10 September 2021 02:53 am Views - 301
Amid a slew of measures taken in the recent past to alleviate the pressure on the currency, the Monetary Board of the Central Bank this week decided to further limit importation of some 623 products under 11 categories, which are deemed “non-essential /non urgent,” unless such imports are covered by 100 percent cash margin.
According to the Monetary Board order, letters of credit (LC) cannot be opened by licensed commercial banks (LCBs), “unless such LCs are covered by 100 percent non-interest-bearing cash margin deposits maintained at the respective LCBs at the time of opening the LC”.
The order came amid allegations that importers are front loading imports to minimise the escalating cost they have to incur due to the weakening rupee and the uncertainty they face on possible future controls on their imports.
The order also bars banks from granting credit to importers to cover the stipulated cash margin deposit requirement. Banks are further required to endorse the invoice certifying whether the cash margin deposit requirement is met.
Sri Lanka’s rupee came under severe pressure since the end of April as restrictions on economic activities were re-imposed in response to the virus resurgence, escalating speculation over currency, prompting exporters to withhold dollar sales and importers to buy more dollars, both expecting the rupee to weaken further due to the conflicting objectives under which they operate.
The Central Bank on Tuesday fixed the rupee between Rs.200 -Rs.203 to a dollar to bring the situation under control, but the efficacy of that move is yet to be seen.
“The decision to impose the cash margin deposit requirement is expected to support the ongoing efforts to preserve the stability of the exchange rate and foreign currency market liquidity, particularly by discouraging excessive imports of speculative nature,” the Central Bank said in a press
release yesterday.
The order issued on September 8 has listed 623 products identified under HS codes, which include consumer goods from chocolates to fruits to cereals to clothing accessories to mobile phones to electrical appliances and air conditioners.
On August 20, announcing the lockdowns, President Gotabaya Rajapaksa said the people must be ready to make economic sacrifices should lockdowns be prolonged beyond August as it severely hurt the economic output, government and personal income generation and welfare spending, amid escalating expenses on virus containment measures, payment of salaries and pension for two million public servants and interest payments on borrowings.
Sri Lanka has slapped controls on imports deemed as nonessential. Import restrictions on non-essential goods were first introduced at the onset of the pandemic in March 2020 as any hopes of recovery in the economy, as key foreign exchange earnings such as tourism, direct investments and merchandise and services exports, were undermined repeatedly by the flare ups in the virus.
What makes Sri Lanka’s economic woes worst is the foreign debt repayments, which average to US$ 4.0 billion a year until 2025 amid very thin external sector buffers.
Unless its foreign reserves get replenished with uninterrupted foreign inflows from aforementioned key sources and worker remittances, Sri Lankan economy remains vulnerable to even to the slightest shocks under the current setting.