ECONOMYNEXT – Sri Lanka has lifted a ban on open account food imports allowing rice, lentils and potatoes to come freely to the island in the worst currency crises in the history of the island’s intermediate regime central bank.
Sri Lanka only needs about a 100 million US dollars a month for key food imports according to industry officials but a ban on open account imports in May threatened the country’s food supplies as the banks are unable to allocate foreign exchange on time for food, amid forex shortages driven by money printing.
Under open account trade, suppliers can send goods on credit which can be settled later based on their personal relationships. Perishables have to be cleared quickly from the Port but banks are unable to give dollars in time for importers of most items.
Some foods like onions and potatoes are vegetables which perish.
“A big share of essential food imports come from India,” Trade Minister Nalin Fernando told reporters. “They need to get the food out of the exporting country in a day or two and clear them as quickly as possible.
“They give credit and delayed payment facilities because they cannot kept for a long time. For example onions and potatoes perish quickly.
Prices of foods moved up after open account imports were banned in May, he said.
“So there was a reduction in the availability of foods and then prices went up in the market. So we discussed with the Treasury and Central Bank we are giving permission against for 10 essential food items to be imported on open account basis.”
The central bank was pushing to close open account trade as the money it printed created excess outflows triggering a parallel exchange rate for people who were willing to pay higher than the officially directed price.
Sri Lanka’s rupee has collapsed from 4.70 to 360 levels since the soft-pegged central bank since it was set up in 1950 abolishing a currency board or hard peg which could not print money to manipulate the interest rate.
The soft-peg was set up on a false promise propagated by US Mercantilists in particular that there was ‘monetary policy independence’ while operating a reserve collecting peg with an exchange rate target either to run counter cyclical policy when the anchor currency tightened or to finance deficits.
Prime Minister Ranil Wickremesinghe, as Minister of Finance has issued gazette notice on June 25, allowing 10 foods to come in through open account basis.
Download gazette Gazette-2285-19-open-account
The Director General of Customs and Controller of Imports and Exports were directed to issue operating instructions.
These include, rice, milk powder, dried fish, potatoes, peas, lentils (Massor dhal), chillies, wheat and sugar.
Sri Lanka earns about a billion US dollars in exports, about 600 million dollars in remittances (about half coming in through unofficial gross settlement systems such as Hawala), and another few hundred million as services exports.
However Sri Lanka’s soft-peg has lost credibility and there is no floating exchange rate to allocate dollars to the highest bidder.
In a fixed pegged system a central bank provides any which are not provided by the market, and it has to lead to a rise in rates and contraction in credit. However in a soft-pegged system interventions are offset with new money.
Sri Lanka is also injecting new money to keep Treasury bill yields down. Over 40 billion rupees were printed on Friday, data showed. (Colombo/June26/2022)