Chapter

SRI LANKA

Author(s):
International Monetary Fund. Monetary and Capital Markets Department
Published Date:
September 2004
Share
  • ShareShare
Show Summary Details
(Position as of January 31, 2004)
Status Under IMF Articles of Agreement
Article VIIIDate of acceptance: March 15, 1994.
Exchange Arrangement
CurrencyThe currency of Sri Lanka is the Sri Lanka rupee.
Exchange rate structureUnitary.
Classification
Independently floatingThe exchange rate of the Sri Lanka rupee is determined by supply and demand in the foreign exchange market. The Central Bank of Sri Lanka (CBSL) determines the weighted average interbank rate on a daily basis and participates in buying and selling of foreign exchange at or near market prices.
Exchange taxNo.
Exchange subsidyNo.
Forward exchange marketEffective January 21, 2003, forward sales and purchases of foreign exchange by banks are permitted up to a period of 720 days (previously, 360 days) for repayment of foreign loans. These may be applied to payments and receipts in foreign exchange for trade in goods and services. The commercial banks provide a forward exchange market in which rates for current transactions are determined freely.
Arrangements for Payments and Receipts
Prescription of currency requirementsPayments to and receipts from the member countries of the ACU with respect to current transactions and settlements are effected in dollars. For settlements with all other countries, payments for imports may be made in any foreign currency or in Sri Lanka rupees, provided that the supplier maintains a nonresident rupee account in Sri Lanka. Other payments may be made either in the currency of the country to which the payment is due or by crediting Sri Lanka rupees to a nonresident rupee account with the prior approval of the CBSL.
Controls on the use of domestic currency
For current transactions and paymentsThe rupees may be converted into any currency for making payments and transfers for current transactions.
For capital transactions
Transactions in capital and money market instrumentsProceeds from permitted investments may be converted.
Transactions in derivatives and other instrumentsThese transactions are not permitted.
Use of foreign exchange among residentsTransactions among residents must be conducted in rupees.
Payments arrangements
Regional arrangementsSri Lanka is a member of the ACU.
Clearing agreementsYes.
Administration of controlExchange control is administered by the CBSL’s Department of Exchange Control. All remittances of foreign exchange in Sri Lanka must be made through authorized commercial banks in accordance with procedures prescribed by the Controller of Exchange (COE). Remittances may also be made through post offices under permits issued by the COE. The Board of Investment (BOI) handles applications relating to foreign investments in Sri Lanka where special concessions are sought.
General permission has been granted for investment by nonresidents in companies whose equity capital is in rupees, subject to certain exclusions and limitations, provided such investments are made through share investment external rupee accounts (SIERAs).
International security restrictions
In accordance with IMF Executive Board Decision No. 144-(52/51)Measures have been taken to freeze all capital and assets belonging to individuals and entities associated with terrorism, in accordance with UN Security Council Resolution Nos. 1267, 1333, and 1390.
In accordance with UN sanctionsPursuant to the relevant UN Security Council resolutions, banks and other financial institutions have been instructed to freeze all capital and assets of individuals, entities, and organizations associated with terrorism, and prior approval is required to maintain corresponding accounts with banks and other financial institutions that do not have a physical presence in any country, also referred to as “shell banks.”
Payments arrearsNo.
Controls on trade in gold (coins and/or bullion)
Controls on external tradeCommercial banks and limited liability companies approved by the COE may import gold on a consignment account basis, subject to terms and conditions imposed by the COE.
Controls on exports and imports of banknotes
On exports
Domestic currencySri Lankan nationals may take out of Sri Lanka up to SL Rs 5,000.
Foreign currencyUnspent rupee balances from foreign exchange sold by foreign passport holders may be reconverted into foreign currency notes only at commercial banks, against original encashment documents issued by authorized dealers or money changers, and may be taken out. Individuals may take out foreign currency for travel purposes but are required to declare it to customs if the amount exceeds $10,000 or its equivalent.
On imports
Domestic currencySri Lankan nationals may bring into Sri Lanka up to SL Rs 5,000.
Foreign currencyTravelers must declare at entry foreign exchange holdings exceeding $10,000 or its equivalent. In the case of nonconvertible currencies, a declaration has to be made, irrespective of the amount. Certain foreign currencies may not be imported.
Resident Accounts
Foreign exchange accounts permittedYes.
