Sri Lanka rupee plunges as car registrations collapse under import controls
ECONOMYNEXT – Sri Lanka rupee has fallen from 186 to around 194 to the US dollar in January 2021 as new car imports and registrations plunged to historic lows amid import controls, data shows.
Total new registrations fell to 3,256 units in January 2021 down from 34,475 a year earlier, according to Sri Lanka vehicle registry data compiled by JB Securities, a Colombo-based brokerage.
Motor car registrations fell to 195 in January 2021 from 2,536 a year earlier.
SUVs and crossovers fell to 161 from 787 last year.
Vans fell to 78 from 911.
Three wheelers fell 20 to from 767.
Two wheelers were down to 1,228 from 26,588.
Meanwhile the rupee fell from 186.40 in December 2020 to 194.40 to the US dollar in January 2021.
Sri Lanka has imposed severe import controls in a Mercantilist belief that foreign exchange and balance of payments troubles (monetary instability) are caused by imports rather than credit driven by printed money (central bank credit or liquidity injections).
Oil also tends to pressure the currency when subsidies are finance by loans from state banks re-financed by central bank with printed money to keep interest rates down.
Sri Lanka has been printing unprecedented volumes of money over 2020 under so-called Modern Monetary Theory to finance the deficit and keep interest rates down.
The low rates and injections made rupee yields fall below domestic dollar yields and turned forward premiums negative. The central bank then banned forward covering.
In 2018 Sri Lanka printed money mostly through open market operations to control interest rates amid an private credit pick-up despite taxes being hike to bring down the budget deficit and oil being market priced to crowd out domestic non-oil consumption.
In 2018 the rupee started to collapse just as gold imports were banned. (Colombo/Mar01/2021)