In an announcement in mid July, the Central Bank said it would permit any outward remittance out of NRFC accounts irrespective of the underlying transistor if the account holder was resident outside Sri Lanka. Previously there was no restriction as such.
This means that the NRFC balances of persons who have returned to Sri Lanka can no longer be remitted out, thereby imposing serious restrictions on those who have brought in their foreign exchange savings into the country before and after they return to the country. These persons may be dual citizens who have various obligations including capital account related transactions overseas although they have returned to Sri Lanka. Sources also said although there are currently restrictions on capital account transactions that can be undertaken by residents, these were meant to prevent persons from converting rupees into foreign currency and not to restrict persons who have earned their foreign exchange overseas and brought it into Sri Lanka.
However, the latest restriction makes NRFC savings practically useless for residents to meet their overseas obligations.
The move, among others of late, expatriates alleged was due to the foreign exchange crisis facing the country and the Central Bank taking steps to retain foreign exchange deposits in Sri Lanka once the funds are here.
Sources also said that following the move several foreign counties, investment advisers are suggesting Sri Lankan professionals to take out any foreign currency savings in NRFC accounts before they return to Sri Lanka.
The Exchange Control Act has draconian provisions imposing severe penalties on those who violate regulations. Any person or bank that violates the new regulation by remitting funds overseas from an NRFC account of a person resident in Sri Lanka can now be liable for massive fines of up to three times the transaction amount.
According to banking sources, banks usually decide whether a person is resident in Sri Lanka or not from the correspondence address although the criteria for residence is not the correspondence address but those given in the Gazette notification issues in April 1992 of the Guide to Foreign Exchange Transactions.
The mid-July announcement changed the status quo that prevailed earlier. As per the Exchange Control Manual titled ‘Guide to Foreign Exchange Transactions’ published by the Central Bank and revised in 2008 it is stated in Section 5.1.1 that NRFC accounts can be opened by persons of Sri Lankan origin while they are abroad or within 90 days of their return to Sri Lanka.
Under permitted debits it is said: “Debits to these accounts are freely allowed, whether it is for remittances abroad or for transfers from one NRFC Account to another or for payments in Sri Lanka (converted to Sri Lanka Rupees at the prevailing rate of exchange).” There was no restriction on foreign remittances.
The Central Bank said the new moves were in keeping with the announcement made in its Road Map for 2012 and beyond. Other measures were transactions such as fund transfers between NRFC accounts, fund transfers between RFC accounts and fund transfers from NRFC and to RFC accounts will be permitted in relation to NRFC and RFC accounts held in the same bank or different banks irrespective of the holder of account or currency type in which accounts are maintained.
However, funds/proceeds realised from the sale of properties in Sri Lanka should be credited to NRFC/RFC accounts only in keeping with the existing regulations. Furthermore, opening of NRFC/RFC accounts by minors will be permitted through the credit of inward remittances received from their guardians/parents who are non-residents, or through the transfer of funds from existing NRFC accounts of such guardians/parents.
The Central Bank also announced the creation of Foreign Exchange Earners Accounts (FEEA), a single foreign currency account unifying several existing foreign currency accounts maintained in the banking system by foreign exchange earners.
This new unified account will replace Exporters Foreign Currency Account (EFC), Indirect Exporters Foreign Currency Account (IEFCA), Foreign Currency Account for Suppliers of Inputs (FCASI), Foreign Currency Account for Professional Services Providers (FCAPS), Non Resident Foreign Currency Accounts for Foreign Employment Agencies and Foreign Currency Account for Gem and Jewellery dealers, and temporary/special foreign currency accounts authorised by the Controller of Exchange.
Accordingly exporters, indirect exporters, suppliers of inputs, professional services providers, entrepot traders, gem and jeweller dealers, insurers, insurance brokers, travel agents, hoteliers, bunker supplies and other residents who undertake foreign projects would be permitted to execute their current international transactions through this new FEEA.
The Central Bank said these new measures would contribute to greater efficiency and convenience, improve investors’ confidence, strengthen foreign reserves in the long term and stabilise the foreign exchange market.
This week, in its August Monetary Policy Review statement, the Central Bank said gross official reserves are estimated to have risen to around US$ 7.1 billion by end July 2012. Such level of reserves is equivalent to an import cover of 4.2 months, and the strengthened external sector position is likely to attract further foreign investment flows as estimated, the Central Bank added.