Sri Lanka’s import controls shattered by credit and money printing in May



ECONOMYNEXT – Sri Lanka’s imports jumped to US $ 1.6 billion in May 2021, from US $ 993 million a year earlier. others have taken their place.

Sri Lanka’s imports of consumer goods in May 2021 were down 4.1% to US $ 253 million from the previous year and down sharply from US $ 332 million in 2020.

Workers in Sri Lanka’s hotel sector have virtually no income, and most private sector companies, with the exception of import substitution and export companies, have cut wages.

State workers and the elected ruling class, however, are paid with printed money, keeping their incomes intact.

Mercantilist whipping boys

Non-food consumer goods fell 6.2% to US $ 132.6 million, and were down sharply from US $ 197.7 million in 2019.

Vehicle imports fell to just $ 500,000, from $ 47.5 million in 2019 and US $ 58.7 million in 2019.

Sri Lanka has completely banned vehicle imports as part of a series of mercantilist import controls imposed in 2020.

However, import and credit controls on cars have been recurrent in all past money-printing-triggered balance-of-payments crises, including the 2018 “output gap targeting” fiscal year.

Intermediate goods recovered 115% from 20201 to US $ 1,045 million in May 2021 and reached the level of US $ 1,047 million observed in 2019.

Fuel is another favorite mercantilist whip boy for currency issues. The ousted Yahapalana administration has also banned imports of gold, another boy whipped up by soft-peggers including the Reserve Bank of India, whose policy has deteriorated vis-à-vis Bangladesh.

Fuel imports rebounded to $ 237 million from $ 62.9 million in 2020 and down from $ 402.8 million in 2019.

Sri Lanka’s credit collapsed after coronavirus lockdowns in March 2020, killing consumption, credit and investment, but import controls were lifted in April.

Capital goods increased 27% from the previous year to reach US $ 308 million in May 2021, but were down from US $ 403.7 million in 2019.

With the 17% increase in capital goods, machinery and equipment rose 15% to US $ 183 million, building materials rose 74% to US $ 101 million.

Sri Lankan interventionists are providing 7% housing loans and are also engaged in a road building campaign.

Monetary stimulation and paper credit

Until July 2019, when the central bank started injecting liquidity by buying bonds to target an output gap, Sri Lanka pursued a policy of contraction or deflation that sterilized inflows. In 2020, the authorities increased printing under the so-called modern monetary theory.

In 2020, mercantilists claimed that a drop in imports and the “trade deficit” (another “usual favorite suspect like cars) were down due to import controls, although analysts using economic reasoning classicists pointed out that this was due to the contraction of private credit and consumption. during confinements.

In May 2021, the trade deficit was US $ 716 million, down slightly from US $ 823 million in 2019, when imports were also driven by income from tourism.

In the five months to May 2021, the trade deficit was US $ 3.6 billion, up from US $ 3.1 billion in 2019, when the central bank followed a deflationary policy by selling its treasury bill stocks.

EN business columnist Bellwether has warned that imports will increase as credit rebounds in the third quarter of 2020, with demand shifting to areas allowed by authorities.

“Sri Lanka imposed import controls in April to stop what bureaucrats and mercantilists see as unwanted imports,” EN economics columnist Bellwether said in late 2020 (The foreign exchange purchases of Sri Lanka’s central bank decline as credit increases).

“But the credit is fungible and it will go to other sectors.”

While import-drawn credit financed by actual savings and loan repayments cannot cause a currency shortage, when loans are refinanced with printed money, the balance of payments will give way.

Inflating the money supply

Analysts had warned for several years that Sri Lanka was following the same policies as Germany’s Weimar Republic, which defaulted on external payments as currency shortages intensified due to money printing.

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“The great German inflation was the result of the monetary doctrines of the socialists of the pulpit”, wrote the economist Ludwig von Mises in 1944, having predicted the fate of the Weimar Republic from 1912.

“But most of those men who between 1914 and 1923 were able to influence Germany’s monetary and banking policies and all the journalists, writers and politicians who dealt with these issues worked under the illusion that a increase in the amount of banknotes does affect commodity prices and exchange rates.

“They blamed the blockade (by the Allies of the Central Powers) or the profits for rising commodity prices, and the unfavorable balance of payments for rising exchange rates.

“They haven’t lifted a finger to stop (money supply) inflation.

“Their ignorance of economic issues pushed them towards price controls and currency restrictions.”

Sri Lanka blamed “speculators” for currency shortages, imposed foreign exchange controls on an already closed capital account, banned term hedging to end customers, banned interbank trading of US dollars above 200, and banned “unwanted” imports and resorted to import substitution.

“They could never understand why these attempts were doomed,” Mises wrote. “They all clung to the mistake that it was not the increase in bank lending but the unfavorable balance of payments that was devaluing the currency.”

In Sri Lanka, mercantilism is widely taught in schools and universities in the name of economics.

Students are led to believe that the trade deficit and imports are somehow “bad” and that the current account deficit (another mercantilist whip) is not the result of foreign-funded investments in the form of foreign direct investment loans or central bank credit. (Colombo / May 21/2021)



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