Friends from Sri Lanka take advantage of import controls, SMEs battered: Samarajiva


ECONOMYNEXT – So-called Sri Lankan cronies who take advantage of customers trapped under state control reap even more benefits from current import controls, while small businesses are wiped out, said a policy scholar and liberator of the poorest consumers.

Many domestic enterprises also needed inputs.

“Import controls create many opportunities for permit holders and their friends to make money,” said Rohan Samarajiva, founder of LirneAsia, a regional policy advisory group, at a forum hosted by the Advocata Institute, a Colombo-based think tank.

“And under these oligopolistic conditions, they will raise prices and add supernormal profits. Because they are now oligopolistic and they will control the market.

“I think we should really look at import restrictions that way.”

“So the consumer and the manufacturer will undoubtedly pay more and because of this their demand will also drop, which is desirable from the government’s point of view.

“But instead of it being done effectively, it will be done inefficiently where the license guys – the license raj – benefit.”

Samarajiva, as the telecommunications regulator of Sri Lanka, was responsible for the deregulation that made international calls cheap for workers in the Middle East, and the outsourcing industry, the broadcast of fixed and mobile telephony in an everyday product from a super luxury status symbol.

It was also a major driver of aviation deregulation in South Asia, which triggered low cost private airlines and visa deregulation, making India the largest source of tourists, benefiting both small operators and upscale hotels.

Kleptocracy

“Just to give an example, the current controversial gazette that requires a minimum 100 percent deposit on invoices is basically knocking out small importers, who won’t be able to afford the minimum deposit and all those tough conditions and will leave us with a few importers. who have deep pockets.

“What we are building is a kleptocracy that will then pollute and completely distort the political processes of this country from this point on. Not that they weren’t polluted enough, but that will make it worse.

Powerful business groups backed by nationalist academics in the style of historic German economics had for years opposed free trade for the poor and allowed producers to extract excess profits from food and building materials in particular.

Samarajiva said small businesses and the informal sector were disappearing from the coronavirus pandemic, but a few large businesses were doing well.

As the currency gives way under the cash injections, costs rise for most businesses.

Sri Lanka’s import controls come from a highly unstable fixed exchange rate regime called the “flexible exchange rate”, where a central bank suddenly suspends convertibility after printing money, triggering chaos.

As part of the “flexible exchange rate”, massive injections of liquidity were triggered from 2015 via the unwinding of term repo, overnight reverse repo injections, outright purchases of bonds monetizing deficits past, as well as injections via dollar-rupee swaps.

The rupee is now hovering around 230 per US dollar for business transactions, but for government transactions convertibility is expected at 203 per US dollar.

The flexible exchange rate involves the most serious currency anchor conflicts seen in the country for a decade and has taken the rupee from 151 to 230 so far.

Conflicts of flexible exchange anchoring (fixing to build up reserves and printing money to target an inflation index with artificially low interest rates, out of step with domestic credit growth.

Under the flexible exchange rate, the monetary authority has carte blanche to inject liquidity to target an inflation index until it becomes impossible to maintain the fixed point of reserve collection and suddenly suspended convertibility and rates raised under duress.

The contradictory flexible exchange rate has triggered three currency crises since 2015.

Analysts have called for an end to the deadly ‘flexible exchange rate’ and a return to a coherent monetary policy based on overnight floating rate rules or a free floating exchange with which inflation targeting is possible .

However, the central bank is now short of reserves and is on the way to making large quasi-fiscal losses on its reserve requirements. (Colombo / September 19/2021)

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