GENERAL SIR JOHN KOTHALAWALA
DEFENCE UNIVERSITY
Business Law (LW 3163)
Name: N.K. Vitharana
Registration Number: D/LLB/20/0064
Semester – Year: 3rd Semester – 2nd year
Intake: 37
Name of the Lecturer: JAD Jayakody (Senior Lecturer Grade II)
Faculty of Law
KDU
Word Count: 1,865
INTRODUCTION
Exchange controls are limitations imposed by the government of the country in order to
limit purchase or/and sale of foreign currencies. The government imposes these limitations,
because these limitations can help the country to stabilize their economy and regulate in-flows
and out-flows of the currency. According to the article 14 of the international monetary fund
only the countries with transitional economies can impose exchange controls. During the years
after the World War II, many European countries started implementing exchange controls. After
the economy of the European continent became stable, countries like United Kingdom, removed
its restrictions. It was done during the year of 1979. Countries which have weak or under develop
economies impose foreign exchange controls in order to limit the speculations opposing their
currencies. In order to limit foreign investments in the country, these countries simultaneously
impose capital controls.
Exchange controls are enforced in a few common ways. A government may ban the use
of a particular foreign currency and prohibit locals from enjoying it.1 Alternatively, they can
impose fixed exchange rates to discourage speculation, restrict any or all foreign exchange to a
government-approved exchanger, or limit the amount of currency that can be imported to or
exported from the country.2 The major purpose of exchange control is to limit foreign exchange
purchases in order to redress or rectify or prevent adverse balance of payments. Usually the
central bank of the country or a specialized government agency has the exchange-control
authority. Resident must sell their foreign exchange to the central bank of the country or a
specialized government authority. Controlling exchange rates is an effective method to curb
exports and stimulate imports.
1
W. Kelton, “Exchange Controls”
<https://www.investopedia.com/terms/e/exchangecontrol.asp#:~:text=Exchange%20controls%20are%20governm
ent%2Dimposed,can%20create%20exchange%20rate%20volatility>
2
W. Kelton, “Exchange Controls”
<https://www.investopedia.com/terms/e/exchangecontrol.asp#:~:text=Exchange%20controls%20are%20governm
ent%2Dimposed,can%20create%20exchange%20rate%20volatility>
FOREIGN EXCHANGE ACT, No. 12 OF 2017
In 2017 the Sri Lankan Parliament enacted the new foreign exchange act repealing the
previous exchange control law. According to the section of this act under any provision of this
act, any duty or function is required to be exercised by the central bank. The key provisions of
this act are mentioned below.
Dealers of Foreign Exchange
According to the section 4 of this act „Authorized dealers‟, „Restricted dealer‟ and
„Dealers for a specific purpose‟ are being permitted to deal in foreign exchange. The authorized
dealers mentioned here are banks, licensed commercial banks and licensed specialized banks
registered under the Banking Act No. 30 of 1988. The central bank will permit a person subject
to certain terms and conditions to deal in foreign exchange who is not authorized to do so; these
personals are referred to as „restricted dealers‟ in the act. The Central Bank of Sri Lanka will
permit a person to deal in foreign exchange for a specific purpose subject to terms and
conditions. These dealers are not recognized as authorized dealers or as restricted dealers.
Current Transactions
The section 6 of the act stipulates that any person can deal in foreign exchange in
fostering current transactions avoiding any restrictions. Payments Current transactions are
defined as;
“(1) all payments due in connection with foreign trade, other current business including services,
and normal short term banking and credit facilities;
(2) Payments due as interest on loans and as net income from other investments;
(3) Payments of moderate amount for amortization of loans or for depreciation of direct
investments; and
(4) Moderate remittances for family living expenses.”3
Capital Transactions
Capital transactions are transactions which are not recognized as current transactions.
3
< https://www.conventuslaw.com/report/sri-lanka-enacts-a-new-foreign-exchange-control/>
Specific Transactions
This act has included provisions for specific transactions. “A resident person in Sri Lanka
can make payments for current transactions and capital transactions within or outside Sri Lanka,
by utilizing foreign assets or foreign exchange in bank accounts held by him in or outside Sri
Lanka, through an authorized dealer or a restricted dealer without obtaining any prior approvals.
Provided that such foreign asset is not derived from the conversion of local currency, disposal or
conversion of any financial or real asset within Sri Lanka, or from the business of dealing in
foreign exchange.”4
SIMILARITIES AND DIFFERENCES BETWEEN THE EXCHANGE CONTROL
ACT AND THE FOREIGN EXCHANGE ACT
Similarities:The first noticeable similarity between these two acts is that, the Central Bank of
Ceylon is responsible for implementing these acts during their time period. “The
Central Bank of Ceylon shall, as agent of the Government, be responsible for
carrying out the provisions of this Act”.
According to section 3 of both of these acts, any provisions of these acts any
powers, functions and duty must be exercised by the central bank. “Where under
any provision of this Act any power, duty or function is authorized or required to
be exercised, performed or discharged by the Central Bank”.
Section 49 of the Exchange Control Act and section 17 of the Foreign Exchange
act stipulates the burden of proof of permission.
The section 50A of the Exchange Control Act and section 21 stipulate the duty of
officers and servants to maintain secrecy.
Differences
In the previous Exchange Control regime, many regulations were made in relation
to different types of capital transactions. In the new Act, the Minister of Finance
4
< https://www.conventuslaw.com/report/sri-lanka-enacts-a-new-foreign-exchange-control/>
is empowered to issue regulations pertaining to capital transactions in foreign
exchange.5
According to section 4 of the Foreign Exchange Act, „Authorized dealers‟,
„Restricted dealer‟ and „Dealers for a specific purpose‟ are being permitted to deal
in foreign exchange. But in the Exchange Control Act only authorized dealers are
permitted to buy, borrow, and accept gold or any foreign currency.
