The Sunday Times Economic Analysis

The objective of these controls is to curb the growth of credit. Whether these forty-four items constitute a significant amount of credit expansion is a moot question. However this effectively reduces the capacity of importers to import these items.

The new restrictions on imports may have surprised many. Not so in the case of the regular readers of this column who were apprised of the impending balance of payments difficulties consequent on the huge trade deficit. The restrictions are also indicative of the government's fiscal problem and the growing inflation that is gripping the economy.

While the increased oil import bill has much to do with the ballooning trade deficit, the restrictions being imposed at a time when oil prices have declined, implies that there are other causes for economic distress. These are not difficult to identify, though hidden in terms of the exact amounts. These are the increases in defence expenditure, especially the costly hardware imports and the increased public expenditure on a number of items. In fact much of the increases in import costs have a counterpart increase in public expenditure.

It is the increased defence expenditure, consequent on the resumed hostilities that have created the new concerns both in the balance of payments and the fiscal deficit. The increased expenditure on military hardware causes a serious dent in the trade balance and the balance of payments. The precise magnitude of the new expenditure on hardware is not known, but that it would be a huge amount, perhaps in the region of about US $ 1000 million. Such an enormous expenditure implies an increasing of the already excessive trade deficit by about a third.

Since the trade deficit that the country is expected to incur this year is likely to be over US$ 3000 million, this additional expenditure creates serious problems in the balance of payments that could lead to a decline in the country's foreign exchange reserves to dangerous proportions. However the increased expenditure may not be immediately felt and accounted for in the current year but would flow over to next year's balance of payments as well.

In as far as the new controls are concerned their impacts, both beneficial and adverse, are likely to be minimal. The new import controls are in the form of a 50 percent cash margin requirement for imports of forty-four (44) "non-essential" items such as electrical goods, chocolates, cosmetics and palm oil. The objective of these controls is to curb the growth of credit. Whether these forty-four items constitute a significant amount of credit expansion is a moot question. However this effectively reduces the capacity of importers to import these items. In a context when interest rates are rising and the exchange rate is depreciating (though there are slight appreciations every now and then within the trend of depreciation), this new imposition means that importers may reduce imports or stagger them to cope with the financial constraints. It also means that the imports of these items would cost much more and these would be passed on to consumers.

These developments would have the desired effect of curtailing imports to some extent though the adverse impacts are the higher prices of these imports that are inevitable. However in the case of most items their impact on the rest of the economy are minimal. These imports are not intermediate or raw material imports or capital imports that would increase either costs of living or costs of production significantly. The increased costs of these and their curtailment would not have an impact on the cost of production of many domestic industrial items. Therefore they are not likely to weaken the country's international competitiveness.

However the imposition of these controls though not having a serious economic impact could send the wrong signals if they are interpreted as a basic change in policies to once again control imports. Further they could lead to speculation as to whether the country's economic fundamentals are not as sound as they are made out to be.

The other side of the coin is that the very insignificance of these imports in the overall import bill means that they are hardly a corrective of the problems. The reduction in imports could be minimal owing to the structure of imports and the causes for the problem being elsewhere. It is the oil bill and the cost of hardware imports that are the causes of the trade deficit, while these together with the increased government expenditure on the war and other "unproductive" items are the causes for the large fiscal deficit.

The fiscal deficit that was expected to be around 5.1 per cent of GDP may rise to about 9 to 10 per cent of GDP and exert enormous inflationary pressure. This is in addition to the import induced inflationary pressure.

The new controls are indicative of the fundamental weaknesses in the balance of payments and the public finances of the country. In fact it is the weaknesses in the public finances that are at the root of the country's economic and financial woes. The latest controls are hardly likely to have an impact on the balance of payments problem or the fiscal imbalance. Neither of these problems is likely to be alleviated by this policy. These controls may only lead to unfavourable signals to the business community and foreign investors.