ECONOMYNEXT – Germany has urged Sri Lanka to end import controls which have blocked vehicles and other goods since last year, as money printed to keep rates low created dollar shortages and depleted foreign exchange reserves.
Sri Lanka slapped import controls in April 2020 as the credibility of highly instable soft-peg fell steeply.
Though total imports went up as credit recovered and funds went into areas not controlled by interventionist bureaucrats, items that brought high levels of taxes such as cars remained barred.
Amid Sri Lanka’s import controls the usual trade surplus with Sri Lanka has widened even further, Germany’s Ambassador to Sri Lanka Holger Seubert said.
He said Germany generally stood for free and fair trade.
“These import restrictions are neither fair nor free,” he said addressing a forum of Top German Brands which is now numbering about 178 firms.
“Sri Lanka is today exporting to Germany three times as much in value as Germany’s exporting to Sri Lanka.
“And the gap, as I said, is increasing. This means that our bilateral trade is getting somewhat of a one-way street of a one sided fair.”
Ambassador Seubert said he was aware that Sri Lanka had external problems.
“We fully understand all of us in this room understand why the government decided to do so,” he said.
“However, I just wanted to make the point that I’m afraid becoming a one sided affair is of course of concern to the German government, as well.”
Ambassador Seubert said President’s Secretary P B Jayasundera had helped trouble shoot many problems faced by German investors and companies in Sri Lanka in recent months and he had been a “true friend” of Germany.
German companies have been a reliable partners for Sri Lanka providing a market for exporters of the island during the Coronavirus pandemic Andreas Hergenroether, Chief Delegate of the Delegation of German Industry & Commerce in Sri Lanka said.
“In the most difficult times German companies remained here and were also reliable customers of Sri Lankan exporters,” he said.
Ceylon Oxygen, a unit of Linde group has also expanded Oxygen supplies without bureaucracy, and other firms had were also providing medical equipment, he said.
“German products and services stand for state of the art solutions and the businessmen for fairness and reliability,” Hergenroether.
“And these are some of the reasons why Germany with a population of 82 million inhabitants have for many years been the third largest exporter of the world. Even in the year of the pandemic 2020 Germany exports were about 1.2 trillion Euros.”
He said in 2020 German exports to Sri Lanka fell 26.3 percent, while Sri Lanka’s exports to Germany fell 5.1 percent.
He said German exports to Sri Lanka grew 14 percent up to September 2021, and exports from Sri Lanka rose 18 percent.
Addressing President’s Secretary P B Jayasundera who was in the audience, he said he understood the difficult situation Sri Lanka was in.
“But after almost two years of import restrictions we hope that with a step-by-step approach we will be able to get an ease on the imporint restrictions, not only for the interest of of the German companies but also for the interest of the importing companies – the Sri Lankan partners.”
Sri Lanka has had a history of controlling trade as money printing by a central bank set up in 1950 created forex pressure.
At one time Germany also had similar problems, particular during the socialist Weimar Republic period when it was unable to settle external obligations and eventually experienced hyperinflation.
Reforms were then brought to the Riechsbank to make it more difficult to print money first with the issue of an interim currency called the Rentenmark and Reichsmark.
At the time Britain’s John Maynard Keynes claimed that there was a ‘transfer problem’ and a trade surplus was needed to repay foreign obligations.
However others, especially Austrian and Swedish economists explained that if monetary stability was maintained without printing money, external payments will reduce a trade deficit and would even create a surplus as resources available for domestic consumption and investment fell.
In the 1930s when national socialists got control of the country, Germany again had difficulty in importing raw materials as the central bank resorted to printing money through a roundabout way using so-called Mefo bills.
Sri Lanka’s central bank law however has clauses which allow unrestrained money printing in line with Anglo-American Keynesian stimulus and heedless spending.
After World War II, the Bundesbank was set up in West Germany, with the Deutsche Mark replacing the wartime inflated currency. Economics Minister Ludwig Erhard, the American banker Joseph Dodge (Colm-Dodge-Goldsmith Plan) and Wilhelm Röpke among other played a key role in the resulting German Economic Miracle with a strong exchange rate.
Analysts have called for tight controls on the central bank to end forex troubles in Sri Lanka which have intensified after the country shifted to call money rate targeting with inflationary excess liquidity.
Even before Sri Lanka’s Import and Export Control Law was enacted in 1969, amid forex troubles from inflationary rural credit re-finance among others, classical economists have warned that import controls and import substitution cannot solve balance of payments as long as money is printed.
“Balance of Payments difficulties cannot be solved by intensifying the rigorous of exchange control and
import restrictions, nor by extending the schemes for expanding domestic production to substitute import goods — the so called measures for “economising” on foreign exchange,” classical economist B R Shenoy said in a report to the Ceylon government in 1966, shortly before the import and export control law was enacted.
“Intensification of the rigorous of exchange control and import restrictions may reduce the quantum of import goods flowing into the market. It cannot reduce the flow of moneys seeking to purchase goods, either for consumption or for investment.
“This flow of money is determined by the national product and the inflationary part of the Net Cash Operating Deficit.
“The remedy to this problem lies in putting a stop to inflationary financing, not in tampering with the normal course of international trade.” (Colombo/Nov25/2021)