Held domesticallyResidents may open and operate resident foreign currency accounts with a minimum balance equivalent to $500 in designated currencies, provided the funds do not relate to any transactions. These accounts may be maintained even if the balance falls below $500 or its equivalent.
Held abroadExcept in the case of exporters, prior approval is required to open these accounts.
Accounts in domestic currency held abroadApproval is required.
Accounts in domestic currency convertible into foreign currencyYes.
Nonresident Accounts
Foreign exchange accounts permittedSri Lankans employed abroad and nonnationals of Sri Lankan origin who are employed and reside abroad may maintain nonresident foreign currency (NRFC) accounts in designated foreign currencies. Credits to these accounts are limited to remittances from employment earnings abroad, foreign exchange earnings received in foreign currency and brought into the country by the above-mentioned individuals, approved investment income, and interest payments on the accounts. Balances on NRFC accounts may be invested in enterprises approved by the BOI, without restriction. Dividends and profits earned and sale proceeds from such investments received in foreign currency may be credited to NRFC accounts without the prior approval of the COE. Resident foreigners may maintain foreign currency accounts with domestic commercial banks in any of 13 designated currencies without prior exchange control approval. These accounts must be operated by the domestic unit of the bank and not by its offshore unit. The accounts may be current, savings, or deposit accounts, but withdrawal of funds by check is not permitted. Credits to these accounts are limited to inward remittances and to amounts in Sri Lanka rupees authorized by the COE for remittance abroad. Debits to these accounts are limited to outward remittances and to payments after converting to Sri Lanka rupees. Shipping and airline agents may also maintain foreign currency accounts in local branches of foreign banks for the purpose of collecting freight paid in foreign currency by exporters only.
Domestic currency accountsThese accounts may be held by (1) nonnationals residing outside Sri Lanka; (2) firms and companies registered outside Sri Lanka; (3) Sri Lankan nationals residing outside Sri Lanka; (4) emigrants; and (5) foreign banks. For categories (1), (2), and (3), credits from inward remittances and debits for local disbursements or outward remittances for current transactions may be effected freely through these accounts; however, local credits to these accounts require prior approval. Interest may be paid on these domestic currency accounts. Accounts held by emigrants (category 4) are designated as nonresident blocked accounts only when instructions to that effect are received from the COE. Debits to such accounts for local disbursements may be freely effected without prior approval. Interest on blocked funds is permitted for outward remittances net of taxes. However, local credits to these accounts and debits for outward remittances involving capital funds over a ceiling of SL Rs 1 million a family (SL Rs 750,000 a person) require prior approval. Foreign banks (category 5) may open and operate nonresident accounts with local commercial banks without prior approval of the COE. Nonresidents, including diplomatic missions, and resident foreign passport holders may maintain rupee accounts on an interest-bearing basis.
Convertible into foreign currencyThese accounts are convertible, but prior approval is required.
Blocked accountsThese accounts are used to hold funds, usually those of nonresidents, repatriates, and emigrants, that have not been accepted for transfer abroad. Authorized dealers may debit these accounts for local disbursements and credit them with pensions and income tax refunds.
Imports and Import Payments
Foreign exchange budgetNo.
Financing requirements for imports
Minimum financing requirementsAuthorized dealers may approve applications to remit foreign exchange or to credit nonresident accounts against applications for the opening of an LC, documents against payment (DP) terms, or documents on acceptance (DA) terms, and against proof of a valid import license, where applicable. These requirements do not apply if the value of a consignment does not exceed the equivalent of $3,000 (c.i.f.) with respect to raw materials and spare parts for the use by a particular industry or for personal use.
Advance payment requirementsAdvance payments for imports are limited to $7,500 a shipment.
Documentation requirements for release of foreign exchange for importsImports may be effected against DP and DA terms and LCs.
Preshipment inspectionInspection is required for certain consumer goods.
Letters of creditYes.
Import licenses and other nontariff measuresAbout 416 items at the six-digit level of the harmonized system code remained under import controls at the end of 2003, mostly for reasons of public health, public morals, environmental protection, preservation of antiquities, or national security.
Paddy is subject to licensing to protect domestic producers against low prices. Some categories of used motor vehicle bodies and parts, guns and explosives, certain chemicals, crude oil, cigarette paper, and cashew nuts in shells are subject to licensing requirements. A total of 22 items are exempted from import duties, subject to the approval of the secretary of the treasury.
