Sri Lanka to give incentives for foreign remittances

Jan 03, 2009 (LBO) – Sri Lanka will give incentives to expatriate citizens to bring their saving home in the form of higher interest rates and lower taxes, Central Bank Governor Nivard Cabraal said. But a severe crash crunch in the government has led to a new surge of money printing in December, adding more pressure on the rupee.

Governor Cabraal says the country now wants more stable forms of money to come to Sri Lanka.

“It was a lesson to us, and we would like to see more permanent money coming into the country,” he said.

The Central Bank will also appoint several commercial banks as ‘lead managers’ to promote Treasury bills and bonds among Sri Lankan expatriates.

In the domestic market, commercial banks have been reluctant to promote treasury bills compared with their own fixed deposits.

Analysts say similar conflicts of interest may occur where commercial banks are placed in a quandary where they are expected to promote treasury bills against their own non resident foreign currency accounts.

This means a mechanism may have to found to appoint a set of non-bank dealers to promote bills overseas. But there are thin margins in re-selling government securities and most primary dealers make money in large deals and not retail sales.

On the other hand commercial banks that promoted hedge funds into Treasury Securities also made fee income from foreign exchange conversion.

Authorities were also planning to offer an additional ‘bonus interest’ to supplement the interest income provided by commercial banks to foreign currency account holders, Cabraal said in his annual policy speech.

Expatriate Sri Lankans would also be encouraged to bring home their savings by paying a “reduced tax as the final income tax if some inflows are subject to payment of income tax,” he said.

In 2008 foreign hot money from hedge funds, encouraged into the country to bridge a budget deficit flew out of the country after September, and the central bank held a rigid peg and underwrote their foreign exchange risk, worsening the problem.

Because the central bank printed money to sterilize the outflows (sterilized intervention), it triggered a balance of payments crisis, where the central bank spent more than a billion dollars in reserves.

The peg has now been abandoned and the exchange rate is adjusting to the demand pressures created by the liquidity injections, but the country has lost more than a third of the reserves.