The idea that foreign exchange controls have shielded this country from foreign currency volatility or that a lack thereof would lead to the Sri Lankan rupee more rapidly reaching the Rs. 150 per US$1 mark is 'merely' perceptions, says Amba Research's Managing Director/Chief Executive Officer, Ravi Abeysuriya.
In reality, although controls protect the rupee from international volatility, they also restrict growth.
This is because controlling the capital account (or financial assets) of the country restricts Sri Lankans ability to invest abroad which allows them to reap higher dividends associated with taking operations international. He further noted that liberalisation occurring in other countries has demonstrated that the lifting of controls has resulted in more money coming into countries than going out.
Thus, the most pressing need for this country, according to Mr. Abeysuriya, is to create a properly developed market which manages long term risks in the capital markets. Currently, Sri Lanka subscribes to a positive list system whereby every currency transactions needs prior approval before it can go though which can prove limiting. Mr. Abeysuriya recommends a better alternative: A negative list system where certain items would be identified as requiring prior approvals while everything else would not need any approvals to proceed.
Accordingly, this would allow "a lot of flexibility for people to transact if they do the right thing as opposed to now where every transaction has to be vetted", says Mr. Abeysuriya.
Mr. Abeysuriya's comments were made at the "Public Lecture on Foreign Exchange Liberalisation: Perception, Realities and Way Forward" presented last week by the Centre for Banking Studies of the Central Bank of Sri Lanka.
The lecture, which was headlined by the Central Bank's Assistant Governor, P. Samarasiri, featured an in-depth lecture about all areas of foreign exchange, including the origins and relationship with globalisation, transactions which fall under foreign exchange, international and local exchange controls and liberalisation measures carried out domestically until today; all of which led to Mr. Samarasiri's conclusions proposing the 'Way Forward' for Sri Lanka. Noting that in 2007 there was an overall surplus of US$ 531 million [based on US$ 1,369 million current account (trade) deficit set against US$ 1,900 million in the capital account], Mr. Samarasiri pointed out that, if looked at on the basis of macro economic principles, a surplus such as in 2007 favours export promotion measures instead of the development spending (favoured by a deficit) which a country such as Sri Lanka needs for growth.
Therefore Mr. Samarasiri recommended liberalising the capital account to match the existing current account, while at the same time introducing compulsory risk management guidelines for both regulators and participants. In addition, he advised that policy makers should adopt prudential regulations to promote market discipline and surveillance while regulators should market policies to promote healthy capital mobility and market discipline as well as helping to guide market participants in creating prudent business models. His suggestions were also in keeping with Mr. Abeysuriya's idea of using a negative list system, since he identified the need to "get rid of arbitrary, case-by-case basis approvals processes".
If this can not be accomplished, according to Mr. Samarasiri, then several drastic measures would prove unavoidable. These include the government increasing foreign borrowing or the Central Bank looking for financing of the current account deficit or even resuming controls on the current account, which now stands at approximately US$ 1,400 million. In addition, the country would continue its low growth and lose opportunities from globalization and it may even have to increase its direct participation in the economy and shrink the private sector. |
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