Sri Lanka moves to curb capital outflow

SRI LANKA’S central bank last Sunday (4) further tightened controls on the outflow of foreign currency to combat a growing cash crunch triggered by the coronavirus pandemic.

Foreign exchange reserves have almost halved since late 2019 to $4 billion (£2.9bn) after the rupee sank to a record low last year. Mixed with the ongoing pandemic, apparent resistance to International Monetary Fund support and patchy demand in recent local debt auctions, market pressure has intensified.

The curbs come as worries continue about the government’s ability to repay its debts, despite reassurances from ministers and officials that it will. The Central Bank of Sri Lanka said overseas investments by local firms would be suspended for six months.

The amount of capital that companies and citizens can take out of the island nation would also be restricted, it added.

Sri Lanka has already banned imports of luxury goods and cars since last year to combat the foreign currency outflows.

The government is planning to extend the import ban to mobile phones, computers and electronic consumer goods, local media reported recently.

The central bank said in a statement that the restrictions were to “assist and maintain the financial system stability”. International rating agencies have expressed concern over Sri Lanka’s ability to service its foreign debt.

But central bank governor WD Lakshman has said the country will meet its debt obligations, which amount to $3.6bn in the next six months.

Colombo has borrowed from several Asian countries, including Bangladesh, China and South Korea, and expects to receive $800 million from the International Monetary Fund in August.

The country’s debt has ballooned over the past two decades after the financing of several infrastructure projects that critics say have become white elephants.