Business Times

Relaxing forex controls good for business

By Natasha Gunaratne

The Central Bank’s (CB) decision to relax controls on foreign exchange transactions, which has been praised in many quarters, is not a political stunt, says Minister of Public Administration and Home Affairs and the Deputy Minister of Finance and Planning Sarath Amunugama.

He told the Business Times that there are several reasons behind that decision, most notably that the foreign exchange position is exceptionally favorable with increases in migrant remittances. Investment funds, pension funds and other financial institutions which pulled out of Sri Lankan bonds due to the financial crisis are coming back.

Opposition politicians earlier this week said the relaxation was a political stunt and also aimed at enabling unnamed members of the government siphoning out funds in anticipation of a loss for President Mahinda Rajapaksa at the January 26 presidential poll. However independent political analysts said this was most unlikely as the new regulations requires the approval of the President and this may take time.

Some economists however cautioned the government against proceeding with the decision without a proper study (See Page 2 Comment).

Dr. Amunugama said the stock market is booming and the US$2.6 billion stand-by arrangement with the International Monetary Fund (IMF) has created a rich foreign exchange situation in the country. “This is in total contrast to what it was one year ago when there was a shortfall of foreign exchange.”

Dr. Amunugama said there are new policy initiatives and the government is taking an aggressive stance to make the most of the situation. He said the liberalization of exchange controls is very important in getting Sri Lankan businessmen and blue chip companies in expanding abroad.

The Central Bank announced on Monday that with the build-up of external reserves, controls on foreign exchange transactions will be relaxed this year. Outlined in the Road Map for 2010 and beyond, Sri Lankans will be allowed to open and maintain accounts with banks abroad and invest in equity or short-term debt instruments in overseas companies. Foreigners will also be allowed to invest in rupee denominated debentures issued by local companies.

Other controls on foreign exchange transactions to be relaxed include:

  • Allowing insurance companies to invest part of their assets of general fund or technical reserve, in foreign assets
  • Allowing listed companies to list on foreign stock exchanges
  • Allowing certain foreign companies to open places of business in Sri Lanka
  • Increasing level of advance payments for imports
  • Removing the restrictions on pre-payment of import bills
  • Removing margin requirements on selected imports under advance payments
  • Providing greater flexibility for forward contracts in foreign currency to cover current and capital transactions
  • Permitting the unification of accounts of foreigners for investments in securities
  • Allowing foreigners on tour or business in Sri Lanka to open Sri Lanka Rupee accounts Secretary General of the Bankers Association Upali De Silva said the country had to go for this type of relaxation. The CB policy is of relaxing the controls gradually. “They are not going to do it virtually across the board,” he said.

“The restrictive measures had to go out one day. With the war over and stability in the country, this is what we aspire to.”

Commenting on the rest of the Road Map, Mr. De Silva described it as positive. In the case of any Road Map or even in any corporate, Mr. De Silva said not everything can be achieved. “Even if a part of it is achieved, we can look forward to those changes.” He added that he does not see any major issues for banks in the CB’s future monetary and financial sector policies.

Economist Muttukrishna Sarvananthan, Principal Researcher at the Point Pedro Institute of Development said the CB’s expectations of 7 to 9% growth in the medium term and the overall budget deficit reducing over the medium term seem dubious. “Since ‘medium term’ is not defined, the CB’s claims seem dubious. According to my estimation as of January 2010, growth in 2010 will not exceed 6%.”

Dr. Sarvananthan said the CB’s expectations on the performance of the external sector that exports and imports are projected to increase, might be attainable. The CB also stated that despite the expected increase in workers’ remittances and higher inflows to the services account, the current account is expected to record a deficit less than 3% in the medium term.

However, Dr. Sarvananthan said the CB’s claim on the fiscal front, that the overall budget deficit is expected to reduce over the medium term, is dubious because no specific figures or a range of high and low figures have been provided. “It is a misnomer to call it the CB’s Road Map for 2010 and beyond because a road map cannot have a vague time frame like ‘medium term’ for both the anticipated economic growth rate as well as for the fiscal budget.

The World Bank’s Country Director for Sri Lanka, Naoko Ishi who was present at the reading of the Road Map, told the Business Times that the plan identified challenges and opportunities and that achieving 7 to 9% growth depends on how the government can execute their strategy. “It is achievable but a plan has to be worked out and implemented.” She added she is optimistic about future growth.

President of the Federation of Chambers of Commerce and Industries of Sri Lanka (FCCISL) Kosala Wickremanyaake said the business community was looking forward to the relaxation of controls on foreign exchange transactions for some time. “Finally, they are doing it,” he said. “We give positive marks to the Road Map. I believe that if we achieved the growth we did in the past with the war, we should now be looking at 7% to 8% growth going forward.” Mr. Wickremanayake said his only concern is the CB’s plan to regulate microfinance institutions. “Our concern is that there is microfinance in a lot of areas and regulation has to be done correctly. We want to hear more of what their plans are.”

Chairman of the Ceylon National Chambers of Industries (CNCI) Newton Wickremasuriya also said the relaxing of controls on foreign exchange transactions is most welcome from a business perspective, particularly because local companies will be able to invest in other countries freely and without much hassle. “The increase of advanced payments for imports from US$10,000 to US$50,000 dollars is most welcome particularly by the industrialists because very often, industrialists have to import spare parts and machinery at short notice,” he said. “This certainly gives us that relief and the freedom to exercise that option without worry.

Mr. Wickremasuriya said it also gives confidence to foreign investors that Sri Lanka is a safer place. He did say however that the demand on the dollar right now is low due to decreased imports. “A lot will depend on exports and our ability to earn foreign exchange.”

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