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ECONOMYNEXT – Facing a severer shortage of essential drugs due to lack of dollars to import them, Sri Lanka raised commonly used drug prices by 40 percent as it sees its worst economic crisis since its independence.

Health Minister Channa Jayasumana issuing a gazette notification announced the new prices for 60 commonly used drugs following an acute shortage for drugs. For details: Maximum retail prices of medicines

The government is unable to import drugs as it has run out of dollars in its reserves while private sector firms have said they are unable to bring the drugs into the country as they are deprived of opening letter of credit amid dollar shortage in private banks.

The 84.5 billion economy has already suspended paying 51 billion US dollar foreign debts from April 12 after it had no reserves.

Already medical practitioners individually and collectively have appealed from donors and Sri Lankan expatriates to send essential medicines amid reports that hospitals are struggling to cater the public demand for drugs.

Sri Lanka maintains a free healthcare system and most of the medicines are given free of charge at state-run hospitals. However, patients are forced to buy essential drugs for cash in private pharmacies as state-run hospitals have run out of drugs.

The price hike also comes after nearly 75 percent depreciation in the rupee currency. The island nation imports most of its medicines. (Colombo/April30/2022)

ECONOMYNEXT – Sri Lanka’s rupee has started to slow the pace of its fall and will stabilize and start to appreciate in the year future based on policy action being taken, Central Bank Governor Nandalal Weerasinghe said.

“When we float the currency, there is an overshoot. But now the pace of the fall is less,” Governor Weerasinghe said.

“At some level it will stabilize. I agree that it has not completely stabilized.”

The rupee fell from 203 to the Us dollar to around 360 to the US dollar over the past month after a non-credible peg (an exchange rate held without the monetary policy to back it) was allowed to fall from March.

Governor Weerasinghe hiked the policy rate from 7.50 percent to 14.50 percent as soon as he took office and also allowed Treasury bill yields to go up.

The high rates will reduce money printing, drive more private savings to the deficit, and also reduce private credit and private investment curtailing imports.

Weerasinghe also slashed a surrender requirement where the central bank was buying dollars from banks by force to 25 percent of receipts to 25 percent.

Analysts have said that a float is a suspension of convertibility (the central bank stops intervening in either direction and stops altering bank rupee reserves through international transaction fixing reserve money) but the surrender requirement made it a peg.

To restore the lost credibility of a peg higher interest rates are needed than required to restore monetary stability through a clean float, analysts have said.

This week newly appointed Treasury Secretary Mahinda Siriwardene also ordered capital expenditure cuts which will also reduce the deficit financing needs, pressure to print money and imports.

“I am cannot give guarantees that it go to this price or the other,” Weerainghe told reporters calmly.

“I can tell clearly that the exchange rate will stabilize and turn (appreciate). nI my 10 years of experience in managing the exchange rate I know it will happen. We are taking the action necessary to make it happen.”

Sri Lanka has an intermediate regime central bank (a soft-peg) where economists print money to boost growth (output gap targeting) and trigger currency crisis.

It is the worst central bank is South Asia after Pakistan. Monetary instability has worsened in recent years under flexible inflation targeting with output gap targeting triggering three currency crises in seven years and default in 2022. (Colombo/Apr30/2022)

ECONOMYNEXT – Sri Lanka’s 2022 economic growth estimate has been revised down sharply to 1 percent, its annual report released on Friday showed, from as high as 5.5 percent in January this year.

Former central bank governor Ajith Nivard Cabraal, who resigned early this month in line with the resignation of the Cabinet, had predicted the island nation’s troubled economy to grow at around 5.5 percent this year, with a recovery in tourism also helping. Cabraal has been blamed for the economic mismanagement by the opposition and analysts.

However, since he resigned, New Central Bank Governor Nandalal Weerasnighe has raised the key monetary policy rates to almost doubled and allowed the interest free one-year government treasury bill rates to be increased to over  24 percent in a move to ease the pressure on the rupee and curb record high inflation.

“Sri Lanka’s economy is envisaged to grow modestly in the near term as the economy is to reset with a debt restructuring programme and long overdue structural reforms alongside an economic adjustment programme to be supported by the IMF, which is expected to facilitate the economy to gather momentum over the medium term,” the central bank said in its annual report.

