ECONOMYNEXT – Sri Lanka’s imports rose to 1,710 million US dollars in July 2021, a 17-month high despite severe import restrictions, as exports picked up, official data showed, as private credit also continued to grow amid money printing.
In Sri Lanka neo-Mercantilism is strong and policy-makers believe that more exports will reduce the trade deficit and not drive imports as the income is spent by recipients.
Sri Lanka’s monopoly note-issue bank, the Central Bank of Sri Lanka has been pumping record volumes of rupee reserves in to the banking system mainly through failed bill auctions triggering cascading credit.
Sri Lanka’s exports rose to 1,104 million US dollars in July 2021, a 28-month high, up from 1,007 million dollars in June. Exports were the highest since 1,137 recorded in March 2019.
At the time Sri Lanka also got tourism revenues. In March 2019 the central bank bought 86 million US dollars from markets with private and state enterprise credit at only 10 billion rupees.
In July 2021, private credit was 85.4 billion rupees, on top of 102.8 billion rupees in June.
The trade deficit was 607 million US dollars, up from 209 billion rupees in 2019 when private and state enterprise credit was only 27.7 billion rupees. SOE credit is usually relates to energy utilities almost all of which will hit the forex market in the first round.
Sri Lanka has been printing money to keep interest rates down, despite the budget deficit running at 10 percent of gross domestic product, following tax cuts in December 2019 and driving up private credit.
In the 07 month to July 2021 total imports were 11.7 billion dollars, up from 8.9 billion in 2020, and higher than 11.3 billion in 2019, when there were tourism revenues.
In the 7-months to July 2019 exports were only 6.8 billion US dollars.
Liquidity is now mostly injected from failed bill and bond auctions where price controls discourage real buyers.
Sri Lanka had imposed the worst import control since the 1970s, in the belief that imports, not liquidity injection was responsible for balance of payments problems and currency falls.
However it has not solved the problem, since money is flowing into other areas which give lower levels of tax to the government dollar to dollar.
Car imports have been banned and personal vehicle imports have fallen from 279 million dollars in 2019 to 6.7 million 2021. Machinery and equipment imports which was 1.42 billion US dollars in 2019 had risen to 1.59 billion US dollars in 2021 as private credit recovered.
Predictably the import controls have failed to stop monetary instability. Credit has instead flowed into permitted sectors.
Consumer good imports grew to 2.25 billion rupees in the 7 months to July 2021, up from 2,167 million dollars in 2019.
As the rupee peg came under pressure, exporter and other have also been incentivized by the central bank to hoard dollars using cheap rupee credit for day to day expenses.
If new money was not printed, exporters borrowing dollars would have simply reduced other consumption and investment credit and reduced imports.
The central bank hike policy rates in August to 6.0 percent from 5.50 percent before getting bond auctions to work.
A statutory reserve ratio rate was also hiked from 2.0 to 4.0 percent. While it withdrew liquidity, the shock has also further spooked banks, who are among to buyers of bonds. (Colombo/Sept13/2021)