Recently, several leading Sri Lankan banks announced a surcharge on overseas transactions paid for by debit and credit cards. The reasoning given for such high fees was that such measures were necessary due to the economic situation. Every nation possesses such reserves of foreign currency within its Central Bank. However, for many months now, Sri Lanka has been struggling to replenish its depleting reserves of foreign currency. In such a scenario, measures to encourage spending on local businesses are a necessity to boost the economy. But they’re only effective if people are aware of them in the first place.
Understanding the current situation of the Sri Lankan economy
A decrease in Foreign Reserve Currencies in Sri Lanka has been a topic trending on local media as of late. But what exactly does it mean? Simply put, the amount of dollars leaving the country for imports and overseas transactions outweigh the revenue flowing in as a result of the exports and other streams.
Sri Lanka’s largest sources of foreign income have been its tourism and export sectors, both of which have taken massive hits following the Easter attacks in 2019 and the ongoing pandemic. The Foreign Reserves held by the Central Bank of Sri Lanka has seen a decline from $7.5 billion in 2019 to approximately $1.5 billion, as per the latest statistics. This has led to severe impacts on the country’s economy as seen by the increasing food prices and other essential commodities.
Furthermore, according to statements received from the banks, many merchants employ Dynamic Currency Conversion (DCC) systems for their payment gateways. DCC platforms enable the direct conversion between foreign currencies at the point of sale. Thereby, enabling seamless transfer of funds between these merchants and Rupee-based cards.
However, the exchange rate for these transactions is determined by the DCC provider and may differ from the rates provided by card scheme entities such as VISA and Mastercard. For this reason, several banks announced that the amount added to the rate of exchange adopted by the payment scheme (Visa/MasterCard) at the time of billing will be increased from 2.5% to 7% on overseas transactions on credit/debit cards.
Additionally, a processing fee of 5% will be levied on transactions to overseas merchants who may be located overseas or online billed in rupees including Dynamic Currency Conversion (DCC) transactions. To their credit, some banks like HSBC and Standard Chartered have reduced it to 3.5%. But in a nutshell, all of this means that credit card and debit card users will now have to pay a lot more for products and services by international businesses.
Can this new 5% levy stop the dollar outflow?
The core idea behind the additional 5% levy on foreign transactions is to limit the outflow of foreign exchange. Thereby, compensating for the mismatch between dollar inflows and outflows. While this is sound, in theory, the reality is that its effectiveness is questionable at best. As we learned, this is largely due to the fact that most consumers remain unaware of its existence.
Speaking to Arteculate, Prabhani De Alwis – a PR executive, shared, “I knew there was a fee on overseas transactions but I didn’t know the exact number. Nor did I think it’d be a big amount. But with the current economic situation, I would be quite conscious if I have to pay 5% or more for any service. Knowing that I’d explore local alternatives where possible to save money.” This was the common view amongst most respondents.
Echoing similar views, Thisal Abeykoon – a Software Engineer, said, “I wasn’t aware that there was an additional fee by banks for overseas transactions. However, I did notice that I was suddenly paying a lot more to access some of the services like Netflix and Spotify that I use regularly, which has made me more conscious about my purchasing decisions.” By and large, most consumers who regularly used online services from international businesses, saw prices increase but were unaware of the 5% levy.
For those that don’t regularly use services by overseas providers, the existence of the levy wasn’t a heavy concern. “I knew the banks were charging a certain amount for overseas transactions because of the foreign exchange issues. But in my case, I wasn’t too concerned about it because I rarely use any international services and even then my transactions are generally small amounts. But if it was a large amount, such as over LKR 7,000 then I’d be more conscious about it,” said Abhishek Gamage – an IT professional.
Of course, even if they’re not concerned about the levy, the fact remains most consumers are largely unaware of its existence. Kanishka Perera – an educator, shared, “Over the past few months, the cost of everyday essentials has risen considerably. I usually use online services because of their convenience and relative safety due to the pandemic. But had I known earlier of the 5% levy, I’d have thought twice about certain purchases and looked at local alternatives.” Hence, one could argue that the lack of awareness means the levy is doing more harm than good as it’s only hurting consumers without boosting domestic consumption to help the national economy.
The importance of choosing local businesses
With the higher transaction fee for overseas payments, platforms such as Netflix, Spotify, and Uber will experience an increase in their local prices. Therefore, the Government of Sri Lanka has encouraged the public to use services offered by homegrown enterprises as there is no extra charge on the payments regardless of the payment method with these local services during these times. Yet, as we’ve seen, these efforts leave much room for improvement.
As a long-term solution, the Government of Sri Lanka is also working towards encouraging the establishment of offices by these foreign entities in Sri Lanka, enabling them to use local banking services for their business. Together with this, local businesses also provide an additional income to the Government in the form of domestic income tax, which is not present with the use of foreign service platforms.
Going further, the government should consider having unregistered foreign companies formally register themselves in Sri Lanka. At the time of writing, Sri Lanka loses approximately $600 million due to unregistered foreign entities operating in the country. All the while competing with local businesses. It’s likely that this would go much further in resolving the dollar crisis compared to invisible levies by banks that punish consumers who are already burdened with heavy costs instead of boosting domestic consumption.