Extending the measures to liberalize the foreign exchange market in Sri Lanka, the Net Open Position (NOP) limit, which is the open dollar position of licensed commercial banks (LCBs), was increased as a whole (banking industry) by as much as 85 percent to reach 120 percent by the Central Bank of Sri Lanka (CBSL), with effect from last Wednesday.
This is amongst a number of exchange relaxation measures listed in the Road Map 2013.
Also known as the foreign currency exposure limit, which differs from bank to bank, was previously capped at 64.7 percent. Raising the threshold is an attempt to liberalize the exchange controls and thus, will provide some form of a leeway for the LCBs in terms of collecting and keeping foreign currency with them than before.
“Raising the foreign exchange NOP limits will provide LCBs more flexibility in managing their foreign exchange transactions. Further, the limits on forward market transactions will also be relaxed with effect from today,” said Ajith Nivard Cabraal, the Governor of the CBSL, unveiling the policy document for the New Year recently.
The main risks to the financial system from the foreign exchange market arise from the impact of excessive volatility in the exchange rate on the NOP in foreign exchange of commercial banks. There is also a possibility of a potential contagion effect as problems in one commercial bank could spread to others.
At a function held at the atrium of the CBSL, Cabraal said that several derivative products would also be allowed to be developed within the broad guidelines that will be issued during 2013.
At present, the only derivative product available in Sri Lanka is the Forward Rate Agreements to hedge the foreign currency risk. However, it is expected that new derivatives such as Options, Foreign Exchange Swaps and Interest Rate Swaps would also be made available this year providing multiple options to hedge forex and interest rate risk.
Outlining several other exchange control policy relaxations he said, “Time restrictions on forward foreign exchange transactions will be removed, while a new investment account for non-residents, amalgamating several types of investment accounts currently maintained at LCBs will also be introduced with effect from today.”
Apart from the above, a new Inward Remittances Distribution Account which can be used as a clearing account to disburse earnings of expatriate workers was also introduced.
The Road Map 2013 further allowed foreign borrowings by companies for investment and business purposes under the ‘External Commercial Borrowing Scheme’. The current limit on overseas investments by residents will also be increased but the CBSL did not provide a particular limit.
Criteria for permitting selected non-banking entities to engage in foreign currency deposit business are expected to be introduced. Besides, i nward remittances through mobile phones will also be facilitated.
A mechanism to change foreign currency through ATMs of LCBs will be introduced, while fund transfers involving shipping companies, port operations and harbour services will also be facilitated.
This policy easing was announced at a time when several exchange control policies had already been relaxed by the Budget 2013, where the role of the exchange controller was dispensed with, when LCBs and corporations borrow from overseas. (DK)