As a precursor to remove foreign exchange controls and enable freer mobility of capital, the government has decided to relax some of the exchange regulations hindering foreign borrowings by the local banks, Mirror Business learns. To this end, the government has instructed the Exchange Controller to allow the banks to borrow from overseas with no questions asked. A circular to that effect will soon be issued.

This is an extension of the 3-year exemption given for the banks to borrow from overseas sources up to US $ 50 million a year without the approval of the exchange controller, by the then government via its 2013 budget. The exemption lapsed on December 31, 2015. Subsequently a circular issued by the Central Bank to licensed commercial banks on the same year relieved banks from the requirement of such foreign borrowings to be capped at 15 percent of the capital funds. The circular was titled ‘Exempting Foreign Borrowings of Licensed Commercial Banks From Regulatory Limits’. However, it is yet to be certain whether both exemptions will be granted by the Central Bank – the former by the exchange controller and the latter by the Bank Supervision Department. The budget 2013 also gave its nod for the then development financiers, DFCC bank PLC and NDB Bank PLC, to borrow US $ 250 million each, over a 10-year tenor.

The then main opposition United National Party (UNP), now the main constituent of the unity government vehemently criticized the move saying the then government was using the banks as proxy borrowers to fund their vanity projects while keeping such debt off the government’s balance sheet. Meanwhile, even after the earlier exemption lapsed end last year, there were occasions this year where the Central Bank allowed certain financial institutions to borrow overseas on a caseby- case basis using the earlier window but under certain conditions.

It was only last week the Premier Ranil Wickremesinghe told Parliament that the government wanted to do away with the existing Exchange Control Act and replace it with a Foreign Exchange Management Act before the next budget due in November 2016. He said this was particularly to facilitate a large pipeline of foreign borrowings totaling US $ 12 billion including the US $ 1.5 billion from International Monetary Fund and another US $ 3.0 billion from sovereign issuances.