“The build-up of macroeconomic instability in the economy, stemming from the heightened vulnerabilities on both the external and fiscal fronts, rising social unrest and political instability, effects of the pandemic, the domestic energy crisis, and elevated commodity prices both globally and domestically are expected to significantly dampen the growth prospects in 2022 and have lingering effects in the immediate future leading to a slowdown in growth.:

“Also, economic activity is likely to further slowdown amidst the announcement of a suspension of external debt servicing by the Government for an interim period and commitment to a debt restructuring programme.”

The island nation has already announced it was suspending all the repayment of foreign debts as it had run out reserves.

Sri Lanka is facing an unprecedented economic crisis with people are deprived of essentials like medicines, food, and fuel as the central bank’s usable foreign currency reserves are already depleted to near zero level.

The absence of fuel also has led to extended power cuts that has hit manufacturing sector while over 75 percent depreciation of the rupee has hit the economy across the sectors.

The 84.5 billion dollar economy has already started talks with the IMF to seek assistance to come out of the debt and balance of payment crisis. (Colombo/April30/2022)

ECONOMYNEXT – Sri Lanka’s rupee traded at 367 to the US dollar in the interbank market Friday market participants said, while banks were quoting 360 for telegraphic transfers for small transactions.

Some importers said they were getting dollars at higher rates.

Sri Lanka is facing the worst currency crisis in its history after two years of money printing to keep rates down.

In order to keep an exchange rate stable, a central bank has to be subject to strict rules and its ability to print money through open market operations curtailed.

The central bank on Friday said the government will soon issue a regulation banning open account imports to reduce Undiyal/Hawala premiums.

This week the kerb market ended around 392.50/395.00 to the US dollar.

People pay high premiums to get money out due to exchange controls and lack of dollars in the formal banking system due to money printing. (Colombo/April29/2022)

ECONOMYNEXT – Sri Lanka plans to remove a forced conversion rule of services exports as part of plans to gradually relax controls imposed in recent months, Central Bank Governor Nandalal Weerasinghe said.

The central bank imposed a series of controls on forcing exporters of goods and services to convert dollars by force and also imposed outward exchange controls as money was printed to keep rates down over the past two years driving up credit and excess demand creating forex exchange shortages.

“In the case of services exports like IT and tourism, we will remove the mandatory conversion requirement,” Central Bank Governor Nandalal Weerasinghe said.

“Goods imports are made through customs. We have no way to track these services. We have been told that some person are not bringing these money in at all because of the forced conversion rule.”

“We want to progressively remove this also.”

The central bank was also planning to relax a rule that required tourists to pay hotels in dollars only.

Governor Weerasinghe immediately slashed a surrender requirement which made banks transfer 50 percent of export and remittances to the central bank for new money, to 25 percent.

Analysts and economists have pointed out that the steep depreciation of the rupee during an attempted float (suspension of convertibility) was due to the surrender requirement which made the regime a peg with ‘strong side convertibility’, a rule that should be use when the exchange rate was appreciating.

Central bank purchases of dollars pushes a peg down.

When a third world intermediate regime central bank prints money, the controls imposed rapidly worsen the crisis. Analysts had pointed at the time that the conversion rules were similar to those imposed by Zimbabwe which was printing excess RTG dollars.

It is not clear to what extend the existing controls fall foul of International Monetary Fund rules on capital flow measures and multiple currency practices.

“We want to progressively remove control step by step,” Governor Weerasinghe said. “For the time being these have been done to stabilize the foreign exchange rate market.”

Governor Weerasinghe said the exchange rate was not being controlled and expatriate workers and other were getting a fair rate now.

Under Governor Weerasinghe policy rates were raised to 14.50 percent from 7.50 in a bid to end the fundamental cause of the currency crisis which is money printed to keep interest rates artificially low.

Treasuries yields have also been allowed to go up, which will drive private savings to the budget deficit instead of to areas like construction and capital goods imports, creating forex shortages for items like medicines.

There have been no major food shortage due to the use of Undiyal payments through open account imports.

Newly appointed Treasury Secretary has also ordered a temporary halt in capital expenditure which will also reduce the deficit, the need for money printing and high rates and construction related imports. (Colombo/Apr30/2022)

ECONOMYNEXT – China will be treated equal to all other external creditors and will not be given any preferential treatment when Sri Lanka carries out its debt restructuring, the island nation’s Central Bank Governor Nandalal Weerasinghe said on Friday (29).

Sri Lanka on April 12 announced that it was suspending all foreign debt repayments as it had run out of foreign currency reserves and it will be restructuring all its external debts.

