ECONOMYNEXT – Revenues from Sri Lanka’s customs agency were 30 percent below target in the first five months of 2019, Finance Minister Mangala Samaraweera said as credit slowed in the wake of a collapse of a soft-pegged exchange regime.
"In the first five months of 2019 we can see that revenues are 30 percent below target," Samaraweera had said after appointing 153 new customs officers.
"It is important to meet the targets because welfare programs depend on the revenues."
Samaraweera said in 2018, the customs department has brought in revenues of 912 billion rupees, 153 billion rupees below target.
Taxes collected at the border had brought in 54 percent of total revenues in 2018, Minister Samaraweera said. Sri Lanka Customs collects import duty, value added tax and some other levies like port and airport levy.
Sri Lanka’s currency collapsed from 153 to 182 in 2018 when the central bank printed money to generate two liquidity shocks in bid to keep interest rates artificially low as the economy recovered.
After interest rates were raised amid capital flight liquidity shortages private credit has turned negative in the first quarter of 2019 leading to a collapse in imports.
The soft-pegged regime which gives the central bank discretion to print money at will, set up in 1950 had become a key challenge to the people after independence.
Foreign exchange shortages coming from targeting both the exchange rate and interest rate has brought permanent depreciation, high nominal interest rates and trade restrictions.
In 2018 trade controls were slapped on vehicles in particular as well as other imports Nixon shock style, just as the US controlled imports as its soft-peg collapsed in the early 1970s, hurting revenues.
Mercantilists who advocate currency deprecation say that depreciation boosts nominal (inflationary) revenues.
However analysts have pointed out that it happens only after inflation picks up when credit recovers after a balance of payments crisis, the boost in only in nominal revenues as the status quo is restored.
In the short term however there may even be a fall in nominal revenues.
When there are liquidity shortages, prices may not immediately go up as suppliers take margin hits to keep selling goods amid the credit crunch. It gives an opportunity to allow the currency to appreciate back before the price structure alters permanently.
The rupee has so far appreciated to 176 to the US dollar. Private credit is still weak, but depending on expenditure state borrowings either from domestic or foreign sources may pick up. (Colombo/June20/2019)