Sri Lanka can remove forex controls before year end: PM

ECONOMYNEXT – Sri Lanka can relax exchange controls before the end of the year due to a large pipeline of foreign borrowings totalling $12 billion that had been lined up, Prime Minister Ranil Wickremesinghe said.

"We now have a situation where we can remove exchange controls," Prime Minister Ranil Wickremesinghe told parliament on Thursday.

"We will bring the necessary law before the next budget. We are strong enough to go on that because we have that confidence."

In Sri Lanka, budgets are presented to parliament in November.

He said, from January to May 2016, a billion dollars of foreign loan agreements had been signed with several countries. From India, $400 million had been borrowed, which can go up to $1.5 billion.

From China, $1.5 billion were expected, $1.2 billion of Samurai bonds (Yen-denominated commercial borrowings) will be sold, $2.7 billion Japanese development and policy loans, and there was a $1.5 billion loan from the International Monetary Fund.

"Up to now, we have $9.0 billion. Not only that, through bonds, we will take another $3.0 billion, taking it up to $12.0 billion."

Economic say equating foreign borrowings to currency strength has no underlying logic, but removing exchange controls could have the positive effect of forcing the Central Bank to follow more prudent policy and make it raise interest rates when credit demand picks up and stop money printing.

Sri Lanka is steeped in Mercantilism, and monetary instability is usually associated with real economy developments.

Sri Lanka imposed draconian exchange controls from 1952 soon after a money-printing Central Bank bank was set up, just a day before the country joined the now failed Bretton-Woodsy system of soft-pegged exchange rates.

Before the Central Bank, Sri Lanka had free capital mobility under a currency board (a hard peg), like Singapore, Hong Kong and many other British possessions.

If the Central Bank is abolished and a currency board re-established, there will be no requirements for exchange controls.

With the government losing the most potent tool to impoverish the working population and pension fund beneficiaries though currency depreciation and inflation, fiscal discipline is forced on the ruling class. The same effect could be achieved through dollarisation. (Colombo/June10/2016)
 

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