Sri Lanka relaxes foreign investment in company debt

Dec 13, 2011 (LBO) – Sri Lanka’s central bank said it had lifted a foreign borrowing limit by companies to 50 million US dollars from 20 million, lifted a rate cap on debentures and also slashed the tenor to two years from five. Before 1950 a currency board arrangement (hard peg) placed a hard budget constraint on rulers.

Critics say in 1953, shortly after creation of a money printing central bank, draconian exchange controls were placed on citizens and non-citizens to allow rulers to continue to print money, manipulate interest rates and generate high levels of inflation.

Though monetary policy has improved mid 2007, Sri Lanka’s soft-dollar peg is currently under some pressure from a delayed interest rates adjustment amid high credit growth.

Failure to allow rates to move up in time requires higher interest rates to bring the economy back into equilibrium.

“These new procedures are expected to support the currently expanding economic activities which require alternative financing sources at a competitive cost,” the Central Bank’s exchange control unit said in a statement.

Companies could now borrow up to 50 million dollars and firms could also give corporate or bank guarantees.

The Central Bank said the changes will be effective immediately.

Companies selling debentures need not maintain a sinking fund to repay the debentures, the monetary authority said, and a ceiling on interest rates have also been removed.

The tenor of debentures allowed to be sold to foreign investors been cut to two years from five.

“Other borrowing arrangements of a short-term nature and those by newly incorporated firms would also be considered for approval by the CBSL, based on the merits of each case,” the Central Bank said.

Sri Lanka has a dollar peg and interest rates in the country have been edging higher than the rest of the world after the state started to deficit spend with the help of central bank credit after 1950.