Sri Lanka central bank to relax exchange controls

Nov 05, 2009 (LBO) – Sri Lanka’s central bank is planning to relax exchange controls allowing up to 500,000 US dollars to be taken out for investment purposes without approval of the central bank, a media report said.

Before the creation of the Central Bank in 1950, Sri Lanka had a currency board with an ultimate ‘hard peg’ with the Sterling pound, where domestic money was created only out of external flows and foreign reserves and the monetary base moved in step.

However due to money printing by the Bank of England there was a balance of payments problem between the so-called ‘sterling area’ and ‘dollar’ area, requiring exchange controls at the periphery of the sterling area.

The sterling exchange controls were devised due to a political reluctance on the part of British authorities to devalue the sterling against gold, after printing money to fight the second world war. Gold convertibility was suspended at the time.

Before 1971 – when excessive money printing by the Federal Reserve created fully inflating paper money and the final links with gold ended – all currencies were ‘anchored’ or pegged to gold, except when gold convertibility was lifted.

Exchange controls represents the coercive use of state power against the economic freedom of the people to move their money out of the clutches of repressive governments that mis-appropriate people’s wealth through the monetary system and legal tender laws.

Both inflation (destroying the domestic value of a currency) and devaluation (destroying the external value of a currency) represents the expropriation of salaries and savings of people by the mis-use of a state money monopoly.

Sri Lanka has however also allowed dollarisation of deposits through foreign currency accounts, slightly undermining the grip of the rupee over the lives of the people.

Exchange controls of the type used in Sri Lanka now, can be traced back to Tsar Nicholas II, 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.

Nobel laureate Friedrich von Hayek wrote in 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.

Under Sri Lanka’s tough exchange control laws, investments abroad has to be examined case by case by the Central Bank and approval also sought from the finance ministry.

“[T]he proposed measures would enable people to take upto 500,000 US dollars out of the country for investment purpose without obtaining the approval of the Central Bank,” Central Bank governor Nivard Cabraal was quoted as saying in the Daily Mirror newspaper.

“It is only if you are intending to take money beyond this amount, that you would need to have approval from the bank.”

Sri Lanka slapped draconian exchange controls in 1953 after a money printing central bank was created in 1950.

Current account transactions are now relaxed for areas such as trade. The capital account had been relaxed for some types of investments such as into the stock market and bond markets for foreign parties.

But freedom for residents to investment abroad remains blocked.

The central bank is expected to announced series of foreign exchange relaxation measures on December 01.

The report said with foreign reserves nearing five billion US dollars there was space to relax exchange controls.

Foreign exchange ‘shortages’ and balance of payments crises develop when a central bank tries to defend a foreign exchange peg and prints money at the same time.