5 January 2017 08:55 am
Sri Lanka’s new Foreign Exchange Act, which is expected to be presented to parliament this year, will do away with the current practice of foreign exchange-related offenses being prosecuted in a criminal court, as such will be dealt in a civil court, according to the Central Bank Governor.
“It’s no longer a criminal offence. Under the old Exchange Control Act, it was a criminal offense. Now we have made it a civil offence,” Dr. Indrajit Coomaraswamy told reporters this week, highlighting the salient features of the new law.
Since the independence, Sri Lanka has been operating with severe restrictions over foreign currency dealings, which in recent times saw some gradual relaxation despite a few bumps on the road.
Deputy Governor P. Samarasiri termed the existing Exchange Control Act as “draconian” as it prohibits all transactions between Sri Lankans and foreign citizens, carried out in foreign currency.
The permission to carry out current and capital transactions is granted by the finance minister based on the provisions available in the Act.
“But any permission granted could be revoked at any time according to the existing law,” Samarasiri noted.
For instance, last April, the finance minister ordered the country’s exporters to bring back their moneys held overseas on short notice, rolling back the progressive style of foreign exchange reforms.
Hence, Samarasiri said these provisions are a clear risk, which keeps the potential foreign investors away from Sri Lanka due to fear of subsequent revocation of foreign exchange rules that prohibit the repatriation of profits. But the new foreign exchange management law will liberalize all the current account transactions by law, sending a clear message to the global investor community that movement of foreign exchange could not be revoked later by any party.
While there will be further relaxation in controls, Dr. Coomaraswamy said that there would not be any dramatic relaxation of capital account because the country’s external sector is fragile to fully relax the capital movements.
“But the intention of the government is to overtime to liberalize the movement of capital. But for that we need more of a cushion in terms of reserves, etc.,” he added. However, he said empirical evidence had suggested that more liberalization in the capital account had resulted in more inflows as the people build confidence of the ability to take money out of the country of what they bring in.
“The empirical evidence shows that, if you do liberalize, more money actually comes in. If people know that they can take their money out, they are more liable to bring the money in. However, your macroeconomic conditions have to be robust enough to ensure there isn’t a very disruptive outflow,” he explained.
Speaking about the capital transactions under the new foreign exchange management law, Samarasiri said there would only be regulation from time to time with respect to movement of capital in the interest of the financial system stability at times of extreme volatility.
“So, the Foreign Exchange Management Act will create more confidence in the market so that these transactions are not that much controlled and bureaucratic,” he remarked.