ECONONYNEXT – Sri Lanka’s central bank has tightened a loophole in newly slapped import restrictions to stop items like baby cologne, deodorants, footwear, rubber tires and air conditioners being imported without letters of credit on which restrictions were originally placed.
The trade controls were slapped after the rupee came under pressure from operating a so-called ‘flexible exchange rate’.
The ‘flexible exchange rate’ has turned out to be an unusually unstable soft-peg where the anchor swings suddenly from de facto external (reserve collecting peg) to supposedly domestic (floating rate with a wide near-double digit inflation target) with unsterilized liquidity collected from the peg intact, sending the rupee sliding down.
A directive by the central bank said authorized dealers in foreign exchange (mostly banks) were barred from releasing foreign exchange for rupees, for the import of “non-essential consumer goods” under cash on advance payment (cash-in-advance) terms.
“Authorized dealers should apprise customer (i.e importance of goods) on this requirement and are required to comply with this section until further notice,” the directive said.
The items include, perfume, rubber tyres and footwear.
Ironically they are among products made by prominent protected goods manufacturers.
The import controls triggered by monetary instability, have undermined the entire trade liberalization strategy of the administration and left advocates of free trade with egg on their faces.
Analysts who closely studied the tendency of the central bank to artificially suppress interest rates when the economy recovered had warned that the exchange rate would be hit (Sri Lanka is recovering, Central Bank threat looms), and liquidity injected would drive the country towards dollar sovereign default. (Sri Lanka’s Weimar Republic factor is inviting dollar sovereign default: Bellwether).
There had been repeated calls for the central bank to be reformed to make free trade possible (Sri Lanka central bank has to be restrained for free trade to succeed: Bellwether).
In the 1970s when the Bretton Woods system of soft-pegs finally collapsed, amid money printing by the Fed and sterilized dollar sales, leading to steep gold losses, Sri Lanka closed the entire economy. The US also slapped trade control, which were called the Nixon shock.
The Central Bank of Ceylon, with money printing powers, was built in August 1950.
Before that a hard peg (currency board) backed by consistent policy (floating rates) was in place like in Hong Kong and Singapore, keeping the economy stable and the exchange rate fixed. (Colombo/Oct12/2018)