Sri Lanka car registrations down to 7 – year low in June after ‘Nixon’ shock

ECONOMYNEXT – Sri Lanka’s new car registrations fell to a 1,580 units in June 2019, down from 6,819 units in 2018, and a 7-year low in the wake of Nixon-shock style controls that were slapped last year as a soft-pegged exchange rate collapsed amid money printing.

Total vehicle registrations fell to 26,201 units in June from 32,635 in May, data compiled by J B Securities, a Colombo-based equities brokerage shows.

The June 2019 car registrations were the lowest since June 2012, when registration were at 1,458 in the wake of a 2011/2012 soft-peg collapse. In the 2011/2012 balance of payments crisis the rupee collapsed from 110 to 130 to the US dollar.

In 2018, the rupee soft-peg which authorities call a ‘flexible exchange rate’ collapsed from 153 to 182 to the US dollaras money was printed by terminating repo contracts and by term reverse repo auctions, overnight cash auctions.

More money was also printed to repay bonds in a so-called ‘buffer strategy’ by re-financing a bank overdraft, while still more was printed to accommodate maturing derivatives. The central bank had largely stopped directly buying bills from weekly auctions with printed money.

In July excess liquidity was further built by unsterilized dollar purchases and a Soros-style swap, analysts have said.

Nixon Shock

Authorities then slapped credit controls on selective imports such as vehicles, in a Nixon-shock stype bid to delay policy corrections and effectively directing rupee bank reserves to other areas such as purchasing bonds from fleeing foreign investors, critics say.

Nixon shock import controls were slapped by US authorities when the Bretton Woods system of soft-pegged exchange rates collapsed amid money printing by then -Fed chief Arthur Burns.

Since Sri Lanka does not have a floating exchange rate, all injections of cash against domestic assets tend to weaken the peg, unless the peg is defended with forex reserve losses.

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The International Monetary Fund suspended Sri Lanka program in 2018 as the central bank lost reserves and Nixon-style controls were slapped.

The central bank has promised not to impose new external controls for ‘balance of payments’ reasons.

Imports of two wheelers also fell to 21,416 unit in June, down from 26,175 units in 2018.

Three wheelers fell to just 821 units, from 2,050 units in 2018. Both two – wheelers and three-wheelers are imported by less affluent people.

Total vehicle registrations fell to 26,201 units in June from 32,635 in May.

After Effects

Monetary instability has since ended but credit is contracting, leading to a fall in imports and tax revenues.

The 2018 soft-peg collapse came very close on the 2015/2016 soft -peg collapse from which the economy had barely recovered, which analysts have called a bust-bust.

There have been calls to abolish the central bank in favour of a currency board, bring criminal penalties to stop the central bank from following money policies (domestic operations) inconsistent with a peg, or go for inflation targeting.

The central bank has proposed changes to its monetary law to move towards a modified inflation targeting framework, which it calls ‘flexible inflation targeting’.

Fears have been expressed that the central bank will still operate a peg (intervene in forex markets to build reserves or otherwise target the exchange rate altering reserve money in either direction), without a floating exchange rate, leading to the same consequences.

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The new law will outlaw some forms of money printing. In a surprise President Maithripala Sirisena had opposed the halting on money printing. (Colombo/July23/2019)