Open Exchange

Nov 23, 2010 (LBO) – Sri Lanka has allowed residents to buy stocks abroad and foreign investors have been allowed to buy into local corporate debt and insurers have been given permission to invest up to 20 percent of their reserves abroad. The exchange control relaxations are in effect from November 22, the government said in a statement issued with the budget.

Central Bank Governor Nivard Cabraal promised to liberalize exchange controls in a road map in January.

Foreign tourists and business visitors will also be allowed to open bank accounts in Sri Lanka.

Sri Lanka imposed exchange controls within two years of establishing a money printing central bank after abolishing a currency board arrangement which had allowed free capital mobility.

Exchange controls are needed to prevent a fall in an exchange rate when a central bank prints money to finance a budget deficit and tries to maintain an exchange rate peg at the same time.

The phenomenon is known as the ‘impossible trinity’ of monetary policy or the ‘open economy trilema’.

The central bank is now conducting fairly tight monetary policy and has built up a large stock of foreign reserves.

The full government statement is reproduced below

1.