ECONOMYNEXT – Sri Lanka’s government is committed to further opening up the economy and import controls imposed recently are temporary moves to protect the economy, Minister of Finance Mangala Samaraweera said.
The recent, rapid depreciation of the rupee is largely due to external factors, he told a forum held by the Sri Lanka Retailers' Association.
Interest rate hikes in the United States, its trade war with China and rising oil prices had led to investors taking money out of emerging markets like Sri Lanka, he said.
“The government has taken all measures to address factors within our control,” Samaraweeera said.
The recent hike in import duty on small cars and the introduction of market-determined fuel prices are key policies to address the two sectors that caused a sharp increase in imports in 2018, he said.
“It was a tsunami of vehicles – we had to take measures to stop this flow,” Samaraweera said.
“These are all temporary measures – the cash margins on vehicle imports, restrictions on non-essential imports,” he said.
““These measures will be reviewed regularly. The government has no plans to restrict imports in a permanent manner, no plans to go back to the closed economy of the 1970s. We remain committed to the rapid liberalisation of Sri Lanka’s economy.”
Samaraweera said the island’s external sector had begun to stabilise in response to these recent government measures.
“Sri Lanka’s potential remains bright despite some of the dark clouds gathering on the horizon. While we face a couple of challenging years ahead, we have created necessary safeguards to face them.”
Analysts however had pointed out that policy errors of the central bank which operates an unstable soft peg with dual anchors had precipitated two run on the rupee this year just as the economy recovered, by leaving liqudity collected during a pegging period and swithing to a floating with the excess liquidity intact.
Sri Lanka had been warned that with the credit system recovering the central bank with its tendency to print money and keep rates down was a threat to stability. (Sri Laka is recovering: Central Bank threat looms)
Instead of raising rates to stop further injections of liquidity trade controls were placed, leaving advocates of free trade with egg on their faces, critics have said.
Sri Lanka has a ceiling policy rate over three times that of the US, which should be enough to keep a rock solid peg, analysts say provided consistent policy is followed.
Monetary policy is now broadly in favour of the rupee with overnight rates at close to 8.50 percent, and market liquidity short, though printed money is still be injected at rates below deposit rates over the longer term.
There have been calls to bring laws to prevent the central bank from printing money into the banking system below the Sri Lanka Interbank Offered Rate, to protect economic stability and the welfare of the people. Since its creation in 1950, the agency had depreciated the currency, generated forex shortages. (COLOMBO, 18 Octber, 2018)