foreign exchange earnings that adding to the country’s reserves is profound and essential. The government expects the above, so various foreign exchange acts or laws are in place.
However, in 2017, the Minister of Finance, Ravi Karunanayake (UNP), recognized the pressing need to introduce a new law for the systematic and productive governance of foreign exchange earnings not declared to the country’s authorities. This was a crucial step to address the issue of people keeping foreign exchange earnings abroad for various reasons, which was not a secret. The importance of such governance cannot be overstated, as it is a key factor in the country’s economic stability and growth.

Foreign Exchange Act, No. 12 of 2017

It is essential to write only the basic material based on the Act so that the reader can read and understand everything in the context. The Act is 30 pages long. As I said, I use only the relevant sections without going into details for this article.

Section 2. (1) The Central Bank shall, as the government’s agent, be responsible for implementing the provisions of this Act to ensure proper promotion and regulation of foreign exchange in Sri Lanka, following such directions as may from time to time be issued on that behalf under this section.
From the above, the purpose of the Act is “to ensure proper promotion and regulation of foreign exchange in Sri Lanka”. Given the above, “promotion” and “regulation” of foreign exchange in Sri Lanka are essential. The meaning of the above two words is straightforward and easily digestible. Based on the above, how to proceed is vividly explained in the following section of the Act.
Section 8 (3) explains that“. Notwithstanding anything to the contrary in the provisions of any other written law, any Sri Lankan citizen resident in Sri Lanka who remits to Sri Lanka any foreign exchange which have not been declared to the Commissioner General of Inland Revenue or the Head of the Department of Foreign Exchange before the appointed date and which are not the property in respect of which proceedings are pending in a court of law or an order has been made by a court of law under the Prevention of Money Laundering Act, No. 5 of 2006, Convention on the Suppression of Terrorist Financing Act, No. 25 of 2005 or the Bribery Act (Chapter 26) shall be liable to pay only a remittance fee of one per centum to the Commissioner General of Inland Revenue and shall not be subject to the payment of any other fee, tax, surcharge, levy or penalty”.

Undeclared foreign exclave can be declared to the (a) Commissioner General of Inland Revenue or (b) the Head of the Department of Foreign Exchange of the Central Bank paying only a remittance fee of one per centum (1%) to the Commissioner General of Inland Revenue and shall not be subject to the payment of any other fee, tax, surcharge, levy or penalty. This means there is a legal provision declaring the undeclared foreign exchange.

However, the Act clearly states where legal provision is not there as such (a) which are not the property in respect of which proceedings are pending in a court of law or (b) an order has been made by a court of law under the Prevention of Money Laundering Act, No. 5 of 2006, Convention on the Suppression of Terrorist Financing Act, No. 25 of 2005 or the Bribery Act (Chapter 26).
Haduneththi wanted to explain to the Bankers the legal provision of Act 12 of 2017 and what provisions are there to work with undeclared foreign exchange based on “promotion” and “regulation” of foreign exchange in Sri Lanka. Given the above, it is unfortunate that the UNP, SLPP, and SLFP supporters failed to understand the simple truth that Hadunneththi explained. It is nothing new but the existing law about undeclared foreign exchange and its practical use.

To make “promotion” and “regulation” more constructive, productive, and helpful, the Section 8 (3) explained, “ Provided further that any such person who remits to Sri Lanka an amount of foreign exchange exceeding the value of one million United States dollars held outside Sri Lanka and invests in a development bond issued by the Government of Sri Lanka shall not be liable to pay the remittance fee or any other tax, surcharge, levy or penalty”.

The above section is highly accommodative and facilitates the “promotion” and “regulation” of foreign exchange in Sri Lanka because the amount of foreign exchange exceeding the value of one million United States dollars held outside Sri Lanka and invested in a development bond issued by the Government of Sri Lanka shall not be liable to pay the remittance fee or any other tax, surcharge, levy or penalty.

3. Benefit of “promotion” and “regulation” in the context of Economic Development in the Country.
As indicated, a 1% remittance fee is applicable if the remitted amount exceeds US dollars one million and is not invested in Sri Lanka Development Bonds. Furthermore, if the amount is below US dollars one million, there is no remittance fee.

Indeed, the cost of 1% or free should be a secondary focus. It confirmed that undeclared foreign exchange (maybe massive) exists, and people are reluctant to know what to do next. The Act accommodates them comfortably and systematically. So, illegal foreign exchange holdings abroad can be remitted to the country. It will undoubtedly boost the foreign reserves.

Second is the economic growth and development impetus provided by such foreign exchange. Until the Act came into effect in 2017, foreign exchange holders supported the development efforts of the rest of the world. In other words, it retarded the development efforts in Sri Lanka while the rest of the world received an array of benefits of foreign exchange from Sri Lanka.

Given the above, the Foreign Exchange Act, No. 12 of 2017, is timely, productive, and helpful in many ways.

As an assessment of the Foreign Exchange Act, No. 12 of 2017. There are two aspects to the above.
First, revised regulations issued under the Foreign Exchange Act, No.12 of 2017, according to the Central Bank Press Release dated 23 April 2021, “Regulations issued under the Foreign Exchange Act, No. 12 of 2017 (FEA) have been revised for further simplification and clarity improvement, with the objectives of achieving greater efficiency in the conduct of cross-border foreign exchange transactions alongside further facilitating economic activities of the stakeholders through greater convenience of doing business. As highlighted above, this revised foreign exchange policy framework has been implemented with effect from 22 March 2021.”. Given the above, the purpose of the Foreign Exchange Act, No. 12 of 2017, has further been strengthened or supported by the press release dated 23 April 2021 by the Department of Exchange Control of the Central Bank of Sri Lanka.

Foreign Exchange Act, No. 12 of 2017, is profoundly important. However, it needs to be more helpful and valuable, and if the public can witness the outcome, it will be excellent. It was stated that following the Act, a substantial amount of foreign exchange was remitted into the country after 2017. This is fantastic news. However, it is essential to publish at least the volume of foreign exchange remitted into the country-based Foreign Exchange Act, No. 12 of 2017, and revise it in 2021.

The writer worked as the Special Advisor to the Office of the President of Namibia and was a Senior Consultant with UNDP for 16 years. He worked as a Senior Economist with the Central Bank of Sri Lanka (1972-1993) before he migrated to New Zealand. The writer can be contacted at asoka.seneviratne@gmail.com