Home / Columnists/ Full liberalisation of the forex market

Full liberalisation of the forex market

Comments / {{hitsCtrl.values.hits}} Views / Friday, 17 June 2016 00:00

I wish to congratulate the Prime Minister for respecting public opinion and staying action on the supplementary vote for the purchase of luxury vehicles for Ministers and Deputy Ministers to the tune of Rs. 1.175 billion, until reparation of disaster devastation is completed. But I would dare to go further and suggest that such extravagant proposals should not be implemented at any time on the basis of prudent fiscal finance which is of imperative need at present.  6

We have been experiencing falling current revenue relative to current expenditure and bludgeoning budget deficits rising to unsustainable levels on the one hand, and a crippling public debt and unsustainable external debt burden on the other hand, in the face of sluggish inflow of FDI.  There has been agreement among the enlightened economics analysts that every effort should be made to increase current revenue while containing current expenditure, and to decrease the debt burden so as to halve the 2015 Budget deficit before the end of this decade. 

It was also advocated in my SLEA Presidential address, last year October titled ‘Living Beyond Means’ that direct tax revenue must be increased to narrow the resource gap and make  our tax system less regressive, while putting on hold for a couple  of years, some of the less essential construction expenditure which has been planned. In this context, It has been advocated that supplementary estimates should be avoided as far as possible, and a little austerity should be the hallmark all round.

Ministers and Deputy Ministers must have reliable vehicles to serve the people whom they represent. Like some have opined, I do not suggest that the Ministers/Deputies should be given Maruti cars. They could instead be given, every five years, any other petrol or diesel car of their choice, which is not subject to the Government Luxury Tax. If the Indian Prime Minister can use an Ambassador car, I do not think it is below dignity for our Ministers or their Deputies to use Japanese Toyotas or Mitsubishi Lancers or Nissan Sunny!dh

More importantly, the purpose of this note is to draw attention to another significant announcement the PM has made a couple of days ago, that the forex market will be fully liberalised before the end of the year.  With the free flow of foreign exchange, this would allow, the PM thinks, Foreign Direct Investment to increase. The Minister of Finance wants this “to keep abreast with other countries” (Island, 13 June)! However, in my view, this is hardly the opportune time to do it. 

Apart from the very adverse fiscal position at present, the country’s economic growth has declined from more than 8% in 2010-2012 to less than 5% during 2013-2015, and is estimated to grow not much higher than 5% this year. With the mega infrastructure investment on board, imports are likely to rise relative to exports against the backdrop of also a fragile global economy.  This would bring about an increase in the current account deficit of the balance of payments. 

The movement of the exchange rate which may improve immediately due to the IMF bailout and associated multilateral and bilateral lending, may also reverse and decline with increased imports. Gross official reserves, which were at around $ 6.3 billion in March 2016 – adequate only for about 3.5 months of import coverage, are at low levels. Although tourist earnings are envisaged to increase, remittances are not likely to rise due to fiscal reforms in Gulf countries. Therefore, the country’s external situation at present is not at all favourable for relaxation of the forex market. 

Nor will the FDI readily flow in as expected by the PM. If relaxation of the forex market was the only factor lacking for FDI to flow in readily, it should have come in amply, at least after the end of the terrorist war, because even then there was no barrier to remittance of profits and repatriation of capital by foreign investors.  

FDI has not been coming in to the country for no other reason than the absence of an “enabling environment” comprising good governance marked with transparency and accountability but without waste, corruption (including nepotism and favouritism) and extravagance or ostentation, with the operation of the rule of law, efficient and independent public institutions, the right to information, simple rules and procedure of investment and business, etc.

Without first effecting fiscal reforms and creating an enabling environment with  good governance, etc.,  if forex market were liberalised, instead of capital and FDI flowing in on a  net basis , capital would flow out allowing also those earning undeclared big money in rupees converting them to foreign currency and sending abroad. This situation would aggravate our present exchange problems. 

Therefore, it is necessary to first effect the necessary fiscal reforms and have in place the enabling environment with good governance and its attributes, which the present Government had promised the people at the last presidential and parliamentary elections. This will enable us to achieve both internal and external balance and eventual accumulation of official reserves sufficient for more than six months’ imports. Then the Prime Minister can think of full liberalisation of the forex market.  



Share This Article


Today's Columnists

A SME policy finally in Sri Lanka

Wednesday, 18 October 2017

The other day there was a communiqué that Sri Lanka must have a SME policy as per the direction from the leadership of the Yahapalanaya Government. It sure gave breath to the economy that is currently nose diving with a growth at 4.7% and all banks

How can Sri Lanka gain from Asia’s ‘noodle bowl’ of regional infrastructure?

Wednesday, 18 October 2017

China’s Belt and Road Initiative (BRI) – a web of intercontinental road, rail and port links – is a hot topic in Sri Lanka

What is more important? Fixing the Constitution or fixing the economy?

Tuesday, 17 October 2017

The Steering Committee of the Constitutional Assembly has produced an Interim Report on six key issues after 73 sessions between April 2016 and September 2017, without basic consensus among the key partners of political party representatives in the C

Top 10 tourist source markets and marketing of Sri Lanka tourism niches

Tuesday, 17 October 2017

The tourism sector is a significant that contribute to the economy of the country. Sri Lanka received over two million arrivals in 2016. This was 14% increase compared to last year 2015. In the case of foreign exchange earnings, Sri Lanka’s earning

Columnists More