In the Foreign Exchange act, there are separate sections for capital, current,
specific transactions. But there are no such kinds of separate sections in Exchange
Control Act.
In the Exchange Control Act there is specific section for legal proceedings in
detail. According to the section 35 subsection 1, “The provisions of Part 11 of
this Act shall apply to sums required to be paid by any judgment or order of any
court or by any award as they apply in relation to other sums, and it shall be
implied in any judgment or order of any court in Sri Lanka, and in any award
given under the law of Sri Lanka, that any sum required to be paid by the
judgment, order or award (whether as a debt, as damages or otherwise) to which
those provisions apply shall not be paid except with the permission of the bank.”
But in the Foreign Exchange Act there are no specific sections regarding legal
proceedings, the idea of legal proceedings in this act can be understood by
referring to section 11 and 13 of the act.
In the Foreign Exchange act there is a specific section for penalties. According to
section 26 (1) of the Foreign Exchange act, “Any person who acts in
contravention of the provisions of this Act or any regulation Order or direction
issued or made thereunder for which no penalty is prescribed, may be required in
writing by the Central Bank to pay as a penalty a sum not exceeding one million
rupees, within such period as may be specified in the notification of such
requirement.”
5
< https://www.conventuslaw.com/report/sri-lanka-enacts-a-new-foreign-exchange-control/>
ADVANTAGES AN DISADVANTAGES OF THE EXCHANGE CONTROL ACT AND
THE FOREIGN EXCHANGE ACT
Advantages
In the Exchange control act, all provisions are broadly constituted. There is a separate
part for payments. And these payments are divided into different sections as payments in Sri
Lanka, payments outside Sri Lanka, compensation deals. This will give somewhat clear image of
payment methods. Since this act is broadly constituted there is a separate part for import and
export. In that the act has stipulated restrictions on both imports and exports.
The new Foreign Exchange act is somewhat different from the previous Exchange
Control Act, even though there are some similarities. According to this new act the exchange
control violations have been decriminalized. Therefore citizens have licenses to enjoy the right in
spending them. However if one of the citizens uses it for illegal purposes the acts has stipulated
methods on how to deal with them. Another advantage of this act is that this act‟s scope covers
areas such as capital transactions, opening and maintenance of accounts, granting of loans and
advances etc. the clarity and definitions of the terms in this act is far more greater than the
Exchange Control Act. The provisions of the Exchange Control act were filled with complexity
and it was not simplified. Therefore these complexities have been reduced in the provisions of
the Foreign Exchange act and there are simplified as well. According to the section 5 of the
Exchange Control Act only the authorized dealers are permitted to deal in foreign exchange, this
has a negative impact on the citizens. But according to section 8(b) “A person in or resident in,
Sri Lanka shall hold foreign exchange in his possession or in a bank account in Sri Lanka”.
Therefore according to the new act a citizen is permitted to deal in foreign exchange subject to
terms and conditions prescribed by the minister. The approval process of the foreign Exchange
act is much faster than the previous act. This new act gives more prominence and discretion for
the banks. Therefore the banks have more power to deal in foreign exchange transactions.
According to the provisions of this act, the banks are allowed deal in foreign exchange in both
Sri Lankan rupees and US dollars, mainly in providing loans for non-residents.
Disadvantages
As mentioned earlier the Exchange Control Act is a broad act. Therefore the interpreters
generally have a hard time in interpreting this act. The provisions of this act are complexed and
not simplified. This act had criminalized exchange control violations, because of this, citizens
cannot deal in foreign exchange at ease. Their right to spend has barricaded. This act had not
given prominence to capital transaction, specific transactions and current transactions. The
definitions of the terms in the provisions in this act are difficult to understand. Unlike in the
Foreign Exchange Act according to section 5 of this act, only authorized dealers are permitted to
deal in foreign exchange.
In the near future foreign transaction will become obsolete because of the use of digital
transactions and bitcoins. People will become more accustomed to keep their money in phones
and laptops rather than in wallets. Many countries have moved pass using exchange control and
there are most interested in online transactions.
CONCLUSION
The government of Sri Lanka has enacted this new statute, the Foreign Exchange Act No.
12 of 2017 replacing the previous act, the Exchange Control Act, which had been implemented
several decades ago. This new act has given prominence to capital, specific and current
transactions. And this act has decriminalized exchange control violations, unlike in the previous
Exchange Control Act. There much more new salient features of this act like mentioned above
event though there are some similarities between these acts. The provisions in the Foreign
Exchange Act are somewhat in favor to the citizens. The new act will also become obsolete and
meaningless in the future because the government will promote online foreign transactions and
people will become accustomed with virtual money and bitcions.
Bibliography
Websites
<https://www.conventuslaw.com/report/sri-lanka-enacts-a-new-foreign-exchange-control/>
Kelton W, “Exchange Controls”
<https://www.investopedia.com/terms/e/exchangecontrol.asp#:~:text=Exchange%20controls%20are%2
0government%2Dimposed,can%20create%20exchange%20rate%20volatility>
‘Salient Features of New Foreign Exchange Act’
<http://www.sundayobserver.lk/2018/02/25/business/salient-features-new-foreign-exchangeact#:~:text=Sri%20Lanka%E2%80%99s%20new%20Foreign%20Exchange%20Act%20came%20into,the%2
0exchange%20control%20act%20and%20associated%20prison%20sentences>