Sri Lanka to relax foreign exchange controls: CB Governor

Jan 04, 2010 (LBO) – Sri Lankans would be allowed to open bank accounts abroad and buy shares and debt of foreign companies as part of a relaxation of foreign exchange controls, Central Bank governor Nivard Cabraal said. Foreign exchange ‘shortages’ crop up when a central bank ‘prints money’ (generates local money by purchasing domestic government debt instead of foreign currency) and tries to maintain a peg or stable rate of exchange at the same time.

Such ‘soft pegs’ are also prone to frequent balance of payments crises.

Exchange controls effectively criminalise the freedom of a person to move his savings across a border, usually to a lower inflation regime.

Exchange controls of the type used in Sri Lanka now, can be traced back to Tsar Nicholas II of Russia, who in 1905-06 limited the release of foreign exchange to only trade backed transactions.

Per person foreign exchange carriage was limited to 50,000 German Marks by the Tsar.

Renowned monetary economist Economist Friedrich von Hayek wrote in his book Road to Serfdom that the experience in Europe had shown that exchange controls had been a first step in a “decisive advance on the path to totalitarianism and the suppression of individual liberty.”

“It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape–not merely for the rich, but for everybody.”

The 1953 exchange controls were swiftly followed by import controls, import substitution and a completely controlled economy in the 1970s.

The following is a list of the proposed foreign exchange liberalisation moves announced on Monday.

1) Allowing Sri Lankans to open and maintain accounts with banks abroad

2) Allowing Sri Lankans to invest in equity or short term debt instruments in overseas companies

3) Allowing foreigners to invest in rupee denominated debentures issued by local companies

4) Allowing insurance companies to invest part of their assets of the general funds or technical reserves in foreign assets

5) Allowing listed companies to list on foreign stock exchanges

6) Allowing certain foreign companies to open places of business in Sri Lanka

7) Increase level of advance payments for imports

8) Removing restrictions on pre-payment of import bills

9) Removing margin requirements on selected imports under advance payments

10) Providing greater flexibility for forward contracts in foreign currency to cover current and capital transactions

11) Permitting the unification of accounts of foreigners for investment in securities

12) Allowing foreigners on tour or business in Sri Lanka to open Sri Lanka rupee accounts

Updated Foreign investors would also be allowed to buy into Sri Lankan corporate debt. At the moment foreigners are only allowed to buy government Treasuries.

In 2009, foreign investors bought 1,705 million US dollars of Treasury bonds and bills from May to November, Cabraal said presenting his main monetary policy programme for 2010.

He said Sri Lanka’s foreign reserves were at a historic high of 5.2 billion US dollars and in 2010 the balance of payments was expected to register a surplus of 700 million US dollars.

Cabraal said insurance firms would also be allowed to invest abroad. Sri Lankan firms would also be allowed to list abroad.

Foreigners on tour or business in Sri Lanka would also be allowed to open Sri Lanka rupee accounts.

Cabraal said the operating instructions to banks on the new foreign exchange rules were now being prepared.

Draconian foreign exchange controls were imposed in Sri Lanka in 1953 after the creation of a money printing central bank in 1950, when Sri Lanka abolished a currency board regime or ‘hard peg’.

The Bank of England had also imposed exchange controls between the sterling and dollar areas during the period.