IMF urges Sri Lanka to lift curb on exporter proceeds
ECONOMYNEXT – The International Monetary Fund has asked Sri Lanka to lift a rule requiring exporters to bring back proceeds early, saying the restriction could harm exporters and may amount to a capital flow management measure (CFM).
As a signatory to the IMF’s Article IV agreement Sri Lanka has to keep current transactions free but the IMF also discourages the use of capital controls to cover policy errors.
In 2015, under then Finance Minister Ravi Karunanayake and ex-Central Bank Governor Arjuna Mahendran, Sri Lanka imposed a 3-month requirement to bring back export proceeds which was later extended to four months.
Sri Lanka’s central bank triggered a balance of payments crisis in 2015 and 2016 by delaying rate cuts, cutting rates by printing hundreds of billions of rupees and scaring away bond investors leading to a currency collapse and high inflation.
Instead correcting policy, and reducing credit restriction were place on exporters.
"This repatriation requirement could potentially discourage exporters’ outward investments (capital outflows) by increasing the cost of outward payments and transfers, constituting a capital flow management measure (CFM), according to the Fund’s Institutional View (IV) on capital flows," IMF staff said in a report.
"The authorities are of the view that eliminating the measure at the current juncture could be premature as Sri Lanka remains vulnerable to shocks especially with international reserves remaining below the adequate level, while staff recommends removing this temporary measure as policy adjustments are implemented, for CFMs should not be used to substitute for warranted macroeconomic adjustment.
"The pace to phase out this temporary measure will be further discussed in the Article IV consultation in early 2018, together with Sri Lanka’s overall efforts to further liberalize the capital account and develop the FX market," the staff report said.
The rule does not require the dollars to be converted to rupees.
Analysts say such moves demonstrate the lack of awareness of authorities about how monetary systems work, which is common in so-called soft-pegged exchange rate regimes, which run into balance of payments trouble, as such countries are steeped in Mercantilism.
Any dollars or foreign currency kept anywhere, either abroad or within Sri Lanka form part of the monetary base of the US Fed or a foreign central bank and has no impact on the domestic monetary base whatsoever.
Full blows BOP crises are caused by a currency monetary base that does not shrink in line with outflows, when an exchange rate is defended, because fresh money is printed to replace outflows (sterilized foreign exchange sales).
To the amusement of critics who watched the central bank create BOP crises by printing money earlier before restrictions were also place on car imports, another frequent scapegoat of authorities.
Sri Lanka has slapped extra taxes on imports and also restricted access to import letters of credit after printing money and generating balance of payments crises in the past. Some of the practices have fallen foul of the IMF Article IV obligations and have been termed ‘multi-currency practices’ by the lender.
Sri Lank imposed draconian exchange controls as from 1952, shortly after setting up the monetary printing dollar pegged central bank replacing a currency board that has kept the economy stable for decades, to join the failed Bretton Woods soft-pegged system.
Since then the country has followed two monetary regimes. Until 1977 it printed money and kept the exchange with draconian exchange, protectionism and trade controls, which impoverished the entire population and pushed unemployment to around 20 percent.
After 1978 the central bank printed money and allowed the exchange rate to depreciate, generating high inflation and helping create low wage jobs.
Conditions improved somewhat after 1995, when A S Jayewardene, a London School of Economics educated central bank Governor, moved policy away from Mercantilism towards economics.
Ironically the 2015/2016 BOP crisis and restrictions came when the country is attempting to become an international financial centre. (Colombo/Jan12/2018).