ECONOMYNEXT – Sri Lanka has relaxed some foreign trade and exchange controls triggered by money printed to keep rates down, but Central Bank Governor Nivard Cabraal said exporters will be asked to convert a higher share of receipts.
Exporters who now have to sell 25 percent of export proceeds and banks have to sell 10 percent to the central bank.
The new directions will set limits after “permitted credits” and their will be monitoring mechanism, he said.
“If exporters say they also have to import, then that’s fine. What we ask is to convert the balance,” Cabraal told EconomyNext after the launch of new policy frame work.
“If a diamond exporter says he spends 98 percent of his export proceeds for imports, what we say is convert the remaining 2 percent here.”
If not they will have to face corporate tax at 28 percent instead of 14 percent.
A similar scheme will be devised for services exports.
The exporter mandatory conversion does not address remittances and may also encourage other accounting methods for exports, analysts say.
The central bank has now mandated a 203 rupee rate to the US dollar but money printing has increased inflationary expectations to until 230 to the dollar.
However to maintain a peg a central bank has to sell dollars to underwrite the rate (provide convertibility) and avoid printing money and allow rates to go up.
A part of the remittances have also gone out of official channels as a result of the mandated rate which is not backed by a convertibility undertaking.
However Cabraal had ear market 300 million dollars for convertibility according to a dollar flow projection in the roadmap.
Sri Lanka’s runs into frequent foreign exchange shortages due to activist monetary policy with a peg (money printing) and outright deficit financing with central bank credit and then a raft of controls come.
Economists and analysts have called for central bank reform restrain its ability to maintain low interest rates with printed money, so that long term monetary stability and a low interest rate regime that prevailed in the country before central bank was set up can return.
Cabraal had taken the first corrective step of taking away price controls on Treasuries auctions but bond markets are still not active. However a steepened yield curve has made bill investments more practical.
“It is important to keep low interest rates,” Cabraal said delivering a monetary policy road map for the next six months.
“Sometimes in times of stress may not be able to do it.”
Cabraal said he was removing recent cash margins on 600 items imposed to stop electronic items and underwear but asked importers not to bring large stocks.
Controls imposed on immigrants transfers will expire in January and will not be renewed, he said.
He also said 17 licenses of money changers that were cancelled will be restored.
The central bank will take the exchange rate risk when foreign investors invest in government rupee securities. The foreign holding in government holding has plummeted from 3,489 million US dollars in 2015 to 9 million US dollars at the moment.
New loans will be government to government and the international sovereign bonds would be reduced to 10 percent of the GDP from the current 15 percent, he said.
Buying Back ISB Bonds
He said the central bank is ready to buy the ISBs maturing in both January ant July if they are trading at a huge discounted rate.
“If lead mangers come and tell me that our ISBs are at a discounted rate, I am going to ask them to retire them,” he told EconomyNext.
Sri Lanka has bout 13 billion US dollars left in sovereign bonds.
Sri Lanka was trying to sell land to get foreign investments and was also negotiating 500 million dollars of swaps with other parties.
He expects around 500 million US dollar from the long term lease of lands.
New loans will be government to government and the international sovereign bonds would be reduced, he said.
If steep discounts persist in bonds, the government may buy back ISBs maturing in 2022, he said.
The current debt moratoria due to covid-19 pandemic will be unwounded gradually.
Banks will be directed not to auctions security of defaulted loans for six months till March 2021 and a 15,000 million rupee interest write off will be provided, he said.