ECONOMYNEXT – Sri Lanka is bringing changes to the country’s foreign exchange law to closely monitor cross-border forex flows and possession and dealing, the central bank said in a monetary policy roadmap.
“The proposed amendments to the provisions of the Foreign Exchange Act, which are at the finalisation stage, would be completed by early 2020,” the central bank said.
“This would facilitate effective and comprehensive data collection for compilation of external sector statistics, regulatory supervision and macroeconomic policy formulation.”
Sri Lanka passed a less draconian foreign exchange law in 2017, reducing some penalties.
The central bank said it was combating ‘illegal possession’ of foreign exchange.
After the soft-pegged money printing central bank was set up in 1951 triggering forex shortages, abolishing a currency board which allows for free flow of capital, many routine transaction weredeemed ‘illegal’.
Even possessing foreign exchange was deemed ‘illegal’.
“We continued to identify the implementation issues and concerns in combating unauthorised activities involving foreign exchange such as illegal possession, transfers, exchange and other dealings in foreign exchange within Sri Lanka,” the road map said in 2020.
“We are also in the process of introducing an International Transactions Reporting System (ITRS), a comprehensive monitoring system of cross border transactions and foreign currency transactions through the banking system.”
Large penalties were slapped people who break the rules.
Under Governors A S Jayewardene and Nivard Cabraal, many forex laws were relaxed.
Sri Lanka already had some forex controls during the World War II because the Bank of England got into trouble printing money, generating difficulties in dealing outside the ‘Sterling area’.
However after independence draconian exchange and trade controls were imposed on citizens to allow the central bank to print money and operate a soft-peg.
The economy was almost completely closed in 1971 as the the Bretton Woods system collapsed with US Fed Governor Arthur Burns printed money to target an output gap during Vietnam War.
Forex controls were relaxed after a new administration opened the economy in 1978, but no fundamental reform was done to the central bank to restrain its domestic operations department, which inject liquidity to generate forex shortages.
Britain ended foex controls under Margarat Thatchers’s reforms with Alan Walters as advisor, which allowed the country to become strong and ended ‘Sterling crises’ from money printing. The controls slapped in 1939, were ended in October 1978.
“Exchange controls have been with us in one form or another for just over 40 years,: UK Chancellor of Exchequer Geoffrey Howe said at the time.
“They have now outlived their usefulness. The essential condition for maintaining confidence in our currency is a Government determined to maintain the right monetary and fiscal policies.
“That we shall do. It is right to give an additional degree of freedom to allow the pound to operate in the world unrestricted by restraints of this kind.”
Tax payer money wasted on monitoring and punishing citizens for violating exchange controls was also saved. There were 750 bureaucrats in the UK to enforce exchange control, paid with tax payer money at the time, Howe said.
“…[T]here will from tomorrow be full freedom to buy, retain and use foreign currency for travel, gifts and loans to non-residents, buying property overseas and investment in all foreign currency securities,” Chancellor Howe said.
“Portfolio investment will be wholly freed, and the requirement to deposit foreign currency securities with an authorised depositary is abolished.
“Foreign currency accounts can be held here or abroad. Passport marking for travel funds can now be abolished The necessary Treasury orders are being laid this afternoon.
“The removal of controls will lead to public expenditure savings of about £.14½ million a year, which represents the current cost of about 750 staff at present employed on exchange control work at the Bank of England and about 25 at the Treasury.”
In Sri Lanka – like in the UK during post World War II resurgence of Mercantilism and Keynesianism – there is a belief that currency problems come from too much imports or too little exports or the ‘currency account deficit’, not liquidity injections and the soft-peg now called the ‘flexible exchange rate’.
Analysts and economists have called for central bank reforms to restrain the domestic operations department to control liquidity injections, or a currency board to be re-established, so that the country can progress without balance of payments crises and forex shortages. (Colombo/Jan07/2020)