Although the idea of relaxing exchange controls in the country was initiated sometime back, the Government now intends to introduce the new Act by January next year, according to Finance Minister Ravi Karunanayake.
The regulations in place currently, governing the exchange of foreign currencies was introduced and formally known as the Exchange Control Act No. 24 of 1953.
In simple terms, what the Act aims at is to implement tools to measure and limit the currency flow into and out of the country.. Every country has laws and regulations to control its exchange flow.
Introduced in the fifties, Sri Lanka’s Exchange Control Act is no longer in tune with the times. The circumstances and business environments have changed through the course of time.
The Act introduced the Exchange Control Department, that acts on behalf of the Sri Lankan Government, through the Central Bank of Sri Lanka, in managing foreign exchange transactions in the country.
During the presentation of the budget for the fiscal year 2017, the liberalization of the Exchange Control Act came into the limelight, when the Minister of Finance, Ravi Karunanayake said, the existing Exchange Control Act will be repealed and a new Act implemented.
“Exchange Control Act will be repealed and a Foreign Exchange Act will be introduced to protect foreign reserves from irregular transactions,” the Minister said during his budget speech.
With the Government’s initiative to increase foreign investments in Sri Lanka and make use of the strategic geographical location of the country, axing of this archaic piece of legislation is timely. This in turn looks to increase and stabilize foreign investments.
“We have done away with the draconian and archaic laws and introduced modernized laws, not to have any capital outflows which are injurious to the economy,” Minister Karunanayake said, speaking to the Sunday Observer.
“It is the view of the government, in order to compete with other countries and markets that are fast changing, Sri Lanka too needs to keep up with the newest market and economic trends, to boost investor confidence and create market discipline.”
The basic idea was to decriminalize the existing Act which is a draconian law. Under the current Exchange Control Act any offence committed is treated as a criminal offence and will attract criminal penalties.
The architect of the original Act, former Central Bank Governor N .U Jayawardane himself, later fell victim to the very Act he introduced. According to his colleagues he later admitted that introducing such a draconian law was a grave mistake.
With the introduction of the new Act, money laundering and financing terrorism are covered. Therefore, the need to continue with a criminal element in the Exchange Control Act is no longer necessary.
Another important aspect of this piece of legislation is that it is the only Act that empowers a bureaucrat to impose penalties without going before a court of law. It permits the Controller of Exchange to impose a fine up to four times that of the offence.
The liberalization of this Act is a must. The Maldives doesn’t have an Exchange Control Act.
Sri Lanka cannot march forward without foreign sector investments and foreign exchange, which is an essential part of the development of the country. The country needs to be abreast with other countries in respect of new legal, economic and policy developments.
Although the relaxation of these regulations is welcome, it is a fine line between relaxations of regulations to entertain foreign investments and entertaining money laundering and tax havens. Therefore, the government needs to be mindful of what they intend to achieve by liberalizing these laws.
According to economics experts, the liberalization of exchange controls is the only way to mobilize foreign resources to secure a better economic growth for wealth creation in the country.
“The Act should look to make the current control act more fluent in terms of doing business. But, the government needs to take inputs from all stakeholders before implementing or introducing the new Act,” said the Lead Economist at Frontier Research, speaking to the Sunday Observer.
He said, the new Act will need to carefully balance the impact from capital flows, given how quickly the trend in portfolio inflows can change and help the overall position of reserves as well.
“The country will benefit from new regulations in place of outdated laws. As with any other laws that have been implemented in recent times it should be implemented for the betterment of the country, and not merely to be exploited” he said.