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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka to continue relaxing exchange controls: CB governor

Sri Lanka to continue relaxing exchange controls: CB governor

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Redbulls

Redbulls
Director - Equity Analytics
Director - Equity Analytics
March 03, 2013 (LBO) - Sri Lanka will continue to liberalise foreign exchange controls to encourage the investments needed to maintain high economic growth, Central bank governor Nivard Cabraal said.

"The thinking now is to try to have faster growth for which we need more savings and investment which, if not available in our own country, we must get from outside," he said.

"What we are setting out is exchange liberalisation in a gradual manner - gradually giving confidence to outside and local investors," he told a forum on liberalizing foreign exchange controls organized by the Shippers' Academy Colombo.

"In the next few years we will need to bring in new reforms. We have not gone too fast, nor have we gone too slow. We have been not too hot or too cold, not too hard or too soft. We will apply those principles in foreign exchange regulations."

Cabraal said in 2008 there was a sudden exit of capital from Sri Lanka because of global conditions.

"People wanted to take money out and we allowed it. We did not impose any constraints. As a result they were very confident and when things turned normal they came back. Today we have three billion US dollars in Treasury Bills and Treasury bonds - a few years ago it was zero."

Cabraal said the central bank also allowed banks to enhance capital through foreign capital.

"In 2012 921 million US dollars came into banks by way of Tier II capital. These were not sources tapped in the past. Today we have opened up and the foreign exchange regime has attracted capital into the country."

Cabraal also said the central bank was considering lifting restrictions on repatriation of profits by foreigners investing in property in Sri Lanka.

"We are now taking a fresh look at that," he told the forum in response to a question.

"We should allow a person to take profit out in the same way as in other investments. This was brought to our notice a few weeks ago - that this is an area that seems to be unfair and is different from how we allowed other profits to be repatriated."

In the case of property investments, capital gains by foreigners selling property have to be credited into Non-Resident Foreign Currency accounts and repatriation of profits limited to 20,000 US dollars a year whereas there was no such restriction on repatriation of capital gains by foreigners investing in shares.

Growth would be slow if the country relied only on domestic savings, Cabraal said.

"That's why we took 56 years to reach a per capita income of 1,000 dollars by 2004."

Sri Lanka needs an annual domestic savings rate of around 34 percent of gross domestic product on a consistent basis over the next few years to maintain economic growth at around eight percent, Cabraal said.

The savings rate now was 25 percent of GDP, leaving a gap of nine percent of which the central bank estimates two percent to come by way of improved productivity, leaving seven percent savings that need to come in from outside from foreign direct and portfolio investments and government and corporate borrowings.

"For that we need an exchange rate conducive for people to do business - for exchange to enter and exit easily," Cabraal said. "Nobody will come in unless you can exit easily."

Deputy governor Ananda Silva said remaining forex controls were mainly to limit demand in case there is a sudden shock, particularly an external shock, and prevent flight of capital and also to maintain economic stability.

An important recent change was the introduction of foreign exchange earners accounts that amalgamated different accounts previously required for different categories of domestic residents such as exporters.

Likewise, rules have been simplified for foreigners to bring in money with the creation of securities investment accounts, again amalgamating different accounts required previously for different investments.

"We also allowed flexibility within existing regulations," Silva said, giving as examples the removal of the 90-day limit on the tenor of forward contracts and higher foreign currency allowances for overseas travel.

Also, transfer of funds between different accounts is now allowed freely.

"We plan to further simplify existing regulations and give more flexibility to existing regulations and introduce new regulations covering various sectors of the economy," Silva said.
http://www.lbo.lk/fullstory.php?nid=965747130

K.Haputantri

K.Haputantri
Co-Admin
Good move Cabral. Gradual liberalization is healthy & no shocks to the economy. Go ahead & do it.

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