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Thursday April 18th, 2024

European Union overreacting to Sri Lanka import controls: CB Governor

ECONOMYNEXT – The European Union, which protested Sri Lanka’s import controls, is over reacting, the island’s Central Bank Governor W D Lakshman said while officials said the data showed affected imports are minimal.

“The statement that was published here from the EU is probably an overreaction presented too early,” Governor Lakshman told reporters.

“We are at a time we are trying to resolve our balance of payments problems. Even under WTO rules, I think a country is allowed to do certain things which are needed to meet the balance of payments problems.”

In Sri Lanka and many developing countries with monetary instability, there is a strong belief that the balance of payments and currency problems are caused by imports and not money and credit.

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Analysts have blamed the phenomenon on a strong prevalence of Mercantilism and lack of knowledge of classical economic theory.

Classical economists have blamed the ideology on Keynes naming his book a ‘general’ theory though it could only be practised without the balance of payments troubles when credit was weak or negative (Why Singapore chose a currency board over a central bank) and the teachings of arch-Keynesians like Alvin Hansen (IS-LM) which also has to assume no external trade (Mundell–Fleming model).

In 1971 the US also imposed trade controls called a ‘Nixon-shock’ as the dollar peg with gold collapsed from printing money to target an output gap. Sri Lanka then closed the entire economy.

Trade or current account deficits are driven by foreign-financed savings-investment gaps, while currency falls are triggered by central bank liquidity driven credit, classical economists say. Commodity prices are also expected to spike amid US dollar weakening as demand recovers.

In 2018, Sri Lanka injected liquidity to control rates first by terminating term repo deals, a so-called ‘buffer strategy’ and then through Treasury bill acquisitions in April, critics have said.

The ‘buffer strategy’ refusing to roll over maturing bonds as paper (which happens without an impact on reserve money or the exchange rate) and repaying them with a bank overdraft which was re-finance with window money. As the rupee fell gold imports which were being re-exported through a grey market.

Shortly after gold imports were banned in 2018, the rupee collapsed as more money was injected including through dollar-rupee swap of the types used by foreign speculators to bring down East Asian pegs.

In September more import controls were slammed, making nonsense of the free trade agenda of the then administration and making them a laughing stock.

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Sri Lanka controls imports in ‘Nixon-shock’ move to protect soft-pegged rupee

Sri Lanka rupee collapses as gold imports end

Governor Lakshman said the emerging problem with the EU could be resolved with discussions.

“I think our external relations authorities are taking up this matter for discussion between Sri Lanka authorities and relevant EU authorities,” he said.

“I think discussions can solve this problem, which I am sure is a short term problem as far as we are concerned until we get out o the present difficulties.”

Officials said the impact on Europe, which had a large trade deficit with Sri Lanka and was a key destination of exports, was minimal.

“We studied the impact of import restrictions on imports from those countries it seems that the impact is quite minimal,” Director of Economic Research Chandranath Amarasekera said.

“As you know the most of the import restrictions are on non-essential imports and agricultural goods that are coming from because the government wants to promote domestic production of agricultural goods.”

“All of us need to understand why the import restrictions have been put in place,” Amarasekera said.

“It is primarily because of the difficult situation that we are in. We have saved about 3 billion dollars because of the reduction of import this year in the first 10 months.”

Analysts, however, have warned that with excess liquidity injected by domestic asset acquisitions, that imports can pick up (or domestic prices to rise) as credit is fungible.

Assistant Governor N Nanayakkara said some of the restrictions have been relaxed; imports for re-exports have also been relaxed. He said the government has said that items such as cars will be kept for a year. (Colombo/Nov27/2020-sb)

Comments (1)

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  1. Leelananda Pilanawithana says:

    It is not overreaction if EU ban import from SL then it is overreaction. This is the warning next step is ban like SL. Then you have no wards for that situation.

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Your email address will not be published. Required fields are marked *

  1. Leelananda Pilanawithana says:

    It is not overreaction if EU ban import from SL then it is overreaction. This is the warning next step is ban like SL. Then you have no wards for that situation.

Sri Lanka’s discussions with bondholders constructive: State finance minister

ECONOMYNEXT – Sri Lankan authorities continue to engage all debt restructuring negotiations in good faith, within principles of equitable treatment among creditors, and with maximum transparency within the norms of such negotiations, State Minister of Finance, Shehan Semasinghe has said.

“It is standard practice, when a representative group of bondholders is formed, to entertain confidential discussions with such group and its appointed advisors. In the case of Sri Lanka, the Ad Hoc Group of Bondholders represents holders controlling more than 50% of the bonds, which make them a privileged interlocutor for Sri Lanka,” Semasinghe said on X (twitter).

“It is well understood that given the price sensitive nature of the negotiations, and according to market regulations, discussions with the Group and its advisors are to be conducted under non-disclosure agreements. This evidently restricts the ability of the Government to unilaterally report about the substance of the discussions.

“The cleansing statement, which was issued on the 16th of April, at the conclusion of this first round of confidential discussions with members of the Group, aims at informing the Sri Lankan people, market participants and other stakeholders to this debt restructuring exercise, about the progress in negotiations. It provides the highest possible level of transparency within the internationally accepted practices in such circumstances.

“As informed in this statement, confidential discussions held in recent weeks with bondholders’ representatives proved constructive, building on the restructuring proposals presented by both parties. During the talks both sides successfully bridged a number of technical issues enabling important progress to be made. Sri Lanka articulated key remaining concerns that need to be addressed in a satisfactory manner.

“The next steps would entail further consultation with the IMF staff regarding assessments of the compatibility of the latest proposals with program parameters. Following these consultations, we hope to continue discussions with the bondholders with a view to reaching common ground ahead of the IMF board consideration of the second review of Sri Lanka’s EFF program.”

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Sri Lanka rupee weakens at 301.00/302.05 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 301.00/302.05 to the US dollar in the spot forex market on Tuesday, from 299.00/10 on Tuesday, dealers said. Bond yields were broadly steady.

A bond maturing on 15.12.2026 closed stable at 11.30/35 percent.

A bond maturing on 15.09.2027 closed at 11.90/12.05 percent up from 11.95/12.00 percent.

A bond maturing on 15.12.2028 closed at 12.10/20 percent down from 12.10/15 percent.

A bond maturing on 15.07.2029 closed at 12.25/40 percent.

A bond maturing on 15.03.2031 closed at 12.30/50 percent. (Colombo/Apr17/2024)

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Sri Lanka Treasury Bill yields down across maturities

ECONOMYNEXT – Sri Lanka’s Treasuries yields were down across maturities at Wednesday’s auction with the 3-month yield moving down 7 basis points to 10.03 percent, data from the state debt office showed.

The debt office sold all 30 billion rupees of 3-month bills offered.

The 6-month yield fell 5 basis points to 10.22 percent, with 25 billion rupees of bills offered and 29.98 billion rupees sold.

The 12-month yield dropped 4 basis points to 10.23 percent with 18.01 billion rupees of bills sold after offering 23 billion rupees. (Colombo/Apr17/2024)

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