ECONOMYNEXT – Sri Lanka’s customs revenues are below the target set for the first quarter of 2013 amid continued import controls, State Minister for Finance Ranjith Siymabalapitiya has said.
The Treasury has set a target of 270 billion rupees in import duties for the first quarter but actual revenues were 12 percent lower, he had said.
The stronger rupee, which had reduced prices and raised confidence in the current economic program had also contributed to lower revenues.
The central bank had stabilized the rupee by raising rates to reduce credit and money printing. Higher fuel and energy prices, which would otherwise have been financed by credit had also been reduced by an IMF program.
Sri Lanka will lift import controls on a series of goods in the near future, Minister Siyambalapitiya said.
Forex shortages and currency depreciation come from a soft-pegged central bank (now called a flexible exchange rate) which conducts inflationary open market operates to enforce an artificially low policy rate, which drive unsustainable credit which are not financed by deposits.
Sri Lanka has a long history of slapping import controls after engaging in inflationary domestic operations to suppress market rates or engage in re-financing activities and them imposing import and exchange controls.
Tax revenues then fall worsening cashflows and prompting more printing.
Currency depreciation and reserve losses then take place regardless of the import controls as credit re-financed by Treasury bills purchased by the central bank to maintain an artificial policy rates then shifts to areas not covered by import controls, such as industrial machinery or building materials.
Sri Lanka President Sirisena calls to expand Nixon shock as rupee falls
Unlike items like cars which are taxed at rates of around 200 to 300 percent, the arears favoured by state economic bureaucrats are taxed at low rates.
The crisis in eventually contained by raising rates to high levels to kill credit, and restore confidence in the currency peg.
The currency crisis is then blamed on budget deficits. Tax rates are then raised across the board amid a contracting economy.
A few years later the cycle repeats as interest rates are suppressed, either through yield curve targeting (buying maturing bills or new money), or aggressive open market operations, under ‘flexible inflation targeting’ and after the IMF taught Sri Lanka to calculate a potential output, in an attempt to boost growth by open market re-financed credit.
Critics have called the Sri Lanka’s import control which came from from suppressed interest rates Nixon’s shocks, after import controls imposed by then then US President Richard Nixon after the Fed collapsed the US dollar in 1971 with an artificially low policy rate to target an output gap. (Colombo/Apr19/2023)