Central Bank to ease foreign flow restrictions

Reuters: Sri Lanka will relax foreign exchange regulations by cutting down on paperwork for foreigners investing in the country, the Central Bank said on Friday.

Foreign investors have long complained of the lengthy paperwork required to both invest and repatriate money but Sri Lanka says the measures are designed to safeguard its reserves.

Chief Economist K.D. Ranasinghe, at the Central Bank told Reuters in an interview that the relaxation, which is expected to be announced in the 2011 Budget due 22 November, will also allow foreign investors to repatriate funds more easily.

It will also become easier for local firms to invest abroad, he said. “The (new) system will be very liberal, so that foreign investors can come in and go out at any time,” Ranasinghe said.

“So the relaxation and liberal environment will prompt them to come in without any restrictions, of course up to some limit. The red tape, restrictions, and bureaucracy for local firms going for international capital market will also be relaxed.”

Central Bank Governor Ajith Nivard Cabraal last week said currency controls would be relaxed.

The Central Bank has been cautious about easing exchange controls after Sri Lanka faced a balance of payment crisis in 2008. That was triggered when foreign funds pulled out over $1 billion during the global financial crisis.

But since then, the Central Bank has built up a record $7 billion in reserves - more than five times the eight-year low of $1.27 billion hit in March 2009.

“The reserves are more than what we had expected. We may not try to further build up our reserves. We won’t aggressively build up in the same way as we did last year, Ranasinghe said.

He said maintaining high reserves is a cost as some of them have been borrowed. As an alternative, Ranasinghe said the Central Bank now wants commercial banks to accumulate reserves up to a maximum of 15 percent of a bank’s capital. The current limit for banks is $1 billion.

Ranasinghe saw current policy rates as appropriate, though food prices have pushed up inflation in recent months. The Monetary Board will assess the latest economic numbers next week before announcing November policy rates on Tuesday, he added.