Govt. ready to relax currency controls – CB chief

By Rosemarie Francisco

MANILA (Reuters) - Sri Lanka is ready to relax currency controls and allow private banks to build foreign exchange reserves to manage strong inflows, Central Bank Governor Ajith Nivard Cabraal said on Thursday.

Cabraal also said he expects inflation this year and the next to be under control despite expected strong growth.

Sri Lanka will announce measures to relax currency controls on 22 November but they are unlikely to include a change in the existing 10 percent cap on foreign investments in government securities, Cabraal told Reuters on the sidelines of an economic forum at the Asian Development Bank.

He had said last month the cap may be relaxed slightly.

“Right now, we don’t see any reason to do that because there is sufficient flows that are coming,” Cabraal said on the adjustment of the cap. “Bringing in more flows right now will put in further difficulties for us to handle the expansion as far as the foreign exchange is concerned.”

He said the government would expand areas where foreigners could invest, including in unlisted sectors and corporate debt.

“Some of the restrictions that we have, especially in areas where (foreign investors) could do business, as well as the practices and framework that they had to fulfil will be relaxed to some extent,” he said.

“Setting up branch offices by foreign companies in Sri Lanka will also be relaxed, and allowing Sri Lankans to set up branches outside will be relaxed...Even advance payments, the thresholds set out for advance payments, all that will be relaxed.”

He said the Central Bank was mulling a rationalisation of its foreign reserves policy to ease the cost burden on the monetary authority and the government from a rising reserve level that has hit $6.8 billion.

But he said the Central Bank wants to make sure the policy adjustment would not cause” any volatility or any pain to the economy” set to hit 8 percent growth this year.

“We may put in place the framework that does not build up too much of the official reserves, but we will allow the banks to build up the reserves to some extent, so that we will not see the cost having to be absorbed by the Central Bank or by the government,” Cabraal said.

He projected average inflation to be below 6 percent this year and at 5 percent or less in 2011.

Sri Lanka’s annual inflation has been on an uptrend since July, hitting a five-month high in September.

“The slight blip was something we had expected, and it (inflation) has behaved exactly the way that we had expected; so it is not a surprise to us,” said Cabraal. “That is why our policy rate has been kept where it was, even though there were some people who expected us to relax the policy rate further.”

$40m from ADB to boost Financial Sector, SMEs

By Deepal V. Perera

The Central Bank said yesterday that the Asian Development Bank (ADB) had released US$40 million to Sri Lanka to conduct two programmes namely the Financial Market Programme for development of the Financial Sector, and Development of Small and Medium Enterprises.

Central Bank Governor Nivard Cabraal who was in Manila early this week for meetings with officials of the ADB has been successful in initiating the release of the funds for the above two programmes.