Capital Markets and Portfolio Investment in Sri Lanka
The Colombo Stock Exchange (CSE) is governed by the Securities and Exchange Commission (SEC), unit trusts, stockbrokers, listed public companies, margin traders, underwriters, investment managers, credit rating agencies and securities depositories. Investment in foreign portfolios is encouraged. Foreign investors in numerous allowed industries can buy up to 100 percent of the equity in Sri Lankan businesses. Country and regional funds may receive SEC permission to invest in Sri Lanka’s inventory market to promote portfolio investments.
These funds create transactions through share investments in business banks ‘ Inward Investment Accounts. There are currently 297 firms listed on the CSE representing 20 company industries. Because liquidity in the stock market is restricted, investors need to control their exit strategy carefully. The exchange rate will also affect investors. The state and the central bank usually refrain from constraints on present global transfers following their commitments under Article VIII of the IMF.
When the government is experiencing problems with the balance of payments, it tends to impose controls on foreign exchange transactions. In 2018, Sri Lanka took several steps to limit imports due to pressure on the equilibrium of payments.
In September 2018, the Central Bank implemented a 100% deposit requirement for non-essential imports including perfumes, toiletries and tires and a 200% deposit requirement for motor vehicle imports. The Central Bank also enforced reserve requirements against credit letters opened for such imports and directed banks not to release foreign exchange on non-essential imports under advance payment terms. In March 2019, those conditions were withdrawn.
The government consumes more than 50% of the national economic assets of the nation and has a virtual monopoly on the country’s leadership and use of long-term savings. This inhibits the free flow of budgetary funds to the markets of products and factors. High budget deficits have led to more excellent interest rates and more significant inflation. Inflation was around 4.0 percent in February 2019 on a year-to-year basis, and the average prime lending rate was 12 percent.
Retained earnings finance an essential part of private investment in Sri Lanka. Bank loans are the most commonly used private-sector loan tool. Large enterprises also raise funds through corporate debentures. For all deposit-taking organizations and all types of debt instruments, credit ratings are compulsory. Local businesses are permitted to borrow from foreign sources. About 6 percent of the total investment is financed by foreign direct investment. Foreign investors are allowed to access local market credit and are free to raise foreign currency loans.
| Article Code : | VBS/AT/07102019/Z_T3 |