ECONOMYNEXT – United Motors Lanka Plc, agents for Mitsubishi in Sri Lanka said it expected a hit on its supply chain as a self-imposed import embargo was placed on the country after money printing just as the country was recovering from a Coronavirus crisis.
“As the Covid-19 pandemic situation is still uncertain, it is difficult to quantity the future business impact on the company,” United Motors said in a stock exchange filing.
“Further the Government’s decision to restrict imports of most categories of vehicles we market could have a medium term negative impact on our revenue from vehicle sales once the current stocks are exhausted.”
Sri Lanka has been aggressively contact tracing Coronavirus infections and is behind only few countries in the world such as Vietnam, observers have said.
There have been spikes in cases in the Navy due to an initial reluctance to test frontline workers and high risk groups but most the testing gaps have been closed.
However the lack of a credible monetary policy framework has led to frequent balance of payments crises, high nominal interest rates, International Monetary Fund bailouts and trade and exchange controls.
Amid the latest trade controls, United Motors said it will focus on after sales service and repairs, which could grow if import controls are extended.
In the year to March 2020, revenues had already dropped to 9.85 billion rupees, from 12.7 billion rupees a year earlier.
In 2018 the rupee also collapsed as fiscal policy improved, but the central bank printed money to target a call money rate, critics have said.
The latest restrictions are among the worst trade controls slapped since a 1970s self-imposed economic embargo that reduced Sri Lanka to a subsistence level economy and drove up unemployment to 20 percent.
The 1970s controls came in the wake of the collapse of the Bretton System of soft-(gold) pegs due to money printed by then Federal Reserve Governor Arthur Burns to target a ‘potential’ growth rate in the US amidst the Vietnam war.
Sri Lanka’s central bank has resisted operating a credible external anchor (exchange rate) with a discretionary ‘flexible’ exchange rate and resisted basing monetary policy on a credible domestic anchor with a ‘flexible’ inflation targeting framework, critics have pointed out.
In 2020, tax cuts in the form of ‘fiscal’ stimulus and rate cuts and unprecedented liquidity injections in the form of ‘monetary’ stimulus had earned the country another downgrade to ‘B-‘ as forex shortages raised fears about the ability to repay foreign borrowings.
Vehicles, gold and oil imports are usually blamed for monetary instability and falling currencies in Sri Lanka and not money printing coming from trying to control multiple variables (exchange rate and interest rates) at the same time.
“It’s the policies of the central bank in all cases,” explains Ross McLeod, Associate Professor at Australia National University’s, College of Asia and the Pacific.
“The value of money is its purchasing power. That’s kind of the inverse of the inflation rate. If you have the value of the currency falling, it is equivalent of saying prices are rising.
“So it’s never the fault of the people. It’s always attributable to the policies of the central bank.”
Specifically, if the central bank tries to control more than one nominal variable simultaneously, it’s just going to fail, because it only has one instrument of policy.
However the 2015 and 2020 episodes of monetary instability happened in the wake of plunging oil prices, weakening Mercantilist (trade linked) explanations for monetary instability. (Colombo/June02/2020)