Put our money where our mouth is

The Sri Lankan economy has scraped through another week. With fuel supplies sparsely available in limited quantity for a limited time period, the result has been more price hikes. These too are likely to be passed on to other goods in the market, starting the cycle all over again. 

This raises the question. The most basic question to anyone with scarcity on the forefront of their mind. The question that has given birth to an entire field of study for economists to ponder: What, when, how much and whom to produce for?  

For Sri Lanka, this question comes with a twist, what to produce domestically and what can we go without buying from overseas. With the foreign exchange reserve position at $ 1.6 billion, this time around, the question is not just for economists and law makers; business owners too are forced to choose. 

Officials prefer imports being settled by the banking system rather than through unofficial channels. Vehicle spare parts and similar high profit yielding items are believed to be coming in to the country as a result of the unofficial system. But simply closing off the unofficial flows may save dollars in the short term. In the long term we could possibly be shooting the economy in its proverbial foot. 

What economic analysts had rung the alarm bell for since 2019 on populist policies, more recently is being rung for the banning of direct account imports due to the cobra effect, more commonly known as the law of unintended consequences. In this particular case, the result of policy decisions that were commended as an unorthodox move to bring dollars into the formal channel and resulting in the easing of forex stresses, in fact, could create food shortages. 

Approximately $ 2 billion was earned through export trade and overseas worker remittances each month, and these recurring inflows are now depleted. This means that even the $ 200 to 250 million worth spent on the food import bill a month is under severe pressure. This is further worsened due to CBSL monetary tightening driving up the cost of borrowing in local markets for rupees and dollars alike. 

Since mid-May this year, an attempt was made to reduce Hawala and Unidyal style gross-settlements being made for what officials called ‘non-essential’ imports. Now, essential food importers have sought exemptions from these newly imposed trade restrictions not to retain prior earning levels, but amidst fears that banks will not be able to supply dollars for these trades.

According to sources, this has caused some importers to obtain Middle Eastern remittances via the Undiyal system in order to meet this demand. Quick to perish food items such as onions and potatoes are under greater risk of spoiling unless immediately cleared from port, in the midst of this search for dollars. 

However, these unofficial systems along with the Indian credit line for food imports, have been held as a reason that the country has thus far avoided a severe food shortage. The same cannot be seen with other essential imports without accessibility to channels and lines of credit. 

For example, medicines under price controls were simply discontinued when the rupee broke the Rs. 230 to a dollar peg level. The unavailability of dollars now results in a month’s medicine import bill of $ 25 million too being ignored, with much dire consequence.

Importers who have had long term relationships with regional suppliers with some notable shipped imports are able to procure this at a moment’s notice. These food suppliers have been willing to extend credit to their local counterparties due to the strong relationship that has developed spanning many generations. In conclusion, we need to get back to the drawing board on external trade policy before the clock, and food, runs out.