ECONOMYNEXT – Sri Lanka central bank’s recent import restrictions over 600 items should be revisited as it is hindering a booming service exports of information technology (IT), president’s secretary P B Jayasundera said.
The central bank early this month expanded its import restrictions to items including telecommunication goods including mobile phones as printed money mainly from failed bond auctions (central bank credit) triggered excess outflows over dollars flowing into the country.
As the central bank gave convertibility to the new rupees, reserves dwindled.
The restrictions have hit the information technology industry (IT) which is a booming foreign exchange generator especially after the pandemic started last year.
Jayasundera, Sri Lanka’s top most public official and former finance secretary, said such restrictions do not make sense and contradict the overall post-Covid-19 economic recovery plan.
“IT is one area where exports have bounced back rapidly and the IT industry itself claims they are targeting 1.7 billion US dollars this year,” Jayasundera told EconomyNext in an interview.
“Now the central bank has imposed a 100 percent credit margin on IT products, which is not healthy.”
“So those things should be revisited in order to get the cash flow as the recovery plan is done collectively.”
The latest restrictions do not ban imports.
Instead importers have been asked to fork up extra cash upfront for letters of credit and to settle bills with other money, raising the cost to high levels and making importers to look at other lending agencies for money.
The central bank had earlier suspended convertibility for the new rupees, leading to the rupee falling or floating down to 230 to the US dollar for imports.
The central bank then decreed a 203 exchange rate, revaluing the rupee up, but there is convertibility undertaking to support new peg.
Banks then began to ration dollars amid excess rupees from failed bond auctions.
Convertibility is given from reserves mostly for debt repayments.
However the money for debt repayments are also not raised from bond auctions or taxes, which should crowd out private consumption, credit and imports but from central bank credit, leading to further erosions of reserves.
Money injected to cover failed bond auctions are either going to finance the deficit, where the state worker salaries are the biggest item or old securities are being repaid with new money, turning paper debt into reserve money, exchangeable for real goods and dollars, analysts have pointed out.
Newly re-appointed central bank Governor Nivard Cabraal has lifted a price control on bill auctions which was serving as a de facto policy rate to inject money and drive credit and excess imports, in a bid to get Treasuries auctions to work and divert real resources to the budget.
If bond auctions are successful, rupees would be ‘rationed’ instead of dollars bringing the external and domestic sectors in to balance, and restoring monetary stability, analysts say.
But confidence is still weak among bond buyers at current rates (the price of the bond is too high) to at the levels the debt office is willing to sell, requiring some meeting point to be established in the near future.
The 12-month T-bills yield rose 38 basis points this week and some short term bonds are beginning to be quoted.
The central bank also raised a statutory reserve ratio before lifting the price controls and getting bond auctions to work, creating a large liquidity shortage. The liquidity short is filled with window money overnight 6.00 percent, creating an asset liability mis-match.
The asset liability mismatch is discouraging banks from investing in longer term bonds, but does not necessarily discourage short term credit or floating rate loans.
The printed money and low rupee interest rates, and 230 rupee to the US dollar in OTC market near floating rate due to the suspension of convertibility have also encouraged exporters to borrow rupees and hold dollars.
Sri Lanka also does not have an interbank spot market for a proper float, if any, to work, analysts say. There is also no forward market for importers.
They have been closed progressively as central bank credit inserted new rupee reserves to banks, lowered interest rates below domestic credit developments, hurting the exchange rate peg.
While there are restrictions on some goods, that officials dislike, especially cars, which bring high levels of taxes for every dollar spent, imports to sectors that they like instead of the economic agents, are at record levels.
In the 17-months to July 2021 imports rose to a 17-month high with intermediate goods rising to 6.5 billion US dollars, higher than the pre-pandemic 6.5 billion US dollars.
Machinery and equipment imports were 1.58 billion US dollars up from 1.43 billion in the pre-pandemic 2019. Total imports mainly to preferred sectors were 11.7 billion dollars up to July, up from 11.3 billion pre-pandemic.
In the absence of central bank credit, imports should at least have fallen by the net fall in tourism revenues (tourism earnings – less outward travel), as tourism sector workers and hotel owners lost incomes, analysts say.
However if hotels are given central-bank re-financed credit (printed money) to pay workers, the other credit and imports would not be crowded out.
The central bank’s excess money printing at record low interest rates since mid-2020 has encouraged importers to use cheap credit to import with available foreign exchange. (Colombo/Sept25/2021)