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Sri Lanka businesses hit by self-imposed import embargo can appeal to finance ministry

ECONOMYNEXT – Sri Lanka businesses hit by a series of import controls to promote import substitution and ‘save foreign exchange’ as the country was already hit by a Coronavirus crisis could appeal to a committee at the finance ministry by email to get relief.

Sri Lanka has banned a series of imports, some imports have been suspended for three months, some could be imported under a license if authorities permit, some could be imported if suppliers give three-month credit, in a self-imposed trade embargo not seen since the 1970s.

Shortly before the Coronavirus crisis, only the supply chains of a few export firms were hit. But the import controls threaten a vast number of small and big businesses.

The effect on the businesses and consequent bad loans on the banking system is not yet known, though several listed firms have issued warnings.

“Go to the web and check this list,” Information Minister Bandula Gunewardene told reporters. “If there is some problem for an industrialist in getting raw material or any other essential item, write to the Secretary Treasury through an email.

“Do not come to the Finance Ministry. If you do that we cannot solve the problem. The President and Prime Minister have said that there is a special committee appointed to look into this problem to take decisions.

“If there is anyone who had got into, difficulties, they can make an appeal by email.”

Sri Lanka had to control imports because the country is facing the ‘biggest foreign exchange crisis’ in its history, Gunewardene said.

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Sri Lanka facing ‘biggest forex crisis in history’ triggering import controls: Minister

Sri Lanka’s central bank has printed unprecedented volumes of money in March and April amid a credit spike in March, sending the rupee crashing to 200 to the US dollar.

Private credit is expected to slow as companies cut capital expenditure in a bid to conserve cash. Some analysts are expecting private credit to slow to as much as two percent in 2020.

When credit slows and consumption and investment falls, pressure on the currency pressure goes down, unless more money is printed to pay state salaries or to keep rates down.

Gunewardene claimed that due to the Coronavirus crisis exports have fallen, remittances have also fallen and unless controls were imposed on imports, the rupee would fall to 250 and 350 to the US dollar and cost of living would soar.

Such beliefs were widespread outside of Germany, Austria, Switzerland, Singapore, and Japan in the immediate post-war era especially in English speaking countries, which tried monetary and fiscal stimulus based on Keynesian economic beliefs.

While more developed nations slammed exchange controls, other countries where classical economic knowledge was even less, strangled their economies with trade controls as well, in self-imposed embargoes.

The UK suffered ‘Sterling crises’ under Keynesian policies and the US dollar collapsed taking the Bretton Woods system with it in the 1971-73. The Fed had been trying to target potential growth rate among other goals in the lead up to the collapse.

Ironically Sri Lanka was taught to calculate the ‘potential’ growth which is targeted by printing money during an International Monetary Fund program.

Sri Lanka then closed its entire economy with the worst trade embargo seen in its history triggering 20 percent unemployment.

The US also placed a self-imposed trade embargo on itself called the ‘Nixon’ shock which was swiftly dismantled, and Keynesians lost influence in policymaking.

The UK, the birthplace of John Maynard Keynes also suffered, and went to the International Monetary Fund with then opposition shadow chancellor Geoffrey Howe described as ‘cap in hand’.

However, the UK abandoned such policies under Margaret Thatcher and Geoffrey Howe abolished all exchange controls in 1979 which was accompanied by a revamp of Bank of England operations.

Under Keynesian policies and wartime money printing, the UK has been severely weakened after World War II while Germany and Japan became strong under prudent monetary policy and strong currencies.

“Exchange controls have been with us in one form or another for just over 40 years,” Chancellor of the Exchequer Geoffrey Howe told UK’s parliament on October 23, 1979.

“They have now outlived their usefulness. The essential condition for maintaining confidence in our currency is a Government determined to maintain the right monetary and fiscal policies. This we shall do.

“I have now decided to remove all the remaining exchange control restrictions from midnight tonight, apart from those still needed, I hope not for long, in relation to Rhodesia.

“With that single exception, there will from tomorrow be full freedom to buy, retain and use foreign currency for travel, gifts, and loans to non-residents, buying property overseas and investment in all foreign currency securities.

“Portfolio investment will be wholly freed, and the requirement to deposit foreign currency securities with an authorised depositary is abolished. Foreign currency accounts can be held here or abroad. Passport marking for travel funds can now be abolished the necessary Treasury orders are being laid this afternoon.

The former Chancellor Dennis Healy objected to the abolition with the ‘Sterling era’ arguments making dire predictions.

‘..[T]he right hon. and learned Gentleman is not only suspending all the rules governing the control of our exchanges,” Healy said.

“..[H]e is abolishing at a stroke the whole apparatus of control so that if the balance of payments, or the position of our reserves, or the value of the pound, moves in such a way that it is necessary to restore controls it will be impossible for him to do so.

“The right hon. and learned Gentleman must realize that this is one more reckless, precipitate, and doctrinaire action, which the Government will regret no sooner than those who lose their jobs or go bankrupt as a result.”

The rest is history. The UK never had to impose trade or exchange controls up to now. (Colombo/May29/2020-sb)

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