ECONOMYNEXT – Sri Lanka’s import controls on so-called ‘non-essential’ goods are essential to stop foreign exchange ‘leakages’ Central Bank Governor W D Lakshman said promising a vigorous review of a post 1977 ‘open economy,’ amid record money printing.
“Overall, while working within a framework of market economy, the performance of the open economy policies introduced from 1977 will be reviewed vigorously, so that the country and its economic agents could follow a focused approach to becoming an industrial economy,” Governor Lakshman said delivering a policy roadmap for 2021.
“A policy framework with such long-term objectives would generate greater macroeconomic benefits than being driven by short-term vicissitudes in the market and unbridled desire for short-term financial gains.”
Sri Lanka is now pursuing an ‘import substitution’ strategy to ‘save foreign exchange’.
In April 2020 Sri Lanka slapped the worst import controls seen since the 1970s after money printing and a ‘flexible’ exchange rate sent the island’s soft-peg close to 200 to the US dollar in March amid surge in private credit and importer panic.
The rupee stabilized after April 2020 as private credit contracted in the ensuing.
Some of the controls have since been relaxed. Some imports have been allowed under suppliers credit.
Governor Lakshman said import controls should continue.
“For the sustainability of the low interest rate structure, it is essential that foreign exchange leakages for non-essential imports and outward investment are minimised, thereby allowing the domestic production economy to reap the intended benefits from easy monetary conditions,” he said.
Sri Lanka has been printing record volumes of money to finance a budget deficit worsened by value added tax cuts in December 2021, a hit on revenues from import controls and a Coronavirus pandemic.
Analysts have warned that currency pressure will return as credit picks up and printed money which is piled up as excess liquidity in central bank windows get used up.
If imports are controlled, domestic prices could also go up further as credit picks up, some analysts say.
However Governor Lakshman said domestic production would keep price down. The budget for 2021 had given more support for domestic production.
“These fiscal stimuli and incentives would help expand the domestic capital base, improving domestic supplies,” he said.
“These developments would reduce the import dependence of the country, enhancing domestic production ratios in agricultural and industrial supplies.
“Furthermore, domestic supply improvements would enhance Sri Lanka’s external competitiveness and export potential, while also reducing seasonal volatilities in domestic inflation to a great extent.
“These features of the new macroeconomic policy framework will be incorporated into economic management decisions of the Central Bank more closely, to ensure a coordinated approach to pushing the country on to a rapid growth path and sustained prosperity.”
The steady erosion of forex reserves, which is a partly due t an erosion of confidence, analysts warn shows that interest rates are already out of line with the balance of payments.
The last administration also controlled imports after printing money to keep interest rates down as credit picked up. There have been calls to reform the central bank to allow free trade and monetary stability.
Excess liquidity however has driven up stock prices, allowing foreigners to exit easily. (Colombo/Jan05/2020 – Update II)