Less than a week before the Budget, a large number of import curbs by the Central Bank on Friday --- including a 100 percent margin (deposit) on a range of popular consumer items -- to save on dwindling foreign exchange reserves have stunned businesses and could lead to a slowdown in traditional Christmas sales.
The Central Bank, in five circulars to commercial banks said imports of 44 -- considered non-essential -- items would henceforth be allowed only if a minimum 100 percent deposit of the value of the LC (Letters of Credit) is deposited with the bank. Earlier no such deposit was required. This means that if an importer places an order for Rs 100 million and opens an LC, a cash deposit of Rs 100 million has to be placed with the LC-opening bank.
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| More burden on car importers |
The CB defended the move with Governor Ajith Nivard Cabraal saying the rationale behind the decision is to prevent speculation in foreign exchange purchases, after the marginal depreciation of the rupee on Thursday, and block any run on foreign reserves. “The world crashed on speculative trading. We don’t want that to happen here. We want to act prudently and these measures are meant to prevent a crisis,” he told The Sunday Times.
“Wait and see… we have a few more aces up our sleeves,” he said, without giving details.
Whether these ‘aces’ will be announced before Thursday’s budget or in it, remains to be seen though what is clear is that any steps would essentially be to curb huge foreign exchange outflow or act as a buffer against inflation and the cost of essential commodities.
The rupee, after a ‘marginal float’ was permitted by the Central Bank, was trading at over Rs 110 against the US dollar on Friday.
The head of one of Sri Lanka’s biggest consumer-retailing firms said that while he sympathised with government concerns over a draw on foreign exchange, it was unfair to impose such limits on small and medium-scale businesses. “The big players (like us) will survive and find the money but the small traders and industries would be badly affected. They always get affected in such measures and they don’t unfortunately have a voice,” he added. “The margins (deposits) should have been reduced to 50 percent at least for the small traders.”
The restricted items include televisions, refrigerators, washing machines, microwave ovens, table and kitchenware, fans, chocolates, bread and pastry items, beer, wines and spirits, perfumes, beauty care, soap, palm oil, wall tiles & floor tiles, wristwatches and toys.
The ruling also applies to consumer items imported through DA (Documents Against Acceptance) terms.
In another circular, the commercial banks have been told that the deposit (margin) for importing vehicles has been increased to 200 percent from 100 percent earlier, with immediate effect. This means that car importers have to now deposit double the amount they did earlier – that is equivalent to the cost of the vehicle). Curbs have also been placed on foreign purchases of foreign currency for import purposes.
Bankers said the curbs were meant to restrict imports by compelling importers to pay upfront – unlike before -- the value of the goods being imported which ‘many small importers won’t be able to do’.
“Most importers operate on an advance-against-imports credit scheme and asking them to pay money upfront would put them in great difficulty due to the current economic climate,” one banker said, adding that there would be sharp fall in vehicle imports and other items on the ‘restricted’ list.
While traders are looking up in ‘horror’ as the traditional buying season approaches and wondering whether to cut imports or go ahead and burden the consumer with high prices for many of these items which essentially are a draw during the Christmas and New Year season, Mr. Cabraal says, “ultimately the burden of speculation in foreign exchange trading is borne by our exporters which we think is unnecessary, and these imports are non-essentials.”
Defending further the decision, he said, the Central Bank would not allow any sharp depreciation in the rupee and would intervene in the markets when necessary and “we have enough foreign exchange (for such intervention).”
Central Bank figures show that foreign exchange reserves are equivalent to three months of imports, though the deficit from the trade balance has risen sharply by 76 percent in August 2008 (the latest data) to $501 million from $284 million in the same 2007 month.
Opponents of the policy say foreign reserves have fallen sharply and the country is facing a major foreign exchange crisis with little interest in the Central Bank’s recent $300 million bond offer. UNP Parliamentarian Dayasiri Jayasekera said reserves had dropped by $900 million to $2.5 billion now from $3.4 billion in August due to the mismanagement of the economy.
He said foreigners had withdrawn monies invested in Central Bank dollar bonds. Mr Cabraal doesn’t deny this, saying the outflow (from this sector) has been $250 million while another $300 million is expected to be withdrawn from dollar bond investors. “But that is not unexpected given the global crisis and we have enough exchange to handle these outflows,” he said.
Economist Sirimal Abeyratne said Friday’s steps appeared to be geared to tackle a volatile situation in the foreign exchange markets where speculation played a major role in determining the exchange rates.
“These steps (to save foreign exchange) have become necessary because of the difficult period and the over dependence on remittances and foreign borrowings,” he said. “Our foreign exchange is always a problem as we depend on poverty (remittances of unskilled workers) and misery (borrowings of foreign loans) and this makes it unstable.”
The crisis is worse in some other regional markets like Pakistan for example where the local currency has crashed by 30 percent and foreign reserves are sufficient for just a few weeks.
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