Sri Lanka mulls import permits after Mercantilist gold tax kills export competitiveness

ECONOMYNEXT – Sri Lanka’s jewellery industry is calling for tax-free import quotas for gold, a report said, after authorities slapped a 15 percent Mercantilist tax hitting the exporters, as the rupee fell to a new historic low, hitting exports and sales to tourists.

Sri Lanka’s Daily Mirror newspaper quoted M L Gammanpila, a Director General of the state National Gem and Jewellery Authority that is in talks with the Finance Ministry to start an import quota system.

Gammanpila said the agency was assessing the gold requirement for exports.

The newspaper said jewellers had complained that Sri Lanka’s jewellery was now about 15 t 20 percent more expensive than competing countries like Thailand and it will hurt exports and also sales to tourists.

The impact of import duties hitting exports is called ‘effective protection’.

Ironically Finance Minister Managala Samaraweera in one of his earliest speeches after taking over, said he will bring down effective protection.

A jewellery industry representative who was not named said, sales to tourists may be amount to as much as 100 million dollars a year.

The Finance Ministry slapped a 15 percent tax on gold, in a knee-jerk Mercantilist reaction after official gold imports soared.

The tax came as the rupee fell to a historic low after central bank printed tens of billions of rupees to cut rates on top of a seasonal demand for extra cash.

It is also following a strategy of targeting a real effective exchange rate index, resulting steady depreciation of the rupee over 2017 and 2018, on top of a currency collapse in 2015/2016.





Sri Lanka’s gold inflows are suspected to be smuggled to India for a profit.

Analysts say the latest ‘own goal’ by the finance ministry against the jewellery industry underlines the need to reform the central bank or abolish it altogether in favour of a currency board.

Without reforming the central bank and its trigger happy domestic operations department, no free trade regime will succeed, analyst have pointed out. (Sri Lanka central bank has to be restrained for free trade to succeed: Bellwether)

The central bank and its trigger happy domestic operations department stands against Sri Lanka’s ambitions to be a hub of the Indian Ocean, analysts have said.

Sri Lanka’s claims to be a financial hub of the Indian Ocean is also nonsense with a money printing, depreciating central bank operating a downward crawling peg generating balance of payments crises every few years, analysts have said.

Gold trading is a fairly large sector in regional financial centres, ranging from Dubai to Hong Kong. India is believed to the world’s largest consumer of gold.

India had slapped a Mercantilist 10 percent tax as the rupee in 2013 as the rupee collapsed from 54 to the US dollar in January 2013 to 63 in August in a Mercantilist bid to ‘narrow the current account deficit’, triggering a smuggling epidemic.

The jewellery industry in Sri Lanka also warned that ‘illegal practices’ may happen, an oblique warning that gold will now be smuggled into Sri Lanka.

Mercantilists believe that current account or trade account deficits trigger currency falls rather than money printing.

Sri Lanka’s central bank has had a much worse monetary policy than India. At the time of independence from British rule the Sri Lanka (the Ceylon) and Indian rupees were at parity.

At the time the Indian rupee was the ‘dollar of Asia’ and was used in countries as far as the Middle East, which were linked to the British Empire, while most of South Asia was also using rupees or were hard pegged.

But after the Reserve Bank of India was nationalised and money was printed to finance Nehru’s 5-year plans, the inflating Indian rupee was dumped by many countries.

Sri Lanka’s rupee was at 4.77 to the US dollar, when a currency board which kept the rate fixed, was abolished creating a money printing central bank in 1951 that gave a license to politicians to deficit spend.

Soon after its creation draconian exchange controls were imposed and not just gold, but all imports were progressively restricted. A permit raj also proliferated in both countries.

Sri Lanka’s rupee had since been debauched to 156 to the US dollar with three civil wars. The Indian rupee is now down to about 55 to the US dollar. (Colombo/Apr23/2018)

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