ECONOMYNEXT – Sri Lanka exports to Pakistan are forced to pull back as monetary instability in Pakistan worsened making it difficult to make payments or open letters of credit, shippers in Colombo said.

The State Bank of Pakistan has triggered forex shortages in the style of Sri Lanka in the course of printing money to chase an inflation target and two Zimbabwe-style Coronavirus central bank re-finance funds.

Some Sri Lanka exporters have long-standing relationships with buyers in Pakistan and try to help as much as they can.

“I sent a shipment to Pakistan on a letter of credit but I was warned that the payment may not come on the due date,” a rubber exporter based in Colombo said.

“I sent the containers anyway.”

Pakistan’s media reports said 9,000 containers were stuck in port pending foreign exchange. Reports said banks had stopped opening new letters of credit above 1,500 US dollars in a repeat of what happened in Sri Lanka.

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A Sri Lanka exporter said his buyer had asked for 90 day usance (open account with 3 months credit) due to forex problems.

“I simply cannot afford to give such a facility,” he said. “If I could I would have helped. We are also in difficulties now.”

Sri Lanka experienced similar troubles in 2022 until newly appointed central bank Governor Nandalal Weerasinghe hiked rates and phased out money printing.

There are also Sri Lanka style import controls. Wide parallel exchange rates are seen with remittance through official channels falling.

The diverted unofficial remittances however will continue to finance essential imports (as deemed by free citizens) for which letters of credits are not given through official channels.

Related Sri Lanka remittances up after tight money kills parallel FX gap, Pakistan down

In Bangladesh which is also hit by monetary instability as credit picked up last year and fixed policy rates were enforced with printed money there is an official parallel exchange rate for remittances (a kind of a crude float that avoids sterilization).

Legislators in both countries have given economic bureaucrats and interventionists, powers to control economic freedoms of the people instead bringing laws to curb the domestic operations of the central banks and blocking officials from printing money to enforce non – market interest rates.

Pakistan ran into a foreign exchange crisis despite an International Monetary Fund agreement as private credit recovered strongly after a coronavirus crisis.

The State bank of Pakistan has started two re-finance funds (printed money) in the period despite operating a reserve collecting peg. Sri Lanka deliberately crippled Treasuries auctions for stimulus, after cutting taxes despite operating a reserve collecting central bank.

Pakistan is also operating an impossible trinity monetary regime trying to generate inflation of 5-7 percent a year despite operating a reserve collecting peg. In January inflation hit 27.5 percent as the currency gave way under liquidity injections.

Sri Lanka hand printed money against the balance of payments to generate inflation of 4-6 percent (roughly 5 percent) despite operating a reserve collecting peg and ran into currency crises even when taxes were hiked and fuel was market priced.

Pakistan’s foreign exchange reserve dwindled rapidly over 2022 as credit picked up leading a progressive depreciation and losses in energy utilities as currency depreciation pushed up costs.

An IMF team is in Pakistan to complete a review and strike a new staff level agreement.

The State Bank of Pakistan floated the rupee last week to end sterilized interventions and stop the drain of foreign reserves after they fell to low levels.

The State Bank of Pakistan’s claims against depository corporations rose 107 percent to 6.8 trillion rupees in the year to December 2022.

SBP’s foreign reserves fell to 5.5 billion US dollars at the end of December 2022 from 18.5 billion rupees in the same period.

By January 27 reserves were down to 3.08 billion dollars and there are fears of sovereign default.

There has been a spate of sovereign defaults of countries with reserve collecting central banks (externally anchored credit systems) which are printing money to target inflation (a domestic anchor) which have got market access within the last decade or so.

The Pakistan rupee fell to 277 to the US dollar in February 07 from 229 on the last week of January in a bid to end dual anchor conflicts by suspending convertibility, which is generally called a float.

Sri Lanka’s rupee collapsed from 200 to 370 to the US dollar in March in a botched attempt to float with surrender requirement (a ‘strong side’ convertibility undertaking that forces the currency down) in place.

Pakistan and Sri Lanka rupees are both derived from the Indian rupee at 4.76 to the US dollar which started to collapse in the second half of the 20th century amid activist monetary policy.

Sri Lanka has faced extreme monetary instability under so-called flexible inflation targeting with output gap targeting (stimulus) running into serial currency crises and external default as interventions are sterilized to maintain a fixed policy rate.

There have been calls in Sri Lanka to end the independence given to officials to suppress interest rates and trigger external instability through high levels of inflation targeting or flexible policy and force the monetary authority to strict rules bound by law.(Colombo/Feb08/2023)