Import taxes and/or tariffsImports of certain items, including guns and explosives, certain chemicals, crude oil, and some used vehicles, require licenses. Effective January 1, 2004, the tariff structure on non-agricultural products consists of the following rates: zero, 3%, 6%, 12%, 16%, 20%, and 27.5% (previously, zero, 2.5%, 5%, 10%, 15%, 20%, and 25%; prior to September 3, 2003, zero, 2%, 5%, 10%, and 25%. A few items such as beer and tobacco are subject to a 75% rate, while some cigarettes are subject to a rate just under 100%. The duty on selected items (e.g., crude oil, refined petroleum, and pharmaceutical products) is zero.
Effective January 1, 2004, a temporary surcharge of 10% (previously, 20%) is applied to all products subject to duty, except certain essential goods.
Selected agricultural products are subject to specific duties (e.g., chilies, red and large onions, potatoes, rice, and sugar). A Port and Airport Development levy of 1% of the c.i.f. value (effective January 4, 2003, 0.50% (previously, 0.75%) for imports for processing and reexports) and effective January 1, 2004, a value-added tax with rates of zero and 15% are applied.
State import monopolyNo.
Exports and Export Proceeds
Repatriation requirementsExporters are free either to repatriate export proceeds and have such proceeds credited to any rupee account or to an exporters’ foreign currency account with the domestic banking unit of a bank in Sri Lanka or to retain export proceeds abroad in any commercial bank, provided monies in such accounts are not used for acquisition of property or other capital assets outside Sri Lanka. Special arrangements apply to exports carried out under trade and payments agreements and to exports to a member country of the ACU.
Financing requirementsNo.
Documentation requirementsNo.
Export licenses
Without quotasLicenses are required for exports of coral shanks and shells, ivory and ivory products, handicraft items of ebony, timber (logs or in plank form), vintage motor vehicles, and metal waste and scrap metals (e.g., copper, nickel, aluminum, lead, tin, and zinc).
With quotasTextiles and apparel are subject to bilateral quotas under the MFA. The Textile Quota Board allocates quotas among exporters based primarily on their past export performance.
Export taxes
Other export taxesTaxes are levied on exports of coconut, rubber, and tea.
Payments for Invisible Transactions and Current Transfers
Controls on these transfersIndicative limits/bona fide tests are applied to all these transactions.
Trade-related paymentsRemittances of premiums for general insurance are permitted, subject to the country’s insurance regulations. Remittances of premiums for reinsurance may be effected through authorized dealers without prior approval, subject to documentary requirements.
Indicative limits/bona fide testReasonable amounts of commissions are allowed for export orders secured through agents abroad, provided that export proceeds have been repatriated to Sri Lanka.
Investment-related paymentsProfit remittances of nonresident partners and remittances of dividends to nonresident shareholders of companies whose financial assets are in rupees may be effected through commercial banks without prior approval if they relate to the year of application and do not include undistributed profits of earlier years or reserves of the company. However, relevant documentation is required to remit interim profits or dividends, or final profits or dividends.
Indicative limits/bona fide testYes.
Payments for travel
Indicative limits/bona fide testYes.
Personal payments
Indicative limits/bona fide testYes.
Foreign workers’ wagesForeign technical employees of approved enterprises may remit their entire savings after meeting expenses and paying taxes and levies.
Indicative limits/bona fide testYes.
Credit card use abroadCredit card use is allowed only for travel-related purposes and personal expenses and not for payments for imports of goods in commercial quantities or for capital transfers.
Indicative limits/bona fide testYes.
Other payments
Indicative limits/bona fide testYes.
Proceeds from Invisible Transactions and Current Transfers
Repatriation requirementsNo.
Restrictions on use of fundsFunds retained abroad with COE permission and export proceeds permitted to be retained abroad may not be used for acquiring property or other capital assets outside Sri Lanka.
Capital Transactions
Controls on capital transactionsYes.
Controls on capital and money market instrumentsExcept for the local purchase by nonresidents of shares or other securities of a participating nature, all capital market securities and money market instruments are controlled.
On capital market securities
Shares or other securities of a participating nature
Purchase locally by nonresidentsNonresidents may invest in shares of up to 100% of the equity capital of existing listed and unlisted public companies without prior approval, subject to certain exclusions and limitations, in terms of the general permission granted. Funds must be channeled through a SIERA.
Sale or issue locally by nonresidentsYes.
Purchase abroad by residentsInvestments under an employee share option scheme are permitted, subject to approval from the MOF.
