Columbo – Sri Lanka plans to restrict foreign holdings of government securities to a maximum 5 percent from the current 10 percent to prevent possible hot money flows and improve the quality of reserves, the country’s central bank chief said on Wednesday.
Sri Lanka’s economy is struggling to attract long-term foreign investment due to policy inconsistency and political instability.
The move comes after the island nation suffered about $1 billon in foreign outflows from rupee-denominated government securities in 2018.
Almost 42 percent of these outflows were in the last couple of months in the unfortunate aftermath of a political crisis triggered by President Maithripala Sirisena sacking Prime Minister Ranil Wickremesinghe.
Foreigners held 3.1 percent of the total outstanding government securities of 5.29 trillion rupees ($28.95 billion) as of Dec. 26, central bank data showed.
“In view of the increased volatility in global financial markets, we also intend to reduce the threshold for foreign investment in rupee denominated government securities from 10 percent of the outstanding government securities stock at present to 5 percent,” Central Bank of Sri Lanka Governor Indrajit Coomaraswamy said.
A rise in interest rates in the U.S. and major economies, and trade tensions, have led to greater volatility in the system, he added, during the release of the bank’s 2019 economic outlook.
“All that has elevated uncertainty. In such a context, foreign institutional investors, that is foot loose money, goes in and out very fast. Those are the people we gave this 10 percent limit. Now with a much more volatile global financial context, its better not to have as much exposure.”