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By Imesh Ranasinghe

Sri Lanka’s leading commercial banks decided to limit the foreign exchange transactions through credit cards and hike the Dynamic Currency Conversion (DCC) this past week, which caused panic for IT businesses, as their cost structures changed overnight.

Meanwhile, many people took this matter to social media, where they spoke about unsubscribing from foreign platforms such as Netflix, Spotify, and Apple Music and reconsider the paid tools used by their businesses for day-to-day operations.

In these circumstances, The Sunday Morning Business decided to look into why banks are resorting to this option and how it will impact the already beaten down economy of the country since the start of the Covid-19 pandemic in 2020.

Why are banks resorting to this option?

Speaking to us, a spokesman from the banking sector said that the main cause for this issue is the foreign exchange rates in the market which is completely different from what the Central Bank has published.

In this scenario, when it comes to card transactions, most of the banks are using rates used by Mastercard and Visa, which are the rates published by the Central Bank and other institutions such as Reuters.

But according to him, the market is operating at a much more depreciated value, so every time a transaction happens, the banks incur a lot more, as they are unable to get specific foreign currency from their own treasuries at the rate at which those transactions are actually going through.

“This is not a normal scenario, this is an abnormal scenario which is a result of the present economic situation of the country, especially our reserves not being at the optimum level 

and the Central Bank not being able to publicly admit that we have lost control of the exchange rate. And now, it is trading at this level,” he said.

Furthermore, he said that if the rupee is subject to a 10% depreciation against the US dollar, the national debt obligations will go up by 5% for all foreign currency borrowings, which will be a very difficult situation for the banks and the country to be in.

“So we are going to get the cards to add this additional markup so that we end up matching up with the rates that are being operated in the market. If not, a card transaction would be far cheaper than going to the bank and trying to get forex or do any other similar transaction,” he said.

Also, he said customers cannot access foreign currency through the Electronic Fund Transfer Card  (EFTC) to pay for transactions of a commercial nature.

This is based on the present exchange management regulation, where a citizen of Sri Lanka can have access to foreign currency through EFTCs, which are credit cards, debit cards, and prepaid cards to pay for a person or body overseas for transactions of a personal nature.

According to him, people are using their personal cards to advertise or do boosting on behalf of a company, which is not permitted by law.

“You need to get a corporate card and those transactions need to happen through that,” he said.

This is in accordance with Direction No. 3 of 2021 under the Foreign Exchange Act No. 12 of 2017, issued by the Department of Foreign Exchange at the Central Bank.

It states that authorised dealers should ensure that EFTCs issued to persons in or residents in Sri Lanka, may be used for making payments to persons residing outside Sri Lanka only in respect of current transactions of a personal nature other than for the use of payments for purposes such as dealings in foreign exchange (forex trading), payments related to virtual currency transactions, payments related to betting, gaming, and gambling activities outside Sri Lanka, and payments for import of goods to Sri Lanka for commercial purposes subject to the Regulations and Operating Instructions issued under the Import and Export (Control) Act, No. 1 of 1969 and any amendments thereto.

However, he said if the markets were behaving at an equilibrium, in a normal circumstance, this requirement shouldn’t have arisen.

How is the IT sector affected?

Asela Waidyalankara, a technocrat and a cybersecurity consultant said the DCC hike for card payments would have a big impact on the local IT industry.

For example, he said many of the businesses depend on either tools, technologies, or platforms that are overseas, these include, MS office 360, AWS (Amazon Web Services), Google Drive, and Dropbox, for which payments are made in dollars while services like Uber, which runs on AWS, might increase prices following this move.

“I run a cybersecurity company. Our cost structure changed overnight because I have given proposals to customers taking one US dollar at Rs. 200,” he said.

He added that the sudden decision of the banks to increase fees (DCC) by about 6% from 2.5% to 6%-7%, and to peg the dollar at about Rs. 222, is a problem to his business, as he has already given proposals to clients assuming the dollar is at Rs. 200.

Moreover, he said this will not only impact IT services, but digital marketing starting from  Facebook to Instagram advertisements, as their cost structures are completely different now.

“They will have to come up with new cost structures because of this; they rely on overseas payments, and obviously ad payments are made to Facebook. The IT industry will have a massive cost impact. This is very unfair because this is an industry that has grown in the pandemic, and through the work we are doing, we are bringing in dollars to the country,” he said.