A Sri Lankan delegation led by Finance Minister Ali Sabry including Weerasinghe held talks with the International Monetary Fund (IMF) on its plans for debt sustainability while requesting an IMF funding to overcome the financial crisis.

China was in discussion with Sri Lanka on lending a 1 billion US dollar to repay existing Chinese loans due in July and another 1.5 billion US dollar credit line to purchase goods.

Chinese Ambassador to Colombo this week said the discussions have been temporarily halted as Beijing was waiting to see the outcome of the IMF talks on debt restructuring.

China has openly told Sri Lanka that it is not in favour of debt restructuring as it will have to do the same to other debtors, Colombo government officials have said.

“All the external creditor will be treated equally. There is no question about that. India, China, Paris Club, Non Paris Club all will be treated on the same basis,” Weerasinghe told reporters in Colombo. 

“It is unfair by others if we are going to treat somebody with preferential treatment and others won’t come on board,” he said.

“We do not repay any loans now. We will be starting repaying only once we reach consensus on the debt repayments. If one party delays, then we won’t be able to start repayment.”

China has lent over 5 billion US dollars to Sri Lanka mainly for infrastructure projects amid allegations by the West and India that China has dragged Sri Lanka into a debt trap by financing big infrastructure projects which do not generate revenue.

However, Sri Lanka President Gotabaya Rajapaksa has said China has never created a debt trap while Beijing has maintained its lending to Colombo accounts for around 10 percent of the total external debt.    

Cabinet Spokesman Nalaka Godahewa this week said Sri Lanka will discuss with China on the issue and hopeful that Beijing would consider the current crisis as a special circumstance. 

Weerasinghe said once the restructuring is announced with the basis of equal treatment, creditors can negotiate with Sri Lanka if they have concerns. 

“Once we announce that we are going to treat them equally, then our part is done. The creditors will have to negotiate with us on that basis,” he said.

“We have made it very clear. If we offer a concession to one creditor, then we have to give the same concession to all the creditors. Otherwise it won’t happen.” (Colombo/April29/2022)

COLOMBO (News 1st); 96.2% of Sri Lankans believe that all politicians should be audited and all their unaccounted wealth should be confiscated by the state, a recent poll has found. According to this poll by the Center for Policy Alternatives, nine out of ten Sri Lankans hold the opinion that Prime Minister Mahinda Rajapaksa should CPA Poll: 96% Sri Lankans want all Politicians Audited

ECONOMYNEXT – Sri Lanka’s officials who handled the economic policy misled President Gotabaya Rajapaksa by painting a “rosy picture” and that led to the current economic crisis, Media Minister and Government Spokesman Nalaka Godahewa said on Thursday.

The island nation on April 12 announced it was suspending all foreign debt repayment as it did not have adequate foreign currencies which also has resulted in shortage for fuel, medicines, cooking gas, and milk powder amid extended power cuts.

Since President Rajapaksa was elected in November 2019, the key economic decisions were taken by former presidential secretary P.B. Jayasundera, former Treasury Secretary Sajith Attygala recently resigned central bank governor Ajith Nivard Cabraal and his predecessor W D Lakshman.

“I think what happened was for whatever the reason, ignorance or deliberate, they didn’t pass that information to the president. He was comfortable with his advisors who were painting a rosy picture,” Godahewa told a meeting with Foreign Correspondents Association (FCA).

“Because he is not an economist, he has to be advised. When you keep telling the President nothing to worry, things will get sorted out, probably in the initial days when his focus was elsewhere, he was excited about implementing the manifesto.”

The President slashed value added tax to 8 percent from 15 percent in one month after he was elected to provide some relief to the public citing they had been under pressure of higher taxes imposed by the previous government.

Disaster Recipe

Godahewa, a management accountant and a telecom engineer by profession, said he was against the sharp tax cut as he anticipated the current economic crisis when President Rajapaksa took office.

“I saw this crisis, even before the President came to power. I told the President that the tax reductions proposed by Dr. Jayasundara is going to put us in trouble. I told this many times openly,” he said at his new office at the Media Ministry.

“I didn’t agree with the tax reductions. That was proposed by Dr Jayasundara who was going to come in as Treasury secretary. At that time, the President was convinced by him.”

“I always recommended tax reductions because the previous government has increased taxes significantly. Double virtually, from 9 percent of the GDP to 13-14 percent of the GDP within one year.

“So I said we must reduce taxes, and we must simplify.”

“But when Dr. Jayasundara came up with that list, I immediately thought it was not going to work. I didn’t calculate at the time, but I told the President looking at it, it’s going to be a disaster.”

