Sri Lanka to Ease Capital Controls in a Few Weeks, Cabraal Says

By Anusha Ondaatjie and Susan Li

Oct. 19 (Bloomberg) -- Sri Lanka plans to ease foreign- exchange rules in the “next few weeks,” the nation’s central bank governor said, after keeping interest rates unchanged today to support economic expansion.

“In the next few weeks, we are going to be relaxing some of the exchange controls that we have, which means there will be basis for outside growth as well,” Ajith Nivard Cabraal said in a telephone interview with Bloomberg Television from Colombo. He didn’t elaborate.

Sri Lanka’s move contrasts with countries from South Korea to Brazil which are seeking to restrain capital inflows to prevent further gains in their currencies from hurting exports. Reducing curbs will enable foreign investors to buy corporate debt in Sri Lanka, Cabraal said in January. It will also help local residents to buy shares of foreign companies and permit Sri Lankan companies to list abroad, he said.

“The lifting of capital controls are all part of the growth strategy,” said Bimanee Meepagala, a Colombo-based analyst at NDB Aviva Wealth Management Ltd, the nation’s biggest non-state fund. “Depending on the inflation outlook, they’ll cut or hold rates low for as long as possible.”

The Sri Lankan rupee, which has gained 2.2 percent against the dollar this year, climbed to a 21-month high of 111.62 on Oct. 5 after the island nation raised $1 billion in its third global dollar offering and the International Monetary Fund lent about $213 million. The central bank said Oct. 7 foreign- exchange reserves are at a record $7 billion.

Monitor Inflows

Sri Lanka will watch inflows “carefully” as the rupee has a “tendency” to appreciate because the dollar has weakened, Cabraal said.

Brazil stepped up efforts to curb gains in the real by raising inflow taxes and said it may be forced to take additional measures as Finance Minister Guido Mantega called for an end to the worldwide “currency war.” South Korea is preparing further steps to counter capital inflows arising from low interest rates overseas, Finance Minister Yoon Jeung Hyun said at a parliamentary audit in Seoul today.

Sri Lanka is relaxing foreign-exchange rules to help spur economic growth after the end of a 26-year civil war last year.

Cabraal left the reverse repurchase rate at 9 percent, the lowest level since November 2004, and the repurchase rate at 7.25 percent, according to a statement on the Colombo-based bank’s website today, after lowering them in July and August.

Lower Rates

Cabraal has slashed the reverse repurchase rate by three- quarters of a percentage point since July, even as counterparts from India to Malaysia and Thailand raised borrowing costs this year to counter price pressures or the risk of asset bubbles.

Inflation isn’t a “major threat” in the next few months, Cabraal said today.

Cultivation on land recovered from the separatist Liberation Tigers of Tamil Eelam has boosted farm production and helped slow consumer-price gains in Sri Lanka to about half the average rate of the five years through 2009, according to the central bank.

Consumer prices in the capital, Colombo, rose 5.8 percent in September from a year earlier.

By comparison, the risk of inflation prompted the Reserve Bank of India to raise rates five times this year. Malaysia’s central bank left the benchmark overnight policy rate unchanged at 2.75 percent last month after three consecutive increases while Thailand’s central bank raised its benchmark rate in August for a second month.

Sri Lanka’s $42 billion economy may grow as much as 8 percent in 2010, the central bank said Sept. 21, compared with an earlier forecast for a 7 percent expansion.

Prospects of faster growth and the end of the civil war are encouraging foreign investments.

Aitken Spence Plc, Sri Lanka’s biggest operator of resorts, said Sept. 30 it will build a hotel with Six Senses Resorts & Spas in an investment worth as much as $40 million.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at anushao@bloomberg.net

To contact the editor responsible for this story: Stephen Foxwell at sfoxwell@bloomberg.net; Chris Anstey at canstey@bloomberg.net

source - noir.bloomberg.com