Business Times

Foreign exchange relaxation: Are we ready?

The Central Bank’s decision this week to ease foreign exchange controls by allowing Sri Lankans to open accounts abroad, among other matters, has been hailed by many as a step in the right direction.
The decision has been widely praised in most quarters as a positive move which would also provide foreign investors a lot of comfort in terms of the repatriation of funds from Sri Lanka.

Relaxation of foreign exchange regulations has always been on the cards by successive governments since the liberalisation of the economy since 1978 and it was just a matter of time when this was to happen. The biggest concern in opening the doors to full liberalisation of foreign exchange was the constant worry whether there would be an outflow of funds far greater that what comes into the country, and that has been the only detterent.

The Central Bank in announcing its decision explained that one of the reasons for the move was the burgeoning foreign exchange reserves now standing at a record of over US$5.2 billion by end November 2009.

However, some economists are not too optimistic over the decision saying it needs more study in an environment of unmanageable budget deficits. One economist, who declined to be named, said IMF Sri Lanka Representative Nadeem Ul Haq (in Sri Lanka between 1999-2002) also pushed for opening up the capital account and allowing the free flow of foreign exchange in and out of the country with the then Minister of Economic Reforms Milinda Moragoda being urged to open out the market.

However a group in the new United National Party government of Ranil Wickremesinghe were of the view that the country’s macro economic fundamentals were not ready for such a move and the capital account remained where it is.

Cautious experts argue that they are not opposed to relaxing the capital account but that their concern is essentially in the context of the fundamentals of the economy where budget deficits are still unmanageable and foreign reserves are mostly from ‘hot’ capital – ie. money that comes into the Treasury bond market, into the stockmarket and other sources which can be quickly repatriated like what happened in early 2009.

“What we need is a comprehensive study of the capital account before opening it,” the economist said, adding that in Sri Lanka, government spending is dictated by politics and not economic considerations.
“The moment you have a kind of structure where politics dictates what you do, then nothing is certain and in this case, the free movement of foreign capital can be a negative development,” he said, adding: “We don’t want another disaster like the hedging scandal.”

Do we have the proper legislation or regulations to control the outflows if there is a foreign exchange? Do we have the checks and balances to ensure foreign reserves would not be affected like what happened in 2009? Has the world economy settled down after the worst financial crisis in recent years? All these are questions that need to be examined by a core groups of experts which should be more representative than those working at the Central Bank.

A rather ridiculous view has emerged from opposition circles that the Central Bank decision was aimed at opening the floodgates for some ‘members’ of the government and their families to siphon off ‘ill gotton’ funds ahead of the presidential polls.

While this is unlikely to be the view of the larger common opposition and expressed only in a few quarters, in the present context of corruption and lack of governance there is money being siphoned out all the time through illegal channels and - for that matter- the corrupt doesn’t need official channels to send their money out.

That is already happening through already established foreign accounts and direct transfers from commissions and other ‘income’.

At the end of the day, decisions by the state or agencies linked to the government must be done with a lot of study, understanding and comprehension of all the issues at stake.

This is the same in opening out part of the capital account which needs more study than a mere decision by the Central Bank. The President, as Minister of Finance, needs to study it fully before approving it.

Top to the page  |  E-mail  |  views[1]
Other Business Times Articles
Opportunity costs of elections as bad as direct costs
Relaxing forex controls good for business
Finance depositors to support a presidential candidate
Hemas: No more investments in hospitals
CIMA UK appoints Sri Lanka council after 2008 drama
Raigam firm to prove its ‘salt’ in CSE
F&G to change to Island Finance
Comment - Foreign exchange relaxation: Are we ready?
Interest rates hike for senior citizens welcomed
10% GDP growth by 2012- Amunugama
Hayleys returns to Jaffna with new-concept outlet
Dr. Thusitha Tennakoon appointed Secretary General of FCCISL
DFCC Vardhana Bank, Sampath Bank jointly offer comprehensive ATM facility
HSBC’s ‘Sign on your Dreams’ offer
Executive Presidency – the cost of maintenance
BDO Sri Lanka joins international network to adopt single trading name
Nation Lanka Finance PLC’s ‘Rights Issue’ fully subscribed
Evaluating Sri Lanka's e-Government policy
CB sees rapid social development in post-war era
Colombo Stock Exchange broke several records in 2009
Top Asian officials to discuss lessons of financial crisis
NAMAL Amana Equity Fund declares dividend
Assistant school supervisor in Doha wakes up a millionaire
New Deputy Secretary General assumes duties at Ceylon Chamber
CB forex relaxation hailed by stock market
NCCSL seminar on maximising income from deposits
ICT, entrepreneurial skills for ex-LTTE combatants
NAC becomes CCC affiliate
Lanka can become financial hub in South Asia
TRC approached by foreign firms to develop satellite
Evening with Aviation Leaders
Lanka Hospitals sets international standards in SL
Lanka Walltile looks at new areas
“CB extends capital requirement deadline for Banks”
The retirement income conundrum Intelligent Investor
Hedging case far from over
Fonseka to meet biz community on Jan 12
Jaffna Youths receive business loans from Youth Business Lanka


Reproduction of articles permitted when used without any alterations to contents and a link to the source page.
© Copyright 2010 | Wijeya Newspapers Ltd.Colombo. Sri Lanka. All Rights Reserved.| Site best viewed in IE ver 6.0 @ 1024 x 768 resolution