ECONOMYNEXT – Sri Lanka’s imports are estimated to have soared to 2.2 billion US dollars in December 2021, central bank said amid sterilized forex sales to maintain a policy rate of 6.0 percent as inflation urged to 12.1 percent.
The central bank said December 2021 imports are estimated to have risen to 2.2 billion US dollars, up from a pre-Covid 1.7 billion US dollars in 2019 and 1.5 billion dollars in 2020, when private credit was negative till July.
Up to October 2020 imports have averaged around 1.6 to 1.7 billion US dollars.
Sri Lanka has been hit by balance of payments deficit as money was printed to create outflows greater than inflows from the beginning of 2020.
In a knee jerk Mercantilist reaction Sri Lanka imposed controls including in cars which bring taxes in excess of 200 percent for every dollar spent but promoted investment and consumption with low interest rates and money printing.
Such controls have been imposed in previous money printing episodes.
Some iport controls to allow so-called import substitution ‘cronies’ to arbitrage taxes that would have otherwise gone the government are also in place.
“Sri Lanka has not placed restrictions on imports other than vehicles, tiles and gold rest of the imports are allowed,” Ajith Nivard Cabral, Sri Lanka Central Bank Governor said at the policy review meeting held on Thursday (20)
“That’s why we are seeing an excess import of certain items that are not considered essentials as a result of which some of the essential items were in containers that got stuck.”
Sri Lanka’s low interest rates have spurred private credit and the government is also building roads which transfers money to contractors.
Sri Lanka’s central bank in December and January gave 664 million dollars in reserves.
When monetary reserves are given for imports at a given exchange rate peg, an equal amount of rupees are injected in order to fixe interest rates, pushing credit and imports up in a vicious cycle when an economic activities are strong.
At a monetary policy meeting on January 19, Cabraal raised rates to 6.5 percent from the current 6.0 percent.
Remarkably earlier in January Mercantilists and some members of the business community called for reserves to be given for imports maintaining the peg.
However many businessmen had objected to pegging earlier, calling for the exchange rate to float(suspension of reserve sales).
Any reserve sale is accompanied by a shrinking of reserve money and tightening of credit to maintain a pegged regime. In floating regime there are no reserve sales.
Full year imports are estimated at 20.6 billion US dollars.In the money printing year of 2018, imports rose to 22.2 billion US dollars with tourism inflows.
Meanwhile Governor Cabraal said banks are being asked to prioritize fuel and essential foods when allocating dollars.
In October out of 1.7 billion US dollars of imports, food and beverages were 97 million dollars down from 124 million last year, wheat and maize were 70 million up from 40 million a year earlier.
But machinery and equipment were 205 million US dollars and building materials were 103.7 million US dollars. Fuels were at 385 million US dollars.
Meanwhile Sri Lanka’s President Gotabaya Rajapaksa told parliament on January 18 said after he took over the administration he had banned 16 items including green gram, cowpea, turmeric and ginger to give profits to local producers.
Many importers say their containers stuck at the port due to a lack of dollars in the market therefore imports are being delayed arriving in the country.
Some including intermediate goods importers for export sectors are also finding it difficult to get dollars. (Colombo/Jan20/2021)