Sale or issue abroad by residentsPrior approval is required.
Bonds or other debt securities
Purchase locally by nonresidentsNonresidents may invest in Sri Lanka development bonds. Nonresident Sri Lankans may invest in any real or financial asset through special accounts (rupee accounts for nonresident Sri Lankan investment).
Sale or issue locally by nonresidentsThese transactions are not permitted.
Purchase abroad by residentsThese transactions are not permitted.
Sale or issue abroad by residentsPrior approval is required.
On money market instrumentsThese transactions are not permitted.
On collective investment securitiesThere are controls on all these transactions.
Purchase locally by nonresidentsThese transactions are permitted only in the case of unit trusts in which not more than 20% of the depository property may be invested in government securities.
Controls on derivatives and other instrumentsThere are controls on all these transactions.
Controls on credit operationsBorrowers are required to settle credit granted to finance export orders within a period of 90 or 120 days from the date of shipment. While the 120-day limit is usually granted, the decision to extend the limit is left to commercial banks.
Commercial credits
By residents to nonresidentsExport credits are permitted, provided they are effected through a licensed bank.
To residents from nonresidentsOverseas suppliers may extend credit to importers only if the interest rate is reasonable.
Financial credits
By residents to nonresidentsAll licensed banks may extend rupee credit facilities to nonresident-controlled companies that are incorporated in Sri Lanka. Effective January 21, 2003, prudential limits placed on rupee credits extended to nonresident-controlled companies (that are approved under Section 17 of the BOI Act) no longer apply.
To residents from nonresidentsAll financial credits require prior approval, which is based on review of the terms and conditions. Approval is normally granted only for long-term loans, and preference is given to loans that will be repaid in foreign exchange.
Guarantees, sureties, and financial backup facilities
By residents to nonresidentsBanks may issue performance bonds and bid bonds without limit on behalf of nonresident persons for exports and other service contracts, subject to the conditions stipulated in the tender, quotation, or contract and, in the latter case, proof of the award of contract.
Letters of guarantee valued at the equivalent of $500,000 or more require prior CBSL approval.
To residents from nonresidentsYes.
Controls on direct investment
Outward direct investmentInvestments abroad by residents are permitted only with the permission of the MOF, depending on the period of return and other criteria. Priority is given to investments that promote domestic exports.
Inward direct investmentForeign investment is permitted on the basis of the type of business.
Excluded areas of investment for nonresidents include the following: money lending, pawnbroking, retail trading with capital of less than $1 million or its equivalent, and coastal fishing. The restricted sectors, in which foreign investment is restricted to 40%, include the following: production of goods for export under international quota restrictions; growing and primary processing of cocoa, coconuts, rice, rubber, spices, sugar, and tea; mining and primary processing of nonrenewable natural resources; timber processing industries using local timber; deep-sea fishing; mass communications; freight; travel; shipping agencies; and education. Investment is permitted only up to the limit approved by the government or the relevant authorities in the following sectors: air transportation; coastal shipping; manufacture of arms, ammunition, explosives, military vehicles and equipment, aircraft, and other military hardware; manufacture of poisons, narcotics, alcoholic beverages, dangerous drugs, and toxic, hazardous, or carcinogenic materials; large-scale mining of gems; and lotteries.
Controls on liquidation of direct investmentProceeds from the sale or liquidation of approved investments, along with any associated capital appreciation, may be remitted in full. Expatriates leaving Sri Lanka to take up residence in the country of their permanent domicile are permitted to transfer all assets representing their retirement funds and savings. Foreign nationals who have operated small businesses in Sri Lanka are allowed to transfer the capital they originally brought into the country plus a reasonable amount of savings, subject to certain limits.
Authorized dealers may grant foreign exchange allocations to emigrants upon presentation of appropriate documentation.
Controls on real estate transactions
Purchase abroad by residentsThese transactions are not permitted.
Purchase locally by nonresidentsPurchases for residential purposes are allowed only if funded by inward remittances of foreign currency.
Sale locally by nonresidentsThese transactions are permitted but effective September 12, 2003, the repatriation of sale proceeds is permitted only if the property was purchased or developed out of inward remittances in foreign currency.
Controls on personal capital transactions
LoansThese transactions are not permitted.
Gifts, endowments, inheritances, and legacies
By residents to nonresidentsGifts by residents to nonresidents are not permitted. Transfers of inheritances are subject to a limit of SL Rs 350,000.
