mainadimage
An Echelon Media Company
Sunday July 25th, 2021
Economy

Sri Lanka rupee plunges amid money printing as car imports collapse

ECONOMYNEXT – Sri Lanka’s rupee has plunged to 199 to the US dollar in March as vehicle imports collapsed to almost nothing, official data showed as domestic credit driven by printed money, recovered.

Sri Lanka’s vehicle registrations fell to 3,556 units in March 2021 down from 13,219 units in March 2020 when a lockdown started and down from 34,475 units in January 2020.

Motor car registrations fell to just 149 units in March 2020, down from 1,165 units a year earlier and 2,526 units in January 2020, an analysis of vehicle registry data by JB Securities, a Colombo-based brokerage shows.

Only 11 three wheelers were registered in March down from 762 in March 2020.

However 250 medium trucks were registered up from 95 units a year earlier.

Sri Lanka banned car imports in 2020 as a tax cut in December 2019 followed by unprecedented money printing triggered forex shortages.

There is a strong Mercantilist belief in Sri Lanka that monetary instability involving currency collapses and balance payments deficits are not due to money printing and credit but is due to trade.

Analysts had warned that banning imports does not work in countries because, credit will flow into other permitted sectors and imports will recover. If the credit is financed with printed money outflows will exceed inflows, creating forex shortage and currency pressure.

Sri Lanka had also slapped import controls in past episodes of money printing.

In 2018 Sri Lanka printed money to target a call money rate and an output gap and controlled vehicle imports and gold through taxes and credit restrictions.

Related

Sri Lanka rupee collapses as gold imports end

DUAL ANCHOR CONFLICT: In 2018 Sri Lanka triggered a currency crisis by targeting an ‘output gap’ with printing money to keep call money rates down just after halting gold imports.

Sri Lanka has been following a highly discretionary or corrupted version of inflation targeting and printed money to keep rates down, despite the existence of a pegged exchange rate, triggering economic instability and balance of payments crises.

The central bank has no growth mandate and printing money to push growth and creating monetary and economic instability is not in line with the main objectives in the monetary authority’s law, economists have said.

Related

Sri Lanka has a corrupted inflation targeting, output gap targeting not in line with monetary law: Wijewardene

The International Monetary Fund may also have been complicit in giving technical assistance to calculate an output gap and which led to monetary instability.

The 2018 monetary instability from the ‘flexible inflation targeting/call money rate targeting’, came despite large tax hikes and market pricing of fuel.

Analysts have pointed out that Sri Lanka’s beliefs that imports cause monetary instability is linked to a Keynesian confusion dating back to the 1920s, known as the ‘transfer problem’.

Keynes believed that a trade (or current account surplus) was required to make foreign repayments, and was unable to grasp that that it was a consequence of financial outflows. To make outward payments and create a current surplus the government had to raise taxes or borrow at market rates.

Related

Sri Lanka debt crisis trapped in spurious Keynesian ‘transfer problem’ and MMT: Bellwether

In 1929 several classical economists tried to explain to Keynes that foreign borrowings made imports overtake exports and loan repayments or loans made to foreigners, reduced imports.

Similarly oney printing (inflationary policy) also boosted imports, while deflationary policy (inflow sterilization reduced) imports.

“Foreign borrowing, however, increases and loans (to foreigners) reduce buying power,” Swedish economist Bertil Ohlin wrote in 1929.

“Similarly, inflationary credit policy (central bank purchases of Treasury bills) and deflationary policy (CB securities sales) reduces it.

“In the former case new buying power is created by the banks; in the latter, money which is earned and save is not lent by the banks to others, – it vanishes (is sterilized) and buying power falls off.”

Since he could not grasp idea, those who are schooled in Keynesian economics cannot grasp the concept that money printing creates forex shortages and the reverse ‘generates’ dollars.

Leave a Comment

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *

Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Your email address will not be published. Required fields are marked *