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Sunday March 26th, 2023

Sri Lanka imports top three year high by Aug 2021 amid money printing

ECONOMYNEXT – Sri Lanka’s imports hit 1.68 billion US dollars in August 2021, amid record money printing the highest since 2018 when money was also printed losing forex reserves, data show.

The surge in imports came despite import controls.

Up to August imports were 13.4 billion rupees, up from 10.25 billion rupees in 2020 and also up from 12.88 billion rupees in the pre-pandemic 2019.

In 2019 the central bank did not print money until August and collected forex reserves running deflationary policy. Imports were 15.0 billion rupees up to September in 2018.

Imports grew in 2021 despite controls.

Mercantilist Hot Buttons

Imports of cars, gold and the latest Mercantilist hot button, fertilizer were almost non-existent. Fertilizer imports were down to 0.9 million dollars from 32 million dollars from the pre-pandemic year of 2019.

Sri Lanka’s politician gave subsidized fertilizer to win votes promoting over-use and waste. Interventionists have suddenly banned fertilizer completely without any consultations and evidence based policy formulation throwing farming into a crisis.

With exports 7.9 billion US dollar up to August, up 22.6 percent, the trade deficit was 5.5 billion US dollars, up from 3.8 billion dollars in 2020.

Sri Lanka has a trade deficit due to domestic agents spending non-merchandise related inflows like remittances, IT and tourism reciepts. Sri Lanka has a current account deficit due to foreign financed investments like foreign direct investment and foreign financed budget deficits.

However the currency falls, and there is balance of payments deficit (a fall in net international reserves) when money is printed, pushing outflows above inflows.

Up to August vehicle imports were 7.8 million dollars, down from 280.8 million dollars in 2020, and 496.4 million dollars in 2019 when the central bank did not print money until the last quarter.

Though there were hardly any vehicles imported, money flowed into other ‘permitted’ sectors favoured by control-oriented bureaucrats.

Analysts had warned that imports will pick up as domestic credit and economic activity picked up.

Economist B R Shenoy as early as in 1966 explained the futility of import controls and the actual cause of payments problems, which started after a money printing central bank was set up in 1950.

“..Balance of Payments difficulties cannot be solved by intensifying the rigorous of exchange control and import restrictions; nor by extending the schemes for expanding domestic production to substitute import goods — the so called measures for “economising” on foreign exchange,” Shenoy wrote.

“Intensification of the rigorous of exchange control and import restrictions may reduce the quantum of import goods flowing into the market. It cannot reduce the flow of moneys seeking to purchase goods, either for consumption or for investment.”

“This flow of money is determined by the national product and the inflationary part of the Net Cash Operating Deficit,”

“The remedy to this problem lies in putting a stop to inflationary financing, not in tampering with the normal course of international trade.”

Economists and analysts have called for central bank reform or a its abolition to a currency board for many years to stop high inflation, currency depreciation, output volatility and social unrest.

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Sri Lanka seeks to settle India ACU debt, credit lines over 5-years

ECONOMYNEXT – Sri Lanka has requested India to settle payments due to the country under the Asian Clearing Union mechanism and credit lines given in 2022 over 5 years, Indrajit Coomaraswamy, an advisor the island’s government said.

Sri Lanka is negotiating with India to settle the money over a 5-year period, Coomaraswamy, a former central bank governor told an online forum hosted by the Central Bank.

“Our request from the Indians is to settle it over five years,” he said. “That I think is still in the early stages of negotiation. The same with the one billion line of credit.”

Sri Lanka’s central bank owed the ACU 2.0 billion US dollars to the Asian Clearing Union according to a year end debt statement, issued by the Finance Ministry.

Sri Lanka owned India, 1,621 million dollars according to ACU data by year end, excluding interest.

India has given a 1 billion US dollar credit line to Sri Lanka as well a credit line for petroleum.

Sri Lanka in March 2024 has paid 121 million US dollar out of a 331 million US dollar IMF tranche to settle an Indian credit line.

Indian credits were given after the country defaulted in April 2022 as budget support/import when most other bilateral lenders halted giving money. (Colombo/Mar26/2023)

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Sri Lanka coconut auction prices up 1.16-pct

ECONOMYNEXT- Sri Lanka’s coconut auction prices went up by 1.16 percent from a week ago at an auction on Thursday, data showed.

The average price for 1,000 nuts grew to 83,219.45 from 82,260.58 a week earlier at the weekly auction conducted by Sri Lanka’s Coconut Development Authority on March 23.

The highest price was 92,500 rupees for 1,000 nuts up from the previous week’s 90,600 rupees, while the lowest was 76,500 also up from 70,000 rupees.

The auction offered 900,010 coconuts and 583,291 nuts were sold. (Colombo/Mar 26/2023)

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Sri Lanka in talks for billion dollar equivalent Indian rupee swap

ECONOMYNEXT – Sri Lanka is in talks with India for a billion US dollar equivalent Indian rupee central bank swap, to facilitate trade, Indrajit Coomaraswamy, ad advisor to the government said.

“The amount is still uncertain it could be up to the equivalent of a billion US dollars,” Coomaraswamy told an online forum hosted by Sri Lanka’s central bank.

The money will be used to facilate India Sri Lanka trade, he said.

India has been trying to popularize the use of Indian rupees for external trade and also encouraged Sri Lanka banks to set up Indian rupee VOSTRO accounts.

However the first step in popularizing a currency for external trade is to get domestic agents, especially exporters, to accept their own currency for trade, like in the case of the US or EU, analysts say.

India’s billion US dollar credit to Sri Lanka given during the 2022 crisis is settled in Indian rupees (transaction need).

However the Indian government itself has chosen to denominate it in US currency for debt purposes (future value).

In most South Asian nations, receivers of remittances are willing to accept domestic currencies, leading to active VOSTRO account transactions.

Sri Lanka is expected to repay a 400 million US dollar swap with the Reserve Bank of India next year under an International Monetary Fund backed program for external stability and debt re-structuring.

Central bank swap proceeds sold to banks, which are then sterilized with inflationary open market operations, can trigger forex shortages and currency crises, analysts warn.

Sri Lanka went to the International Monetary Fund after two years of inflationary monetary operations by the central bank’s issue department (money printed to suppress interest rates) triggered the biggest currency crisis in its history and external sovereign default.

Sri Lanka had gone to the IMF 16 times with similar external troubles except for the April 2003 extended fund facility under Central Bank Governor A S Jayewardene which was a purely reform-oriented program with the World Bank (PRGF/PRSP) program at a time when he was collecting reserves with deflationary monetary policy and perhaps the lowest inflation since the Bretton Woods collapsed. (Colombo/Mar26/2023)

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