Apparel industry refutes CBSL allegations of ‘hoarding’ foreign currency earnings

Employees of a MAS Intimates factory - File photo

• In categorically denying forex hoarding JAAF says CBSL has access to real-time data on export earnings and repatriation, hence shouldn’t quote incorrect, arbitrary data
• Alleges CBSL has implicitly tarnished reputation of all exporters broadly, including all apparel exporters
• Opines current forex crisis cannot be attributed primarily to practices of exporters broadly but foreign debt servicing and imports key causes too
• Says global banks increasingly wary of discounting LCs to Lankan counterparts, resulting in already stretched supply chains facing even further difficulties
• Counters CBSL saying Bangladesh, India, Indonesia, Malaysia, Nepal, Pakistan and Thailand are more lenient in repatriation rules than Sri Lanka
• Within EPZs in India no conversion is required; says practice of cherry picking by CBSL is not right 
• Warns cost of $ 2.2 b imported raw materials rising owing to enforced currency conversions would impact the industry with serious macro and micro economic consequences 
• Says need of the hour is not rash rhetoric but a collaborative effort of working together to resolve these issues to ensure international investors, buyers and financiers’ confidence

The Joint Apparel Association Forum (JAAF) yesterday in a statement raised its objections to the article and ‘misleading’ comments contained therein published in the Daily FT on 28 September, titled ‘Exporters hoarding $ 2.76 b in earnings overseas: CB’.

Given that that the Central Bank of Sri Lanka (CBSL) has failed to clarify which exporters or sectors it has accused of “hoarding,” JAAF said it was compelled to state the following in defence of the reputation of Sri Lankan apparel, as the industry accounted for almost 40% of the total exports and 52% of merchandise exports in addition to accounting for 6% of national GDP. 

Accordingly, on behalf of the entire Sri Lankan apparel industry, JAAF via a statement placed on record that it categorically refuted all allegations that foreign currency export earnings were being “hoarded” by any of its members. 

Following is the rest of the statement.

“For context: When the GOSL unilaterally introduced import restrictions, Sri Lanka Apparel, in a meeting with the Presidential Secretariat, proactively volunteered real-time data on the receipt of the entirety of the industry’s export proceeds and this commitment was made well before the CBSL thought of calling for a mandatory conversion. 

“Based on this commitment, a regulatory requirement was introduced under the import controls for the submission of quarterly statements of export proceeds received. Since then, individual apparel companies acted in good faith to provide detailed information on values exported and remittances received to the authorities. While none of the individual apparel exporters nor JAAF has access to real-time data on export earnings and repatriation; the authorities do, which CBSL could have accessed without quoting incorrect, arbitrary data. 

“Unfortunately, despite having such complete, up-to-date access to information, including which specific exporters failed to comply with regulations for repatriation of export earnings, the views expressed by the CBSL have implicitly tarnished the reputation of all exporters broadly, including all apparel exporters. 

“In February, the Central Bank of Sri Lanka (CBSL) issued directives to exporters mandating repatriation of export proceeds within 180 days and conversion of 25% of those proceeds into rupees as a result of a severe depletion of Sri Lanka’s foreign exchange reserves and prevailing balance of payments crisis. This was the new regulatory requirement.

“Consequently, JAAF recommends that all necessary legal action be instituted against companies that did not comply with both directives, namely full repatriation and conversion of 25%. Given that the Government and Central Bank of Sri Lanka is vested with all the legal authority to do so such actions would vindicate the reputation of Sri Lanka’s apparel exporters.  

“JAAF also disputes the rationale advanced in the article in justification of enforced conversion of foreign currency earnings to rupees. On balance, even the examples cited of Bangladesh, India, Indonesia, Malaysia, Nepal, Pakistan and Thailand are all more lenient than what is imposed in Sri Lanka, both in terms of time limits and enforcement of conversion to domestic currency. The examples cited are not representative of widely acknowledged international best practices, nor are they suitable comparisons for Sri Lanka which is heavily dependent on imports – not only to fuel domestic consumption, but also for the purposes of value-addition towards export. 

“Moreover, all funds repatriated into the country don’t simply lie idle, they still remain in the domestic banking system – they are thereafter intermediated to other borrowers. An enforced conversion simply forces dollars to move between different accounts, it does not address the root of the crisis which is the outflow of dollars from the country for debt service payments and imports. If the repatriation gap is as large as $ 300 million a month, then this amount should be funded via rupee resource which would have resulted in massive private sector credit growth, which we do not believe to be the case. 

“If not, a large number of companies would have closed business due to not having sufficient finances to run it. In the case of apparel, however, continued sustenance is seen with the growth momentum despite obstacles and has committed to the government to bring in a minimum of $ 5.1 billion export turnover for the year 2021.

“Additionally, it must be noted that within export processing zones in India, no conversion is required while outside special arrangements are specifically made on the conversion. Hence, the practice of cherry picking is not right. 

“Crucially, in the apparel sector, foreign currency earnings play an extremely critical role in funding imports of basic raw materials, which in turn are necessary to generate the increasing export revenues showcased in the article in question. Currently, Sri Lanka has approximately 350 garment factories set up across the country. By contrast, it has only seven textile factories. At its peak, Sri Lanka imported 255,437 MT of fabric both for the export-oriented apparel manufacturing and for local consumption in 2019, at a cost of $ 2.2 billion. 

“If the cost of those raw materials were to be increased owing to enforced currency conversions, this would have a direct and detrimental impact on the industry, which in turn has serious macro and micro economic consequences for Sri Lanka, and the entire 350,000 directly employed workforce, as well as the indirect livelihoods of 700,000 indirectly connected to the apparel industry. Hence, such decisions cannot be taken lightly.

“Need for structural improvements: JAAF also called into question the validity of references made to lower taxes and other incentives offered to the export sector, given that such concessions, while helpful, were insufficient for the purposes of improving Sri Lanka’s export competitiveness. In regard to taxation, it is pertinent to mention that in addition to the 14% income tax, there is yet another 12% income tax in the hands of the investor. So the effective taxation on income of an exporting company is approximately 24%.

“As a further example, JAAF highlights the historic lack of support provided to the industry to identify a suitable site for a textile processing zone to help reduce dependence on raw material imports, which the apparel sector had been actively pursuing since 2005. In 2013, in collaboration with the Board of Investment the site at Eravur was selected. However, that was not supported by the authorities even then, and it is only now in 2021 that these efforts have finally started to make meaningful progress. 

“JAAF further notes that controls of repatriation and conversion of foreign currency earnings were only implemented in the past year. In the same time, the national economy contracted by 3.6% and the rupee fell by 7.5% against the dollar. Between November 2019 and the present day, Sri Lanka’s reserves fell from $ 7.5 billion down to $ 2.8 billion. As such, the current foreign exchange crisis taking place in the country cannot possibly be attributed primarily to the practices of exporters broadly. 

“Moreover, international banks are increasingly wary of discounting Letters of Credit to Sri Lankan banks, resulting in already stretched supply chains facing even further difficulties. Throughout, the Sri Lankan Apparel industry has not flinched from its duties in ensuring operational continuity and thereby ensuring continuous flow of foreign exchange earnings into the country, despite unprecedented obstacles. 

“JAAF reiterates that the apparel industry stands ready to provide real time data to the authorities to prove that the sector is innocent of the implied accusations levelled against it. The need of the hour now is not rash rhetoric but a collaborative effort of working together to resolve these issues to ensure that international investors, buyers and financiers’ confidence in the ability of the country to revert to its glory is established at the quickest possible time.”