Sri Lanka-Foreign Exchange System

In 1948 Sri Lanka had an essentially open-door policy on imports and an optimistic outlook for its foreign trade relations, but deterioration in the value of the country's export earnings led in 1953 to the Exchange Control Act, which placed some restrictions on the movement of foreign currency. In 1961, in response to balance of payments problems, a rigorous system of exchange controls was introduced. Licenses that acted as exchange permits were issued by the controller of imports and exports. All imports and exports were subject to these regulations, and foreign exchange entering the country, whether by way of exports, invisibles, or the movements of capital, had to be surrendered to the exchange control authorities. Only imports of goods classified as essential were permitted. The list of such items became smaller during the 1960s because of the increasing scarcity of foreign exchange and the availability of new items through local production. In the early 1970s, only imports of the barest minimum of foodstuffs, drugs, textiles, raw materials, and capital goods were allowed.

From 1970 to 1977, Sri Lanka had a dual exchange rate system in addition to exchange and import controls. Under the system, imports of indispensable items--such as food and drugs--were allowed at the official rate, while all other imports were subject to a higher rate. Foreign exchange earned from tea, rubber, and coconut was converted into rupees at the official exchange rate, while earnings from all other exports were given the benefit of the higher rate.

In November 1977, the exchange rate system was liberalized as part of the new government's economic reforms. The dual rate system was abolished, and the rupee was set free to float in response to international developments and the balance of payments position. The immediate effect of this measure was a devaluation of around 50 percent; after this time, the rupee continued to fall gradually against the major international currencies. In December 1987, US$1 equalled Rs32.32 compared with Rs19.3 six years earlier.

Data as of October 1988