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Import ban on vehicles, luxury items to stop rupee’s crash
The Central Bank has banned the import of a long list of items, including computer equipment for networking that is essential to the Government’s ‘work from home’ policy in what is seen as a desperate bid to stop foreign exchange outflows and to stabilise the fast depreciating rupee.
An official announcement by the Central Bank referred to the ban as a “suspension” which will last for three months.
The regulator also suspended the purchase of Sri Lanka International Sovereign Bonds to ease the pressure on the spiralling exchange rate.
The import suspensions were announced on Thursday under the Bank Act which empowers the CBSL to issue directions to licensed banks regarding the manner in which they conduct business. The regulator has, thus, instructed the banks to cease facilitating imports of motor vehicles on the letters of credit and also specified non-essential items.
Rising demand earlier in the week saw the rupee weaken substantially against the US dollar which was to some extent contained by immediate measures announced by the Central Bank.
Dealers said the dollar at one point was trading at Rs. 188-189, up from Rs. 185 per dollar, owing to general panic in the market in line with panic-buying at supermarkets and other stores.
The import of certain categories of motor vehicles has been stopped. Under a schedule, however, tractors, motor vehicles for transport of ten or more persons, motor cars and other motor vehicles principally designed for the transport of persons, including station wagons (ambulance, hearses and prison vehicles, etc), motor vehicles for the transport of goods, have been exempted.
Suspended items include perfumes and toilet waters; pre-shave, shaving or aftershave preparations, personal deodorants, bath preparations, depilatories and room deodorisers; new pneumatic rubber tyres; certain types of footwear, certain types or air conditioning machines; fridges and freezers, etc.
But also included are telephone sets, including telephones for cellular networks or for other wireless networks; other apparatuses for the transmission or reception of voice, images or other data including apparatuses for communication in a wired or wireless network.
“On Friday the dollar was offered at a range of Rs. 186-Rs.189 but we are likely to see it stabilising next week,” one dealer said.
Central Bank Governor W.D. Lakshman said that following the steps taken by the Central Bank like cutting interest rates and reducing pressure on imports with restrictions on non-essential imports, pressure on the dollar was expected to ease next week.
He said they anticipated that the measures taken by the Central Bank along with the government’s relief package which includes a moratorium on loan repayments and four percent interest on working capital loans would kick in and bring some stability to the market.
Other government officials said foreigners were selling out in the bond market resulting in large outflows of foreign exchange which was another reason why the Central Bank had to step in and curb demand for the dollar.
One official said there was a shortage of dollars in the market owing to a reduction in export proceeds and tourism earnings getting affected by fewer arrivals. “In such a situation the Central Bank had to either dig into its reserves (which was unwise to do) or bring in restrictions in imports, which was the right thing to do to reduce the demand on the dollar,” the official said.
Economist Sirimal Abeyratne referring to the Central Bank measures earlier in the week, said: “In troubled times, drastic measures are inevitable.”
In the general sequence of things, when interest rates are cut, they tend to increase consumer demand, consumption rises and thus increases demand for imports. In such a situation, with the demand rising for more imports, the demand for foreign currency (in this case the US dollar) rises, he said explaining how policy measures generally work.
However, with the restrictions on non-essential imports, that should reduce the demand on the dollar until a time when the restrictions are lifted, he added.
Prof. Lakshman said the measures like reducing interest rates to energise the economy were in line with what most central banks were doing across the world to put economies on track vis-à-vis the impact of the new coronavirus pandemic.