Sri Lanka to abolish ‘uncivilized’ exchange control law: Ravi

ECONOMYNEXT – Sri Lanka will abolish its exchange control law to remove ‘draconian’ provisions in line with other civilized nations, Finance Minister Ravi Karunanayake said.

Karunanayake said that a previous plan to create a new agency and set up an exchange management law had been abandoned.

He said draconian exchange controls were not in line with best practices followed in ‘civilized’ nations.

Exchange controls are used by countries with so called soft-pegged exchange rate regimes, where a central bank prints money to control interest rates and then tries to control the exchange rate at the same time.

When a central bank prints money, regardless of whether there is export growth or not, imports go up due to the ‘demand’ created by the newly created money, leading to balance of payments trouble.

Karunanayake said some capital controls may remain, but they would be taken care of by monetary and banking laws.

However, Sri Lanka only last month resorted to ‘uncivilized’ law to force exporters to bring back back dollars. But Karunanayake defended the move saying exporters should not keep dollars out while the country needed it. He said exporters could bring them back and take it out again.

Exporters can still bring dollars and keep them in forex accounts, as Sri Lanka has allowed deposit dollarization, which means the cash or deposits will still form part of the U.S. money supply. However, as a soft-pegged country prone to balance of payments trouble, a clearer understanding of exchange regimes is still absent in Sri Lanka, where mainstream ‘economic’ thinking is Mercantilist in nature, some analysts have pointed out.

Sri Lanka progressively tightened exchange controls after setting up a money printing central bank in 1951 to join the now-failed, soft-pegged Bretton Woods system, after abolishing a currency board that had allowed the free flow of capital.

Analysts have called for the central bank to be abolished and a currency board recreated to prevent balance of payments trouble, and also force rulers to trim budget deficits.

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In the absence of money printing, an excessively deficit spending state will be forced to default in government debt instead of imposing collective default through currency depreciation on both state and private debt-like bank deposits and pension funds.

Modern-type exchange controls emerged when the Russia’s central bank refused to sell more than 50,000 German marks per person.

"Tsar Nicholas II first pioneered limitations on convertibility in modern times, ordering the State Bank of Russia to introduce a limited form of exchange control in 1905-06 to discourage speculative purchases of foreign exchange," explains Steven Hanke, a professor at John’s Hopkins University in the US (The Siren Song of Exchange Controls).

"The bank did so by refusing to sell foreign exchange, except where it could be shown that it was required for imports; otherwise, foreign exchange was limited to 50,000 German marks per person."

"The tsar’s rationale for exchange controls was to limit hot money flows, so that foreign reserves and the exchange rate could be maintained. The more things change, the more they remain the same." (Colombo/April02/2016)

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