ECONOMYNEXT – Sri Lanka’s imports grew to 1.6 billion US dollars in May 2021 from 993 million US dollars a year earlier official data showed as credit partly driven by printed money picked up, shattering Mercantilist import controls on ‘usually suspect’ goods such as vehicles, as others took their place.
Sri Lanka’s consumer goods imports in May 2021 were down 4.1 percent to 253 million US dollars from a year earlier and sharply down from 332 million US dollars in 2020.
Sri Lanka’s hotel sector workers have almost no income and most private sector firms, except import substitution and export companies have cut salaries.
State workers and the elected ruling class however are paid with printed money, keeping their incomes intact.
Mercantilist Whipping Boys
Non-food consumer goods were down 6.2 percent to 132.6 million US dollars, and were sharply down from 197.7 million US dollars in 2019.
Vehicle imports were down to just to 500,000 dollars from 47.5 million dollars in 2019 and 58.7 million US dollar in 2019.
Sri Lanka has completely banned vehicle imports as part of a series of Mercantilist import controls slapped in 2020.
However import and credit controls on cars have been recurring feature in all past balance of payments crises triggered by money printing including in the 2018 ‘output gap targeting’ exercise.
Intermediate good recovered to 115 percent from 20201 to 1,045 million US dollars in May 2021 and reached the 1,047 million dollar level seen in 2019.
Fuel is another favourite Mercantilist whipping boy for currency troubles. The ousted Yahapalana administration also banned gold imports, another whipping boy of soft-peggers including the Reserve Bank of India, whose policy has deteriorated compared to Bangladesh.
Fuel imports recovered to 237 million US dollars from 62.9 million in 2020 and but was down from 402.8 million in 2019.
Sri Lanka credit collapsed after March 2020 Coronavirus lockdowns killing consumption, credit and investment, but import controls were slapped in April.
Investment goods rose to 27 percent from a year earlier to 308 million US dollars in May 2021 but was down from 403.7 million US dollars in 2019.
With the 17 percent rise in investment goods were machinery and equipment up rose 15 percent to 183 million US dollars, building material was up 74 percent to 101 million US dollars.
Sri Lanka’s interventionists are giving housing loans at 7 percent and are also engaged in a road construction drive.
Monetary Stimulus and paper credit
Up to July 2019, when the central bank started to inject liquidity buying bonds to target an output gap, Sri Lanka was running contractionary or deflationary policy sterilizing inflows. In 2020 authorities ratcheted up printing under so-called Modern Monetary Theory.
In 2020 Mercantilists claimed that a fall in imports and the ‘trade deficit’ (another favourite ‘usual suspect like cars) was down due to import controls, though analysts using classical economic reasoning pointed out that it was due to contraction in private credit and consumption during lockdowns.
In May 2021 the trade deficit was 716 million US dollars slightly down from 823 million US dollars in 2019, when imports were also driven by tourism revenues.
During the five months to May 2021 the trade deficit was 3.6 billion US dollars, up from 3.1 billion US dollars in 2019 when the central bank was following deflationary policy selling down its T-bill stock.
EN’s economic columnist Bellwether warned that imports will rise as credit recovered in the third quarter of 2020 as demand shifted to areas permitted by authorities.
“Sri Lanka has slapped import controls in April to stop what bureaucrats and Mercantilists believe are undesirable imports,” EN’s economic columnist Bellwether said in late 2020. (Sri Lanka central bank forex purchases decline as credit picks up).
“But credit is fungible and it will flow to other sectors”.
While imports driven credit financed by real savings and loan repayments cannot cause foreign exchange shortages, when loans are re-financed with printed money the balance of payments will give way.
Inflating Money Supply
Analysts had warned for several years that Sri Lanka was following the same policies as Weimar Republic Germany which defaulted on external payments as forex shortages intensified due to money printing.
“The great German inflation was the result of the monetary doctrines of the socialists of the chair,” economist Ludwig von Mises wrote in 1944, having predicted the fate of the Weimar Republic from 1912.
“But most of those men who between 1914 and 1923 were in a position to influence Germany’s monetary and banking policies and all journalists, writers, and politicians who dealt with these problems labored under the delusion that an increase in the quantity of bank notes does not affect commodity prices and foreign exchange rates.
“They blamed the blockade (by Allies of the Central Powers) or profiteering for the rise of commodity prices, and the unfavorable balance of payments for the rise of foreign exchange rates.
“They did not lift a finger to stop inflation (of the money supply).
“Their ignorance of economic problems pushed them toward price control and foreign exchange restrictions.”
Sri Lanka has blamed ‘speculators’ for forex shortages, slapped exchange controls on a already closed capital account, banned forward cover to end customers, banned interbank trading of US dollar above 200, and banned ‘undesirable’ imports and resorted to import-substitution.
“They could never understand why these attempts were doomed to fail,” wrote Mises. “They all clung to the error that it was not the increase of bank credits but the unfavorable balance of payments that was devaluing the currency.”
In Sri Lanka Mercantilism is widely taught in school and universities in the name of economics.
Students are made to believe that trade deficit and imports are somehow ‘bad’ and the current account deficit (another Mercantilist whipping boy) is not the consequence of foreign financed investment in the form of foreign direct investment loans or central bank credit. (Colombo/May21/2021)