Guide to Sri Lankan Rupee (LKR)
- simpleisgd
- Feb 9
- 3 min read
Introduction
In the first quarter of 2023, the Central Bank of Sri Lanka (CBSL) transitioned to a more market-based approach for determining the exchange rate. However, the Sri Lankan Rupee (LKR) remains partly convertible on the capital account, with no market for offshore transactions or non-deliverable forwards (NDFs).
Foreign Exchange (FX) Framework
Exchange Rate System: Sri Lanka's Rupee (LKR) follows a managed floating regime, with the Central Bank intervening to reduce volatility.
IMF Classification: In June 2024, the IMF classified Sri Lanka’s exchange rate as "free-floating," but it remains largely managed.
Limited Liquidity (Mid-2021 to Mid-2023): Between mid-2021 and mid-2023, FX liquidity was limited, leading to temporary changes in currency management.
Temporary Measures (May 2022 - Feb 2023): The CBSL set a daily middle rate for USD-LKR, with import restrictions and foreign currency surrender requirements to support the exchange rate.
Market-Driven Shift (March 2023): On March 7, 2023, CBSL moved to a more market-driven exchange rate as part of an IMF bailout agreement.
IMF Bailout (March 2023 - March 2027): The IMF approved a $3 billion package, requiring CBSL to raise its FX reserves to $14 billion by 2027.
Product Availability
Spot FX: The market operates from 8:45 AM to 4:30 PM with limited liquidity during the first and last 30 minutes.
FX Forwards: Available for up to one year, with limited liquidity beyond six months. No offshore or NDF market exists.
Hedging: Foreign exchange hedging is allowed for trade-related transactions, debt securities investments, equity market cash flows, and approved entities under the Foreign Exchange Act.
Repatriation Guidance
Transactions via Inward Investment Accounts (IIA) no longer need approval from the Department of Foreign Exchange (DFE).
Dividend payments require proof that withholding tax has been settled.
Offshore investors can repatriate proceeds from the sale or maturity of Treasury bills, bonds, and related interest through IIA.
Proceeds from Special Foreign Investment Deposit Accounts, now IIA, can also be repatriated.
Other capital transfers must follow the new Foreign Exchange Act, with any exceptions needing approval.
As of September 4, 2024, exporters have until the 10th day of the month after 3 months to convert export proceeds into Sri Lankan rupees, up from the previous 7th day.
Exchange control relaxations for companies and individuals migrating abroad began in June 2023, with extensions in December 2023 and June 2024.
Key Regulatory Updates
Sri Lanka has eased foreign exchange and investment regulations, creating a more open environment for global investors. Here are the key updates:
Liberalized Current Account: Exchange controls on trade and service transactions have been removed, aligning with Sri Lanka’s IMF Article 8 commitments.
Capital Account Liberalization: Efforts include USD-denominated sovereign bonds and foreign access to the LKR bond market.
Foreign Exchange Act: The new act clarifies permissible capital transactions, offering more transparency.
Access to FX Markets: Foreign investors can engage in FX spot, forwards, and options markets for better risk management.
Export Proceeds: Exporters can hold proceeds in Business Foreign Currency Accounts (BFCA) or Offshore Banking Business Accounts (OBB).
Hedging Options: FX forwards are allowed for stock market and LKR bond investments by offshore funds.
Investment Process: Foreign investors can buy securities and government bonds through Inward Investment Accounts (IIA) without approval.
Overdraft Facilities: Local subsidiaries can overdraw local currency but not foreign currency.
Conclusion
Sri Lanka’s relaxation of foreign exchange and investment rules signals a stronger, more open economy. Gaining a clear understanding of Sri Lanka’s foreign exchange framework, financial products, and regulatory environment is essential for businesses and investors involved in LKR transactions.