The tax cut was followed by a double digit fiscal deficit in 2020.

To prevent the extra money in the hands of private players coming back to the budget through bond auctions, ceiling rates were place on them to prevent their sale to the public under the powers available to the central bank creating new money as they were bought by the central bank.

Though the price controls were lifted after a change in the leadership of the central bank and bond rates started to go up, policy rates were kept low with overnight injections.

Reserves lost as the peg was defended against the new money and growing domestic credit with economic activity recovering, putting more pressure on the balance of payments with growing imports.

“Not Telling the Truth”

“So those officers are very much responsible for not telling the truth to the people in the public, and not taking proper action,” Godahewa, who was appointed as the cabinet minister on April 18 said.

However, Godahewa claimed crisis had been brewing since 2009 as the country started to borrow annually around 2 billion US dollar commercial loans at a higher rate.

“Nobody can say they (officials) only created this crisis. They aggravated and they couldn’t prevent it. They’re responsible for that. But the crisis is history,” he said.

“We did not put in place a system to generate adequate money to pay back. They built infrastructure which is necessary.”

The crisis has already hit the road with thousands of people having been protesting for nearly three weeks near the Presidential Secretariat demanding the resignation of President Rajapaksa.

Under heavy criticism, Cabraal, Attygala, and his own finance minister brother Basil Rajapaksa resigned.

They were replaced with – retired senior deputy central bank deputy governor Nandalal Weerasinghe as the new Governor, another deputy governor Mahinda Siriwardena as the Treasury Secretary, and Justice Minister Ali Sabry, a lawyer as the new Finance Minister.

A delegation including the three top officials had initial discussion with the International Monetary Fund (IMF) for a loan. Since Weerasinghe’s appointment, the central bank has almost doubled the key policy rates and raised the risk-free treasury bill yields to over 24 percent, more than inflation.

Godahewa said now the President is well informed on economic policy matters.

“Today he is involved in economics. That is why he’s changing the system and he is bringing new people, he is asking the questions now. He knows details. If you ask now, today, he knows exact details,” Godahewa said.

Officials have said they were carrying out government policy.

One of them asking not to be named said the government was now looking for scapegoats to wash their hands off from the failure.

“This is not true. But this blame game is unproductive. It was a government policy and we worked as per the guidance and direction of the president and the government,” the official said. (Colombo/April 29/2022)

COLOMBO (News 1st); Sri Lanka Railways said that the train services that were disrupted following a trade union action on Thursday (28) is being restored. The Railways Control Room said several office trains that were scheduled for early morning on Friday (29) commenced operations. Railway workers decided to join a trade union action on Thursday Railway services to return to normalcy after Thursday’s (28) nation wide protest campaign

ECONOMYNEXT – Sri Lanka has no food shortages at the moment except milk which are imported by a few large companies, but drugs and medical items are facing deadly shortages after the central bank created dollar shortages with money printing.

Sri Lanka is estimated to import around 200 million US dollars of foods a month including onions, potatoes, sprats, lentils and cereals and some types of rice from time to time.

Sri Lanka’s drug shortages are primarily created by the National Medical Regulatory Authority ,a deadly price control agency created by the ousted Yahapalana administration along with the central bank which is running the flexible exchange rate.

When the NMRA imposes price controls importers cannot sell at the current costs with the central bank depreciating the currency with money printing and a surrender rule. Therefore there are shortages.

They also cannot open Letters of Credit at banks due to dollar shortages created by money printing and the surrender rule.

The easiest way to create food shortages is to clampdown on the Undiyal/Hawala markets, open account food imports and force Pettah traders to open LCs or set Customs authorities on food importers who do not fully settle bills through official channels.

The Consumer Affairs Authority can also contribute to food shortages with price controls.

Starting NMRA without ending flexible inflation cum output gap targeting

This column warned as far back as 2015 when the then Monetary Board was printing money claiming inflation was low as commodity prices collapsed that restraining by law the central bank’s flexible policy was the answer not the NMRA. (Sri Lanka’s pharma control Neros fiddling while Colombo burns with falling rupee)

In 2018 when the outcome of the flexible inflation targeting cum output gap targeting gap become clearer, pointed out that Sri Lanka was not Greece where the currency was stable but a Latin America style central bank where the rupee collapses very steeply hitting consumer prices.

Flexible exchange rates or soft-pegs are the most dangerous monetary regime ever cooked up by economists or mercantilists.

