Opening capital markets; sign of desperation

The Central Bank (CB) took a significant step this week opening up Sri Lanka's capital market by introducing the Foreign Investment Deposit Accounts (FIDA) but economists have cast some doubts over the decision.

The move was welcomed by Secretary-General of the Bankers Association Upali De Silva, but Principal Researcher at the Point Pedro Institute of Development, Muttukrishna Sarvananthan described it as a sign of desperation. “No sensible foreigner is likely to open savings or fixed deposit account in rupees where hyper inflation and depreciation are the norm, in spite of the fact that interest rates offered in Sri Lanka for these accounts are significantly higher than in developed countries,” Dr Sarvananthan said.

He explained that Sri Lankans living abroad have been able to open Non-Resident Foreign Currency (NRFC) accounts in local commercial banks for a long time. Therefore, this is now new. However, he said, that allowing foreign nationals to open FIDA in foreign currency and rupees is something new.

"Nonetheless, I do not think our commercial banks will receive a lot of investment from foreign nationals in foreign currency denominated FIDA accounts either because the interest rates paid on those accounts is only marginally higher (0.5%) than the LIBOR (London Inter Bank Offered Rate)," he explained.

"I sincerely do not think these new initiatives would bring much foreign exchange to the country. This is yet another futile attempt to salvage the volatile balance-of-payments (BOP) position of the country. There are, of course, much better ways to stabilize the BOP than this kind of ad-hoc desperate policy measures."

Mr de Silva said FIDA was introduced to gradually relax the capital market in the country According to this new scheme, foreign and Sri Lankan citizens residing outside Sri Lanka, corporate bodies incorporated outside Sri Lanka and foreign institutional investors such as country funds, mutual funds and regional funds can now make investments in savings and time deposits in designated foreign currencies or in rupees with commercial banks.

The CB has been doing this gradually throughout the years and this is another step in that direction, Mr de Silva, adding however that with the FIDA scheme, there is a cost element and risks involved because people will be converting foreign currency to rupees and hedge it for currency fluctuations. (NG)