Sri Lankan exporters have started new import businesses so that they can retain the hard currency they need to obtain letters of credit (L/Cs) and circumvent Central Bank of Sri Lanka regulations aimed at alleviating the country's dire foreign exchange crisis.

The bank's rules stipulate that businesses needing to import raw materials and other factors of production do not need to convert their export proceeds to rupees. This has reportedly led to exporters going into unrelated businesses and to start importing.

Two business lines

Exporters pursuing two different business lines apparently do not need to declare that an L/C is for imported goods if they use it to buy, for example, raw materials a CEO of a bank reportedly told Sri Lanka's Sunday Times.

"We have some import L/Cs lined up for traditional exporters who never imported raw materials. They do this to thwart the regulator's recent direction imposed to reserve US dollars," a senior banker reportedly told the same journal.

L/C difficulties

Banks in India, Sri Lanka's most important trading partner, are making L/Cs harder to come by for Indian exporters selling goods to Sri Lanka.

Some financial institutions in India have cut back on discounting L/Cs issued by Sri Lankan lenders. Others are insisting on tougher terms depending on the financial strength of the parties and the L/C issuing bank or limiting the amount or tenor of the credit (DC World News, 12 January 2022).

The Sunday Times article, Exporters resort to imports to evade rules, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.