ECONOMYNEXT – The International Monetary Fund has welcomed a less restrictive exchange controls in Sri Lanka which replaced a draconian law brought in 1953, soon after a money printing central bank was set up, generating foreign exchange problems, currency depreciation and high inflation.
Following 2017 annual Article IV consultations, a report said IMF staff “welcomed the new Foreign Exchange Act, which modernized the FX-related regulations by replacing the 1953 regime of exchange arrangements and provided market participants with more clarity on FX transactions.”
Sounding a note of caution the report said “capital flow liberalization should be properly sequenced with macroeconomic adjustment and supporting reforms.
Because Sri Lanka prints money and tries to control the exchange rate at the same time, which is practically not possible without exchange controls (the impossible trinity of monetary policy objectives) the island does not have a completely free capital account.
Until 1951 Sri Lanka had a currency board, which kept the exchange rate fixed from 1885, originally hard pegged to what was then the silver rupee.
Under a currency board, there is no policy rate which is maintained though printing money as the monetary authority does not have a d domestic operations department.
The interest rate therefore floats and the exchange rate is fixed and there is free capital movement and free trade.
Until 1884, money was issued in free banking style by the Oriental Bank Corporation, which went bankrupt amid a collapsing credit and commodity bubble after borrowing in sterling and lending in silver, which was a foreign exchange risk.
Meanwhile the IMF also commended the central bank for slashing forex swaps with commercial banks from 2.5 billion US dollars to 1.2 billion US dollars in the latest Article IV report. The swaps represented subsidized exchange risk guarantee.
Under Sri Lanka’s current Central Bank Governor Indrajit Coomaraswamy IMF reports are released quickly, unlike under the previous two governors when reports were suppressed. (Colombo/June22/2018)