The government is prioritising an FX regime overhaul, but what difference will it make for corporates?
The Sri Lankan government is set to reform its foreign exchange control legislation early next year in a bid to increase foreign direct investment (FDI) into the country and spur export growth.
During his budget speech on November 10, Finance Minister Ravi Karunanayake said an Investment Inflow Management Act would be forthcoming in “due course”.
Local economists, who are used to governments pledging action but failing to follow up, have been taking their usual wait and see approach.
However, the head of Sri Lanka’s biggest private sector bank told CT’s sister publication FinanceAsia that the prime minister, Ranil Wickremesinghe, had promised to introduce legislation very early in 2017.Jegan Durairatnam, the chief executive of Commercial Bank, believes it is one of the government’s top priorities and will transform the country’s FDI prospects and finances. What effect the move on its own would have on foreign corporates in Sri Lanka remains to be seen.
The government needs a fiscal boost after spending the past year grappling with a balance of payments crisis thanks to the debt-funded infrastructure spending of the previous government led by strongman Mahinda Rajapaksa.
As a result, Sri Lanka has lost its double-B credit rating from all three international ratings agencies and diminished its foreign currency reserves.
At the end of October, foreign currency reserves had recovered to about $6.1 billion, but still only cover about 3.8 to 4 months of imports, according to local economists. has also been very slow to release the most up-to-date FDI figures, suggesting the number is not very good.
olombo-based economist Deshal de Mel believes the government’s precarious financial situation means it needs to take a gradual and phased approach to exchange control reform to prevent capital flight . “The original exchange control act dates from 1953, so at the very least it will be good to consolidate the many amendments of recent years into a new act, which makes the rules clear and comprehensible for foreign investors,” he said.
Lakshini Fernando, economist at Colombo-based Asia Securities, agrees. “The controls won’t be completely repealed,” he said. “What the government seems likely to do is make it easier for exporters and foreign investors to bring money in and out of the country.”
Economists say it is relatively easy to bring money into the country. But the exit route is complicated and involves a lot of paperwork.
Indeed, both Fernando and de Mel believe that exchange control reform on its own will not make much difference to multinationals considering Sri Lanka as an investment destination.Many are already exempt from exchange controls, for example, if they are registered with the Board of Investment.
What will make a difference are consistent policies and stable government. Earlier this year, Karunanayake, the finance minister, caused consternation among exporters after announcing they had 30 days to remit all foreign currency earnings back into the country to ease the government’s financial situation.
“These unpredictable pronouncements impact confidence and lack of any consultation beforehand was also a concern,” Fernando said.
Fernando is more impressed with the government’s plans to set up a one-stop service centre for foreign investment projects, as the current registration process is extremely inefficient. “It’s a rather long drawn-out way of communicating, with a number of government agencies to get all the necessary chops,” she commented.
Karunanayake said the new agency will become operational at the beginning of January. During his budget he also threw out a number of other incentives for foreign investors. One priority is to develop the north and prevent a renewed flare-up among the Tamil minority.
As such, he announced a 200% capital allowance for companies that invest more than $3 million and employ more than 250 workers in Northern Province, plus a 100% capital allowance for companies, , which do the same in Eastern Province.
In terms of easing foreign exchange controls, he also said the individual foreign declaration threshold was being raised from $15,000 to $40,000, while non-financial institutions will be able to raise the equivalent of up to 35% of their total assets in the international capital markets.