Thursday, November 25, 2010

Sri Lanka Eases Currency Controls in Postwar Stimulus

Sri Lanka is easing foreign-exchange controls as the South Asian island seeks to accelerate economic growth after ending a 26-year civil war.

The government will allow overseas investors to buy corporate debt and local residents to buy shares of foreign companies, according to footnotes in President Mahinda Rajapaksa’s budget speech. Insurers will be permitted to invest up to 20 percent of their “long-term fund and technical reserves” abroad, the document said. The changes took effect yesterday.

Central bank Governor Ajith Nivard Cabraal today said Sri Lanka’s economy is strong enough and the country has sufficient reserves to cope with easing of foreign-exchange controls. Colombo’s benchmark stock index has climbed 90 percent this year, the world’s second-best performer, lagging behind only Mongolia.

“There is money waiting to come into this country with optimism on growth,” said Ravi Abeysuriya, chief executive officer at Heraymila Securities Ltd. “The moves are also very encouraging for local companies and individuals to build a truly diversified investment portfolio.”

The new rules will “promote exports and develop local capital markets,” according to the budget notes.

Contrasting Move

Sri Lanka’s move contrasts with countries from South Korea to Brazil, which are seeking to restrain capital inflows to prevent gains in their currencies from hurting exports.

Cabraal said corporate debt available to foreign investors would have to be rated, while insurers would be required to build their foreign holdings over a period of three years.

Listed companies are allowed to invest $500,000 in equity abroad, while unlisted firms and individuals could invest $100,000, he told reporters in Colombo.

Sri Lanka would maintain a 10 percent limit on government rupee debt available to foreign buyers, Cabraal said.

Rajapaksa, unveiling the 2011 budget in Colombo yesterday, announced plans to cut value-added tax for lenders to 12 percent from 20 percent, reduce levies on tourism and construction companies and offer breaks to tea and rubber companies. The changes will be implemented in January.

Before the budget statement, the Central Bank of Sri Lanka said it planned to introduce inflation targeting in an effort to anchor price expectations, joining Southeast Asian counterparts including Indonesia, Thailand and the Philippines.

The proposed changes to the nation’s fiscal and monetary frameworks mark the biggest overhaul of economic policy since Rajapaksa’s government defeated the separatist Liberation Tigers of Tamil Eelam in May 2009.

To contact the reporter on this story: Anusha Ondaatjie in Colombo at

To contact the editors responsible for this story: Stephen Foxwell at; Chris Anstey at

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