22 June 2016 10:38 am Views - 2710
Top economists in the country have warned that this may not be the correct time for Sri Lanka to be liberalising its foreign exchange markets, as the country’s macroeconomic fundamentals are not strong enough to withstand it. “The policy is right but the timing is wrong. Even the right policies will bring about more harm than benefit, when they are implemented at the wrong time. The economy is far from being in right shape to adopt policies in an ad-hoc manner,” Colombo Unive r s i ty Economics P r o f e s s o r Sirimal Abeyratne said. Finance Minister Ravi Karunanayake this month said that motions to repeal the incumbent Exchange Control Act, and to amend the Monetary Act and the Banking Act to allow greater foreign exchange liberalisation would be presented to parliament this month. S e n i o r E c o n o m i s t Dr.Indrajit Coomaraswamy,
who is now an official advisor to the government, was wary, saying that there would be risks in liberalisation if there were weak macroeconomic fundamentals. “I think before one opens up, and before one has got control of the budget for instance, before one has fiscal and monetary policy coordination in better shape, and generally has strong macroeconomic fundamentals, the risks are high,” he said. S r i Lanka rece n t ly received support from the IMF to ease its balance of payments burden, which included detailed macroeconomic policies required to bring the economy back into a healthy footing.
With this short-term relief, the government seems keen to implement ad-hoc policies, going for amendments to the Customs Code now instead of in 3 years, after gaining a cushion from reformed taxes, as advised by the IMF. Economic Association of Sri Lanka Chairman Professor A. D. V. de S. Indraratna noted that the government’s motivation for liberalisation—the lack of foreign direct investments (FDIs)—is misplaced, as FDIs were flowing in due to the lack of an enabling environment.
“Without first effecting fiscal reforms and creating an enabling environment with good governance, etc., if the forex market were liberalised, instead of capital and FDI flowing in on a net basis, capital would flow out,” he said. While Dr. Coomaraswamy said that the capital account would not be opened up completely, Prof. Indraratna noted that even current account liberalisation would allow undeclared money to be laundered and stashed abroad. “Any liberalisation will lead to a sudden outflow of foreign reserves and it would worsen the pressure on the rupee to depreciate,” former Central Bank Deputy Governor W. A. Wijewardena said. The rupee has remained stable recently due to IMF relief. Meanwhile, Prof. Abeyratne warned that liberalising of the capital account may cause even local investors to seek foreign projects, as longterm growth aspects locally were weak, while in the short term, there may be some inflow of speculative portfolio investments.
He added that if the macroeconomic environment was ideal—had Sri Lanka made use of its window of opportunity to amend laws and integrate with the world--investors would have viewed the liberalisation positively. ““As the economy has not yet even stepped into a growth path as such, I believe it is no different from putting the cart before the horse,” Prof. Abeyratne added. He noted that regulatory mechanisms and the rule of law should be strong and effective to support such a free market, as the lack of proper rules and regulations would lead to disastrous outcomes. Wijewardena advised that full liberalisation should be done gradually over a longer period of time. “The full liberlisation of all the accounts should be a policy target that should be implemented over a period of time, say about 5 years from today. It will enable SL to learn from sudden outflows and take remedial measures,” he said
