Sri Lanka SOEs foreign borrowings requirement relaxed

ECONOMYNEXT  – Sri Lanka state-owned enterprises, have been allowed to borrow from foreign sources without the lender opening an account inside the island, according to regulations approved by the parliament.

Firms where the government owns more than 50 percent of shares have had practical difficulties in borrowing abroad due to current requirements, State Minister of Finance Eran Wickremeratne told parliament.

Under a change to sector 29 of Sri Lanka’s Foreign Exchange Act, an SOE could borrow abroad after getting approval of the line ministry without the proceeds coming through an Inward Investment Account of the lender.

But all borrowings have to be reported by the Department of External Resources, Department of Public Enterprises, and the Department of National Budget, to the Department of Foreign Exchange within a month of the loans coming into Sri Lanka.

Sri Lanka’s SOE’s like Ceylon Petroleum Corporation has large foreign borrowings, despite having rupee customers and are exposed to currency risk from the country’s soft-pegged exchange rate.

Sri Lanka has exchange controls due to the operation of a soft-pegged exchange rate, where the Central Bank prints money to control interest rates (policy rate) boosting domestic credit, and also try to control the exchange rate at the same time, which is not practically possible.

As a result, foreign exchange ‘shortages’ occurs and the rupee falls, generating foreign exchange panics and steep falls in the currency.

There have been calls to reform the soft-peg and outlaw specific actions of the domestic operations department that lead to monetary instability and steep falls of the currency.

SOEs that had dollar borrowings, are hit by large losses when the soft-peg collapses. (Colombo/May10/2019-SB)

 

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