Sri Lanka halts imports of cars, electronics, perfumes, after soft-peg pressure

ECONOMYNEXT – Sri Lanka has halted the imports of cars, perfumes, tyres, footwear, air conditionors, refrigerators, mobile phones, televisions and washing machines, as the rupee soft-peg with the US dollar came under pressure in forex markets.

Banks have been asked by the central bank not to help customers to import any of the controlled items, which the central bank called ‘non-essential’ either through letters of credit (LCs), documents against acceptance or payment (DA/DP).

The rupee has come under pressure in recent days, and trading in the spot market has been low amid global volatility and liquidity injections from the central bank.

The central bank also cut rates this week and injected around 50 billion rupees though a reserve ratio cut Tuesday, imitating floating rate central banks in the West, despite having a soft-pegged exchange rate.

On March 17 another 40 billion rupees was injected though an outright Treasuries purchase. Earlier a 24 billion rupees central bank profit transfer was made through a liquidity injection.

Sri Lanka has now said fuel prices will not be cut and taxes will be raised, which is considered a prudent economic strategy.

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Sri Lanka central bank stops non-essential imports, limits forex issue

The trade and exchange controls will be in place for three months. The controls have been placed using a provision of Sri Lanka’s Banking Act.

Perfumes, (HS code 3303), after shave (HS code 3308), tyres (HS code 4011), footwear (HS code 6402,6403,6404,6405), air conditioners (8415), refrigerators (8418), mobile phones (8517), televisions, monitors (85.28), washing machines (8450),

The central bank is allowing the import of tractors (HS code 8701), buses (HS code 8702) hearses and ambulances (HS code 8703), trucks and bowsers (HS code 8704), cranes and concrete mixers (8705), car parts (8708), military equipment, haulers (8716).

Banks have also been asked not to give more than 5,000 US dollars in foreign currency to those leaving the country.

Modern exchange controls dates back to the 1905 – 1906 when the tsar Nicholas II limited conversion of rubles printed by the State Bank of Russia to 50,000 German marks per person.

Analysts and economists have called for central bank reform and controls on domestic operations to maintain monetary stability.

Prices of Sri Lanka’s sovereign dollar bonds have also plunged to over 30 percent below par for some maturities.

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The central bank also barred the purchase of sovereign bonds by domestic banks.

The central bank showed no signs of withdrawing excess liquidity.

The agency said it would provide “adequate liquidity in the market in order to facilitate smooth operations and sustain market confidence”. (Colombo/Mar20/2020)