Sri Lanka’s IT sector grew by 120% from 2015 to 2020 with current exports at over $ 1 billion, making it one of the highest growth areas in the economy and the fifth largest export segment.  Sri Lanka’s IT/business process management sector envisions $ 5 billion in revenue, 200,000 direct jobs, and 1,000 start-ups by 2022.

Waidyalankara said that the authorities have to make it easier for the IT industry in Sri Lanka as the industry brings net revenue into the country while competing for global and local clients.

“We are preaching that the way forward is digital, and while other countries are removing the roadblocks, we are disheartened. We are always proud that we are Sri Lankan and we are trying to bring dollars into the country, but when you have this type of roadblocks thrown at you, it is very difficult,” he added.

He said that during the pandemic, people who were hesitant to digitalise were moving to the digital space, but these kinds of moves by the financial sector will make them reconsider their decision.

Furthermore, Waidyalankara said there might be cybersecurity issues that may arise as a result of these decisions.

For example, he said if somebody feels that some platforms, apart from an existing Integrated Payment Gateway (IPG) or an internet-based payment system, can provide services at a lower cost compared to these increases, people will not hesitate to provide their credit card information.

Overall economic impact 

Responding to questions by The Sunday Morning Business via email, the independent think tank Verité Research said that the limitations on foreign exchange transactions imposed by banks is a part of a broader concern on the availability of foreign exchange in the economy. 

The country’s gross official reserves declined to $ 2.8 billion at the end of July 2021. Whilst there is a boost to reserves from the $ 780 million SDR (Special Drawing Rights) allocation this week, reserve coverage is limited compared to the extent of maturing external liabilities in the coming months and years ahead. 

Verité said that the lack of tourism inflows and the recent declines in remittances have compounded the foreign exchange availability issue. 

As a result of the mismatch between inflows and outflows of foreign exchange in the system, banks have been selective and placed limits on outflows of foreign exchange.  

“This would naturally have an adverse impact in terms of transaction costs for commercial interactions involving even small volumes of foreign exchange,” Verité said.

Furthermore, in their response, they said that given the globally integrated nature of business activities, even non-tech enterprises will have to make foreign currency payments for basic office software, manufacturers have to make payments for imported raw materials, and companies have to make payments to their foreign service suppliers and external counterparties. 

Many of these day-to-day transactions will be associated with higher costs and disruptions which have ramifications for overall economic activity. 

At a larger scale, it said that any delays related to outward payments by foreign-owned companies will act as a deterrent to potential future investments. 

“Continued restrictions on imports and capital account transactions will hinder Sri Lanka’s business climate and efforts to attract FDI (foreign direct investment), which in turn is a key source of non-debt creating inflows,” Verité said in their response. 

Verité said one possible reason for the DCC hike could be due to the fact that the Central Bank has indicated official foreign currency transaction rates (such as the published spot rate), whereas actual market rates of foreign exchange transactions occur at a different rate, which the also the exact reason explained to us by the banking sector spokesman on the DCC hike.

Here, the higher DCC rate is one way that the banks can compensate for the higher exchange cost compared to the published exchange rates. 

Central Bank’s involvement

Speaking at a virtual press conference held on 19 August, Central Bank of Sri Lanka (CBSL) Deputy Governor T. M.J.Y.P. Fernando said that the CBSL will look into the matter with the respective banks.

She said that CBSL has not particularly requested the banks to limit foreign currency-related credit card transactions, especially online transactions such as payments.

Furthermore, the CBSL issued a statement later saying that the CBSL has not introduced any new restrictions with regard to the use of EFT cards.

The statement said that holders of such cards are, in fact, permitted to use the cards in order to make payments to persons who are residents outside Sri Lanka for current transactions of personal nature. 

“Despite these circumstances, it was observed that certain banks have introduced limitations on use of EFTC transactions in foreign exchange for the purpose of misusing such cards and to prioritise transactions relating to foreign exchange positions of the banks,” the statement said.

The CBSL, thus, urged the public to contact the relevant banks when encountering such transaction difficulty with the request of using foreign exchange sparingly. 

However, an official at the CBSL told us that the CBSL is still looking into the matter with the respective banks while meeting with them.

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