ECONOMYNEXT – Sri Lanka’s ACL Cables Plc struggles to import raw materials from overseas because banks rationed foreign currencies, they told customers amid the worst money printing in central bank history from the country.
“Due to the current shortage of foreign currency in banks, we are struggling to source sufficient quantities of raw materials from foreign supplies,” the company said in a letter to “esteemed stakeholders.”
The forex rationing by banks “will lead to a shortage of materials very soon and we are seeing signs of a shortage as there is barely enough commodities in stock to meet demand over the next two months,” the companies said.
Sri Lanka’s central bank stepped up money printing from around February 2020, under the current administration’s Saubhagya regime, dropping the rupee from 182 in the US dollar to 230 in the over-the-counter market.
The central bank outperformed money printing from 2015 to 2018, which was achieved primarily through overnight injections, term repo injections and outright bond purchases outside of auctions for target the call money rate or a production gap (growth).
The current administration has opted for a full “stimulus” mode by resorting to wholesale bond purchases, implementing a Zimbabwean style credit refinancing program and crippling auctions with price controls.
Newly appointed central bank governor Nivard Cabraal has removed price controls and is crossing his fingers that bond markets will start functioning within the next two weeks.
However, the forex market is still subject to severe controls without interbank spot trading to establish a price and decreed exchange rate of 203 with no monetary policy to support it, leading to the breaking of the credibility of the ankle.
In an over-the-counter market, the US dollar trades around 230 or higher, with off-market settlements between friendly parties who use personal connections to beg dollars from exporters.
Amid money printing and currency shortages Sri Lanka’s main price control agency, the Consumer Affairs Authority, has created shortages by imposing price controls. There is also an Argentinian-style “price of care” program with a state-run retail network.
The central bank of Sri Lanka was created by a specialist in American money like many in Latin America, on the model of Raoul Prebisch’s Banco Central de la República Argentina.
Many central banks set up by the Latin America unit of the Federal Reserve have collapsed and dollarized. Sri Lanka and the Dominican Republic are among the few to survive. (Colombo / Sep 20/2021)