Sri Lanka tightens capital controls, outflows from forex accounts capped

Sri Lanka has tightened exchange controls halting new foreign investments by companies and individuals for the next six months and also lowered the amount of money that citizens can take out when they migrate to another country, as money printing de-stabilized dollar soft-peg.

For the next six months, outward remittances from personal or business foreign currency accounts would be limited to 20,000 dollars.

Sri Lankan firms could invest up to 2 million dollars outside the country under earlier regulations without special permission and individuals could invest up to 200,000 US dollars a year.

Investments from abroad could still be made from foreign borrowings.

The monetary board of the central bank could still approve investments on a case by case basis.

Sri Lanka’s current Minister of Money and Capital Markets Nivard Cabraal started a new round of exchange control relaxations when he was central bank governor. In 2017 the last administration gave blanket approval for individual and firms to invest abroad subject to limits, without prior approval.

For many decades in Sri Lanka all capital transactions had to be individually approved and no citizen was allowed to have foreign bank accounts.

Exchange controls were tightened progressively after a Latin America style central bank was set up in 1950 by a so-called American ‘money doctor’, abolishing a currency board that kept the exchange rate fixed (to silver) from 1885.

The regulations will be in effect for the next six months.

Firms would also be allowed to remit up to 15,000 dollars to existing branches and funds needed to meet regulatory requirements abroad.

The first allowance for those migrating abroad has been brought down to 30,000 from 200,000.

Gifts received from immediate family members would not be allowed to be remitted.

Remitting funds in the provident funds would be limited to 30,000 dollars.

A person who is already resident outside who get temporary residence visa holders to be issued 20,000 dollars down from 30,000 earlier

A person who gets a new temporary resident visa to be issued 10,000 dollars down from 30,000 earlier.

Download forex regulations-July 2021

Sri Lanka has printed unusually large volumes of money under the so-called ‘modern monetary theory’ triggering record balance of payments deficits and pressure on the soft-currency peg of the country.

Pressure has intensified after taxes were cut in 2019 in a ‘fiscal stimulus’ and rates were cut and large volumes of liquidity injected in a ‘monetary stimulus’.

Sri Lanka has been operating a highly unstable soft-peg labelled a ‘flexible exchange rate’ which is neither a consistent peg (external anchor) nor a floating rate (domestic anchor), which conflict which each other triggering currency collapses.

Exchange controls were enacted barely two years after after a Latin America style central bank was set up in 1950 by a so-called American ‘money doctor’, abolishing a currency board that kept the exchange rate fixed (to silver) from 1885.

Economist Steven Hanke says exchange controls can be traced back to Plato, who was inspired by Lycurgus of Sparta.

“Exchange controls are nothing more than a ring fence within which governments can expropriate their subjects’ property,” explains Hanke.

“Open exchange and capital markets, in fact, protect the individual from exactions, because governments must reckon with the possibility of capital flight.”

Modern exchange controls were pioneered by Tsar Nicholas II in 1905/6 when the State Bank of Russia refused to sell foreign exchange except for imports.

“The extent of the control over all life that economic control confers is nowhere better illustrated than in the field of foreign exchanges,” wrote economist and philosopher Freidrich von Hayek in Road to Serfdom.

“Nothing would at first seem to affect private life less than a state control of the dealings in foreign exchange, and most people will regard its introduction with complete indifference.

“Yet the experience of most Continental countries has taught thoughtful people to regard this step as the decisive advance on the path to totalitarianism and the suppression of individual liberty.

“It is, in fact, the complete delivery of the individual to the tyranny of the state, the final suppression of all means of escape-not merely for the rich but for everybody.”