Borrowing money

Sri Lanka’s latest import restrictions should be reviewed: Jayasundara

ECONOMYNEXT – Sri Lanka’s central bank’s recent 600-item import restrictions should be reviewed as they hamper the boom in exports of information technology (IT) services, said Secretary to President PB Jayasundera .

Earlier this month, the central bank extended its import restrictions to items including telecommunications products, including cellphones, as the money printed mostly from failed bond auctions (credit to the central bank) triggered excessive outflows of dollars entering the country.

As the central bank gave convertibility to the new rupees, the reserves declined.

The restrictions have hit the information technology (IT) industry which is a booming currency generator, especially after the pandemic started last year.

Jayasundera, Sri Lanka’s top official and former finance secretary, said such restrictions made no sense and contradicted the comprehensive post-Covid-19 economic recovery plan.

“IT is an area where exports have rebounded quickly and the IT industry itself claims to be targeting $ 1.7 billion this year,” Jayasundera told EconomyNext in an interview.

“Now the central bank has imposed a 100% line of credit on IT products, which is not healthy. “

“So these things should be revisited in order to get the cash flow while the stimulus package is being done collectively.”

The latest restrictions do not prohibit imports.

Instead, importers were urged to shell out additional cash up front for letters of credit and settle invoices with other funds, raising the cost to high levels and forcing importers to look to other lending agencies for money.

The central bank had previously suspended convertibility of the new rupees, causing the rupee to fall or float to 230 to the US dollar for imports.

The central bank then decreed an exchange rate of 203, revaluing the rupee higher, but there is a convertibility commitment to support a new peg.

Banks then began rationing dollars amid excess rupees from failed bond auctions.

Convertibility is given from reserves mainly for debt repayment.

However, the money for debt repayment also does not come from bond auctions or taxes, which should crowd out private consumption, credit and imports, but from central bank credit, resulting in further erosion of reserves.

Money injected to cover failed bond auctions will either finance the deficit, where government employee salaries are the most important item, or old securities are paid off with new money, transforming paper debt as reserve currency, exchangeable for real goods and dollars, analysts pointed out.

Rationing of rupees

Newly appointed central bank governor Nivard Cabraal lifted price controls on the bond auctions that served as a de facto policy rate to inject money and stimulate credit and excess imports, with the aim of making run the treasury bill auctions and divert real resources to the budget.

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If bond auctions are successful, rupees would be “rationed” instead of dollars to balance the external and domestic sectors and restore monetary stability, analysts said.

But confidence is still low among buyers of bonds at current rates (the bond’s price is too high) to the levels the debt office is willing to sell, necessitating the establishment of a meeting point in the near future.

The yield on 12-month Treasuries has risen 38 basis points this week and some short-term bonds are starting to be listed.

The central bank also raised a reserve requirement ratio before lifting price controls and running bond auctions, creating a serious liquidity shortage. The cash short sale is filled with box office money overnight at 6.00%, creating a mismatch between assets and liabilities.

The asset-liability asymmetry discourages banks from investing in longer-term bonds, but does not necessarily discourage short-term credit or variable rate loans.

The printed currency and low interest rates of the rupee, and 230 rupees to the US dollar in the over-the-counter market near the floating rate due to the suspension of convertibility have also encouraged exporters to borrow rupees and to hold dollars.

Sri Lanka also does not have an interbank spot market for proper float, if any, to work, analysts say. There is also no futures market for importers.

They were gradually closed as central bank credit introduced new rupee reserves into banks, lowered interest rates below changes in domestic credit, undermining the exchange rate peg. .

Preferred Imports

While there are restrictions on some products that officials dislike, especially cars, which result in high tax levels for every dollar spent, imports to industries they love rather than economic agents reaching. record levels.

In the 17 months to July 2021, imports peaked in 17 months, with intermediate goods reaching US $ 6.5 billion, more than the US $ 6.5 billion before the pandemic.

Imports of machinery and equipment stood at $ 1.58 billion, up from $ 1.43 billion before the 2019 pandemic. Total imports mainly destined for privileged sectors were $ 11.7 billion until July, against 11.3 billion before the pandemic.

In the absence of central bank credit, imports should at least have declined as a result of the net decline in tourism income (tourism income – fewer outbound trips), as tourism workers and hoteliers have lost income, analysts said.

However, if hotels receive a refinanced credit from the central bank (printed money) to pay workers, other credits and imports would not be crowded out.

The central bank’s excess money printing at record interest rates since mid-2020 has encouraged importers to use cheap credits to import with available currencies. (Colombo / Sep 25/2021)