Settlement of debts abroad by immigrantsYes.
Transfer of assetsRemittances of foreign currency for life insurance premiums are not permitted.
Transfer abroad by emigrantsAt the time of departure, emigrants may be granted foreign exchange to pay for the cost of transportation to the country of migration via the normal, direct route. A foreign exchange equivalent of up to $2,000 a person may also be purchased at the time of departure. Personal effects of reasonable amounts plus jewelry up to SL Rs 150,000 for each married female, SL Rs 60,000 for unmarried females, SL Rs 30,000 for female emigrants under 12 years of age, and SL Rs 37,500 for male emigrants may be exported. Emigrants are also permitted to effect capital transfers of up to SL Rs 750,000 a person, up to a maximum limit of SL Rs 1 million a family unit.
Transfer into the country by immigrantsYes.
Transfer of gambling and prize earningsYes.
Provisions specific to commercial banks and other credit institutionsBanks are required to report their daily foreign exchange position. Reporting requirements with respect to fund transfers through electronic fund transfer cards are in effect.
Borrowing abroadYes.
Maintenance of accounts abroadYes.
Lending to nonresidents (financial or commercial credits)Offshore bank branches may extend foreign currency loans to any nonresidents and also to resident companies approved by the BOI. Effective October 12, 2003, domestic bank branches may extend loans in foreign currency to Sri Lankan expatriate workers who are employed abroad to be used for any domestic purpose against repayment in foreign currency from an NFRC account.
Lending locally in foreign exchangeCommercial banks may grant foreign currency loans from their domestic currency banking units to exporters who are in a position to pay their loans in foreign exchange earnings. Development banks are also permitted to extend foreign currency loans to exporters based on their foreign credit lines.
Purchase of locally issued securities denominated in foreign exchangeYes.
Differential treatment of deposit accounts in foreign exchange
Reserve requirementsYes.
Liquid asset requirementsYes.
Interest rate controlsYes.
Credit controlsYes.
Differential treatment of deposit accounts held by nonresidents
Reserve requirementsThe statutory reserve requirement ratio on rupee deposits is 10%, and the ratio on foreign currency deposits is zero.
Liquid asset requirementsYes.
Interest rate controlsYes.
Credit controlsYes.
Investment regulations
Abroad by banksYes.
In banks by nonresidentsThere is no limit on foreign ownership of domestically incorporated commercial banks.
Open foreign exchange position limitsThe maximum positive daily net open foreign exchange position of commercial banks is 15% of a bank’s own capital funds and reserves.
On resident assets and liabilitiesYes.
Provisions specific to institutional investors
Limits (max.) on securities issued by nonresidentsYes.
Limits (max.) on investment portfolio held abroadYes.
Limits (min.) on investment portfolio held locallyYes.
Currency-matching regulations on assets/liabilities compositionYes.
Other controls imposed by securities lawsYes.
Changes During 2003
Exchange arrangementJanuary 21. The period for forward sales and purchases of foreign exchange by banks was extended to 720 days from 360 days in respect of repayment of foreign loans.
Imports and import paymentsJanuary 4. The Port and Airport Development levy applied to imports for processing and reexport was reduced to 0.50% from 0.75%.
September 3. Tariff rates were revised to zero, 2.5%, 5%, 10%, 15%, 20%, and 25% from zero, 2%, 5%, 10%, and 25%.
Capital transactions
Controls on credit operationsJanuary 21. Prudential limits placed on rupee lending to foreign-controlled companies were removed.
Controls on real estate transactionsSeptember 12. Commercial banks were authorized to repatriate sale proceeds of residential property to nonresidents provided such properties were purchased and/or developed out of foreign currency brought into the country.
Provisions specific to commercial banks and other credit institutionsOctober 12. Banks were permitted to grant foreign currency loans to Sri Lankan expatriates to be used for any domestic purpose against the collateral on their NRFC balances subject to the condition that the loan be repaid in foreign exchange.
Changes During 2004
Imports and import paymentsJanuary 1. Import tariff bands were revised to zero, 3%, 6%, 12%, 16%, 20%, and 27.5% from zero, 2.5%, 5%, 10%, 15%, 20%, and 25%.
January 1. The import surcharge applicable to most dutiable goods was reduced to 10% from 20%.
January 1. A value-added tax with rates of zero and 15% was introduced.

    Other Resources Citing This Publication