CB brings back LC margin requirement to discourage non-essential imports

Central Bank Governor Dr. Nandalal Weerasinghe addresses media at Monetary Policy Review briefing on Thursday

• Letter of credit margin requirement in force again from May 20, 2022
• Same order by former Governor Lakshman was not well received
• Locals won’t be able to enjoy imported goods and services until near equivalent level of dollars is generated via exports

The Central Bank will soon bring back the deposit margin requirements on letters of credit (LCs), a tactic introduced last year by Prof. W.D. Lakshman, when he was Governor.  

Current Central Bank Governor Dr. Nandalal Weerasinghe said this would discourage non-essential and non-urgent imports, thereby saving more foreign exchange for essential imports. 

Soon after the Central Bank began raising the interest rates in August last year, it imposed the 100 percent margin requirement for select 623 products defined as non-essential and non-urgent imports, preventing opening of LCs by the licensed commercial banks (LCBs) ‘unless such LCs are covered by a 100 percent non-interest-bearing cash margin deposit maintained at the respective LCBs at the time of opening the LC’.  

From the remarks of Dr. Weerasinghe, it appears that he alluded to the reinforcement of the same circular issued last September 8, although it demands more clarity.  

“Today, with the monetary policy decision, we impose the letter of credit margin requirement. We brought it back for a large number of non-essential items. Hereafter, they will have to put money in advance to open LCs,” he said at the monetary policy review media briefing held on Thursday.

“That requirement is back in force from today. Already the circular has been issued,” he added.  
The order issued on September 8, 2021 listed 623 products identified under HS codes, which include consumer goods, including some food and electrical items. 

When the circular was brought in September last year, all hell broke out from all corners of the island and in particular, the so-called free market advocates, who went berserk saying that it was an affront to importers and consumers, who must have the freedom to enjoy such products.  

Prof. Lakshman was vilified for such actions since March 2020, when the Central Bank officials collectively decided to ban the vehicle imports to conserve the limited foreign currency reserves, when the inflows were constrained by the pandemic and its resulting lockdowns, border closures and market tumult.  

And today, nobody calls for reopening the market for vehicle imports, as even those with vehicles are tired of waiting for hours daily in fuel queues.  

Simply put, Sri Lankans cannot enjoy imported goods and services until and unless the country generates at least to a near equivalent level of dollars via merchandise and services exports, for which this country must restore a convincing industrial policy and rebuild skills.  

As Sri Lanka saw a bulk of its services exports decimating and exports slowing down for the last two years, the country lost its ability to continue its lust for imported goods and now a population of 22 million waits till the next fuel ship or cooking gas ship arrives.