On Thursday, the Central Bank of Sri Lanka imposed import limitations on a list of extensive non-essential goods effective immediately. Following a meeting of the Monetary Board of the Central Bank held on Wednesday (September 8) a decision was reached to impose a 100 per cent cash margin deposit requirement against the imports of over 600 non-essential goods.
Effectively this means that Sri Lanka has now imposed a 100 per cent cash margin on traders who open Letters of Credit (LCs) for the importation of these listed items. (A margin deposit is the initial amount of money a trader requires to make as a payment in order to open a trading position.) According to the Monetary Board order, banks have also been restricted from issuing credit for importers who are unable to meet the 100 per cent margin.
“Licensed Commercial Banks shall not grant any advances to their customers for the purpose of enabling such customers to meet the minimum cash margin deposit requirement imposed by this Order,” the Central Bank statement said.
The new order comes in the backdrop a deepening foreign exchange crisis for Sri Lanka which has been a major worry for traders, while it has also indirectly caused domestic prices of goods to soar within a short period of time.
Sri Lanka’s foreign exchange reserves dropped to 2.8 billion USD by July this year from an earlier 7.5 billion USD in November 2019. With frequent liquidity injections (pumping money to the economy), the Sri Lankan rupee lost at least 20 per cent of its value during this period, since the Gotabaya Rajapaksa government came into power in 2019. On Monday, the Sri Lankan rupee depreciated further against the US dollar, British pound and Indian rupee by more than 10 per cent.
What does this mean for businesses?
One of the immediate issues resulting from this order would be the widening disparity between asset-rich businesses and small and medium businesses. Small and medium businesses often operate on credit offered through banks who serve as an intermediary in their business transactions. The inclusion of certain categories in this list such as telecommunication devices, clothing and accessories as well as cosmetics and toiletries will have a direct impact on entrepreneurship, especially for dozens of small businesses.
Interestingly the Central Bank also issued the import volumes for each of the listed categories in 2019, 2020 and January to July 2021. Accordingly the import values for telecommunication items such as mobile telephones were 247.3 million USD in 2019 and 268.4 USD in 2020.
Meanwhile clothing and accessory imports including baby garments, nightwear, footwear, underwear and watches amounted to 203.8 million USD in 2019 which dropped to 171.7 million USD in 2020 and 160 million USD in 2021. The items listed in these two categories such as mobile phones and underwear have raised questions among consumers, especially on social media, as they have been identified as goods which are non-essential and non-urgent.
However, the Central Bank in a statement said that this decision is expected to support state efforts to preserve the stability of the exchange rate and foreign currency market liquidity. It added that the order is expected to particularly discourage excessive imports of a speculative nature.