Domestic Bonds

Sri Lanka’s imports soar to four-year high amid ‘currency shortage’

ECONOMYNEXT – Sri Lanka’s imports soared to US$21.6 billion in 2021, a four-year high, amid what are being dubbed in popular media as “currency shortages”, the highest since money printing year of 2018, according to preliminary data in the public domain.

Central Bank Governor Nivard Cabraal in a post on said 2021 imports are estimated at US$21.6 billion, compared to US$16.1 billion in 2020 and US$19.9 billion. billion US dollars in 2019.

In 2020, imports fell sharply as containment measures reduced domestic consumption and private credit collapsed.

Imports in 2021 are the highest since 2018, when the central bank also printed money and created currency shortages, causing the rupee to fall from 151 to 182 against the US dollar.

In 2018, the central bank printed money by injecting up to 60 billion rupees of excess liquidity into money markets to keep interest rates below a policy rate cap.

At the start of 2020, the central bank injected up to 200 billion rupees (around $1 billion) of excess liquidity which was quickly depleted as the economy recovered.

In 2018, money was printed through the purchase of Treasury bills, breaking the “Treasuries only” policy established by the late Central Bank Governor, AS Jayewardne, who was a classical economist.

Money was printed by the central bank in 2018 to keep interest rates low despite politically difficult tax increases to reduce the budget deficit.

Central bank forecasts of year-end imports, trade deficits and foreign reserves projections are dismantled every year that inflationary policy is followed, triggering currency crises and balance of payments deficits.

However, the central bank, for 70 years, printed money to keep rates low, finance rural credit or past and current deficits.

Inflationary policy (printing money above the anchor) drove up inflation as well as imports and triggered balance of payments deficits, or declines in foreign exchange reserves, dollars given by the central bank for imports or other payments.

In the absence of a central bank, peaks in imports or outflows in an indexed regime are met by short-term declines in liquidity, increases in interest rates, and increased domestic savings.

Although currency shortages are triggered by “rupee excesses” in the popular media, the financial press and mercantilists characterize inflationary policy in an indexed regime as “currency shortages”.

Sri Lanka is no longer printing money to finance deficits after Governor Nivard Cabraal lifted price controls on bond auctions and kept short-term rates below the rate cap, but the country is not has no exchange rate regime in effect and is obliged to give “reserves for imports”.

After giving reserves for imports, the liquidity shortage is sterilized with new money to maintain a policy rate of 6.0% giving resources to banks which give treasury bills to the central bank to obtain l printed money and also stimulate investment and discourage saving.

The cycle continues until the central bank raises rates. A move to a floating rate (suspending convertibility or completely stopping giving “reserves for imports”) is usually also necessary to restore a functioning exchange rate regime with a spot market. (Colombo/January 17, 2021)