Sri Lanka’s incoming government plans to push forward with a range of “big bang” reforms to open up its financial system and liberalise the rupee after triumphing in Monday’s general election, the country’s central bank governor has said.
On Wednesday, controversial former President Mahinda Rajapaksa officially conceded defeat following this week’s parliamentary polls, paving the way for his reform-minded rival Ranil Wickremesinghe to return as prime minister of the south Asian island this week.
After the island’s 25-year civil war ended in 2009 with Mr Rajapaksa declaring victory, Sri Lanka became one the world’s fast-growing frontier markets, boosted by billions of dollars worth of infrastructure investment from China.
But Arjuna Mahendran, who was appointed governor of the Central Bank of Sri Lanka earlier this year, told the Financial Times that its new government had inherited a range of problems, including rising national debts and a ratio of tax revenues to gross domestic product that was among the lowest in the world.
Mr Mahendran, a close ally of Mr Wickremesinghe and a former managing director in HSBC’s private banking division, said he would double foreign exchange reserves as a prelude to full currency liberalisation, while moving to cut interest payments by reprofiling some of Sri Lanka’s Rs7.7bn ($57m) stock of government debts, including from Chinese state-backed banks.
Describing existing restrictions on the rupee as part of a “siege mentality”, he said the new government would “slash” exchange controls via new legislation, ushering in a “radically different set of rules” and paving the way to full currency convertibility, potentially as soon as next year.
“Our exchange control act is pretty draconian in how it restricts money coming in and out of the country, so what we are trying is to make it much simpler and more effective,” he said.
“We’d like to go with these big bang reforms when our reserves are a bit more robust,” he added, targeting reserves sufficient to cover a year of imports, more than double the present level.
Sri Lanka is the latest Asian nation to consider currency liberalisation. Raghuram Rajan, the Indian central bank governor, said in January that he hoped to move towards currency convertibility “in a short number of years”.
“When a Sri Lankan travels now you can’t just go and buy dollars,” Mr Mahendran said. “You have to jump through hoops . . . All of that has to be liberalised, to make people’s lives easier, and engender more trade.”
Sri Lanka’s government plans to build up its foreign reserves over the longer term by encouraging global companies to use the island as a base for high-value manufacturing exports, targeting neighbouring India’s sizeable market in particular.
Mr Wickremesinghe told the FT this week that he also planned to strike new trade deals with both India and China. He remained open to further infrastructure deals from Beijing, he added, despite having criticised the previous government for its excessive reliance on Chinese financing.
As central bank governor, Mr Mahendran also said he remained open to the idea — floated by his predecessor — of becoming the first country outside China to issue a renminbi-denominated “dim sum” bond, a step that would help China’s drive to establish the renminbi as a global currency. (Financial Times)