ECONOMYNEXT – Sri Lanka will finalize a plan by June 15 to end vehicle import controls, starting with commercial vehicles and ending with all vehicles in 2025, according to an International Monetary Fund report.
“The authorities have developed an initial roadmap to relax restrictions on the importation of motor vehicles by 2025, starting with public passenger and special purpose vehicles in 2024 Q3, followed by goods transport vehicles in Q4 2024 and the rest in 2025,” the IMF report said.
“A detailed plan, including the implications on tax and reserve accumulations, will be finalized by June 15, 2024.”
Sri Lanka will also remove several other exchange controls which have fallen foul of the International Monetary Fund and are designated as Multiple Currency Practices (MCP), and capital flow measures (CFMs), by end May 2024.
Over 2020-22, Sri Lanka ahd introduced import restrictions on many goods, and other measures that gave rise to exchange restrictions and MCPs, adopted new CFMs, and tightened existing CFMs, the report said.
“In line with the EFF program, the authorities relaxed most of import restrictions by end-2023, with only restrictions on motor vehicles remaining. Similarly, they relaxed three out of six MCPs, and three out of seven exchange restrictions before the program’s first review,” the report said.
“By removing these restrictions ina phased manner, the authorities will avoid having such measures substitute for the needed externalmacroeconomic adjustment. The authorities have been loosening some CFMs that were introduced ortightened since 2020 by increasing the limits on restrictions on capital flows.”
Sri Lanka has imposed and intensified exchange controls including capital controls to due powers given to macroeconomists to print money to target or mis-target interest rate without a clean float, since the setting up of a central bank in 1950.
Sri Lanka’s central bank has operated consecutive deeply flawed operating frameworks with anchor conflicts.
When anchor conflicts intensify in Sri Lanka, usually as private credit recovers, cars have been a favourite target along with gold and what economic bureaucrats label as ‘luxury goods’.
The trade restrictions then lead to cascading fallouts including revenue falls, which then lead to more money printing as the policy rate is obsessively targeted including under ‘data driven monetary policy’, critics have pointed out.
The year 2018 was a classic failure of the flexible inflation targeting regime money was printed to cut rates even as taxes were hiked to reduce the deficit and fuel was market priced.
Analysts labelled the trade control in 2018 (which were milder than in 2020-22) a Nixon’s shock, recalling the trade restriction the then US President imposed after the dollar collar collapsed, as Fed printed money to reduce employment. At the time macroeconomists believed there was trade-off between infaltion and in
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The trade restrictions fail to fix the balance of payments until rates are hiked and money printing to suppress rates are halted. The BOP turns into surplus only after deflationary policy starts.
Sri Lanka started controlling trade and outward remittances (before the central bank Sri Lanka was a net importer of labour like Dubai and Singapore), and progressively intensified external controls as monetary policy became more activist, leading to repeated IMF bailouts from the mid 1960s.
Sri Lanka’s currency started to collapse from the 1980s due to the lack of a credible anchor especially after the IMF Second Amendment to its Articles in 1978, while Latin America started their now chronic external defaults and social unrest.
Sri Lanka’s monetary instability in the 1980s came due to attempting money supply targeting (domestic anchor) without a clean float, after jettisoning its external anchor, which was also undermined by central bank re-finance and similar actions.
From the end of a civil war in particular, serial currency crises and trade and exchange control have come from targeting inflation without a clean float. (Colombo/June14/2024)