ECONOMYNEXT – Sri Lanka is discussing import controls on carefully selected items, Central Bank Governor W D Lakshman said as liquidity injections triggered forex shortages, widened parallel market spreads and undermine the credibility of a 200 to the US dollar peg of the rupee.
“The central bank makes various proposals,” Governor Cabraal told reporters responding to a question on whether the finance ministry would ban the imports of electrical appliances among others.
“Some proposals are accepted. Some are not. These import restrictions are some carefully selected items which are believed to be not essential at all and ones which we think there are stocks for several months.
“We have said it is good to control them for several months. They are still at discussion level.”
Sri Lanka has imposed the worst import controls since the 1970s after printing over 600 billion rupees in 2020 and over 200 billion in 2021.
Though reserve money has expanded unusually fast as food prices rose in double digits, other commodities rose faster and suspected precautionary cash holdings also rose, 2.3 billion US dollars flowed out as a balance of payments deficit in 2021.
In the first four months of the year there was a 929 million dollar deficit.
This month parallel markets started to pick up as banks started to ration letters of credit when the printed money came up for redemption at the 200 to the US dollar peg.
Surrender requirements were placed on remittances and exports proceeds imposing a strong side convertibility undertaking on a 200 to the US dollar non-credible peg which was already on the weak side and fears of devaluation increased.
In Sri Lanka there is a strong Mercantilist belief that monetary instability in the form of currency pressure and BOP deficits have something to do with trade and not the exchange rate anchor or central bank credit.
Import controls, price controls, rationing are outcomes of monetary instability.