ECONOMYNEXT – Sri Lanka’s central bank is looking at a proposal to allow persons who can bring foreign exchange abroad to import vehicles and pay taxes in dollars, Central Bank Governor Nivard Cabraal said amid concerns that the move may be discriminatory.
Sri Lanka’s central bank has printed large volumes of money to keep interest rates artificially low and finance the deficit which has blown apart the balance of payments. Import controls had been placed including in cars.
Restricting cars which bring large volumes of taxes, are one of several cascading policy errors that drive Sri Lanka into economic crises and push high inflation as the balance of payments gives way, whenever the central bank prints money to suppress rates, critics have said.
Cabraal said there is a ‘bubble’ that is developing in car prices which have soared. Leasing companies in particular are financing assets whose values have been artificially pushed up as a result of money printing.
When a central bank prints money to suppress rates, the present value of long term assets go up, though, in the case of cars, import controls have restricted supply in Sri Lanka.
“We now see a bubble in vehicle prices and through that, there could be some harm to the (financial) system,” Central Bank Governor Ajith Nivard Cabraal said.
“So we have a proposal. If people can bring dollars to buy cars from foreign countries and pay the tax also in foreign currencies, then, on one hand, we will have foreign inflows and on the other side, we will get the goods required for the country. ”
“We hope to inform the government on this. The government also could consider this and then we can make a decision. We have not decided yet.”
Controlling car and gold imports have been a tactic of the central bank and finance ministry every time money is printed.
In 2018 also car imports were restricted after printing money to target call money rates with excess liquidity, despite people paying high taxes to bring the deficit down.
However, used car prices have also bubbled up in the US with the Fed also printing money. When central bank’s print money to keep rates down, currencies weaken and the net present value of longer-term assets go up.
In September 2021, Prices of used cars and trucks have bubbled up 24 percent in the USA and stock prices are soaring in the Powell Bubble. Classical economists have said Powell is delusional.
When central banks practice prudent policy used car prices fall.
Governor Cabraal after taking office is trying to deal with the core issue of the foreign exchange short which can lead to a possible default on foreign debt by allowing market rates to go up, so that money printing is reduced or eliminated.
However, observers say the dollar car import move is discriminatory against the person who earns and saves money in the local central bank’s money.
Sri Lanka notes issue in rupees and people are paid in rupees, due to restrictions placed by the authorities against the use of alternative currencies. New controls have been placed on the use of dollar balances in accounts as well, amid record money printing in 2020 and 2021.
Colombo Port City will be a multiple currency area and protected from the frequent policy errors of the Monetary Board of Sri Lanka.
The rupee note-issue produced by the central bank is also the currency that is used to pay taxes.
As a result of failing bond auctions and rupees injected into the banking system at 6.0 percent from the standing deposit window, the government also cannot convert its rupee inflows into US dollars to make external payments.
Due to the loss of confidence in the future value of the rupee and low rupee rates, there is a tendency for those who earn in dollars to keep the dollars without converting. (Colombo/Oct15/2014)