This is what the column said at the time in (Sri Lanka is not Greece, it is a Latin America style soft-peg: Bellwether)

“Under Euro a local company can still repay foreign loans. They can also borrow domestically or use their bank deposits to repay foreign loans. There is no problem with importing goods as the Euro is accepted abroad.

“The prices of fuel or electricity did not go up steeply. They were same as any stable country in the Euro area like Germany or France. As there was no explosion in inflation the value of bank deposits were intact. While there is sovereign default and possible hair cuts on state debt there is no private default or haircut.

“But a falling currency imposes a hair cut on all state and private debt including bank deposits in solvent banks. Pensions are made worthless hitting old people the hardest.

“A collapsing soft-pegged currency will put all citizens other than the very rich, in severe difficulties unlike a strong floating exchange rate like the Euro.

Three sins and a currency collapse

“In a soft-pegged monetary regime like in Sri Lanka, the currency continues to fall each time the central bank intervenes in forex markets and then prints money to keep interest rates down.

“As long as the currency is not floated, there is no end in sight for exchange rate depreciation, especially if interest rates are not raised and credit does not slow. What usually happens in Sri Lanka and other soft-pegs is that in the end rates have to be hiked and the currency floated. This is the phenomenon been referred to as ‘rawulath ne kendeth ne’ in this column.

“In Latin America – unlike Greece – when the currency falls steeply, prices go up, and people ‘s living standards melt as most of the money goes to food and medicines. This makes the many businesses fail as demand collapses.

“Then banks have bad loans and suffer losses.

“Unlike in Greece, the government of a soft-pegged country cannot raise money from domestic markets and repay foreign loans even at prohibitive interest rates. The government may default. Downgrades will compound the problem, pushing interest rates up.

“As prices move up with currency depreciation the value of bank deposits evaporates. If the currency falls by 50 percent, local companies will now have to borrow more to repay foreign loans, making massive holes in their balance sheets even if forex was available to buy.

“If exchange controls come, there will be no dollars to buy with the domestic money they have borrowed.
“It is not possible to import goods freely when a soft-peg collapses because there will be forex shortages due to sterilized intervention. Import controls may also come.

“As the cost of fuel or electricity goes up (oil prices are now falling and there is rain in Sri Lanka) if prices are not raised, more money will be printed to subsidize energy, pushing the currency down.
“In Latin America, energy price controls have led to money printing and rationing. There can be power cuts and fuel shortages.

“In Sri Lanka because of price controls of the National Medicines Regulatory Authority medicines, drugs can go off the shelves.

“In Latin American soft-pegs many price controls were imposed. Instantly goods go off the shelves and black markets appear.

“With import controls more businesses will fail. People will be laid off as revenues fall. Banks will make more losses. Rates will rise eventually. More businesses can fail.

“If this situation continues for several months, there may be runs on banks. If money is printed to bail them out, the currency falls even more. This phenomenon was seen in many Latin American soft-pegs and also Indonesia during the East Asian crisis.

“Debt to GDP will explode until inflation catches up. The share of foreign debt will also increase. This is what happens in Latin America. It is not Greece.

Monetary Meltdown

In 2021 when bad central bank policy continued this column warned that if a float was botched running out of reserves due to ‘fear of floating’ that is found in flexible exchange rate central banks, default and a meltdown was likely.

Soft-peggers do not float in one go but tries to adjust the currency little by little. However it can backfire. The IMF also advised the central bank to adjust little by little. It was done. Two months after the float the rupee is still adjusting little by little.

This column warned against this type of half-hearted floating and half-hearted bond auctions. It is extremely disappointing to this columnist to see these warnings coming true.

This column has said in the past that dire warnings are made in the hope that the central bank’s usually flexible policies would be abandoned.

This is what was said in 2021 when the central bank continued with trying to target an output gap with the peg already broken in Sri Lanka’s monetary meltdown will accelerate unless quick action is taken: Bellwether

“The central bank itself is likely to be insolvent on its dollar liabilities before the end of the year unless money printing is halted.

“However any kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue.

“Soft-peggers are not good at floating. Partial interventions (flexible exchange rate) will lead to even higher interest rates and more losses of confidence.

“In Argentina, short term rates went up to 60 percent due to the ‘flexible exchange rate’ (which is neither floating nor pegged) that had caused so much damage to Sri Lanka since 2015 coupled with an unsterilized disorderly market conditions (DMC) rule, which also lacks credibility.

“The high interest rates can kill many businesses. The high rates from partial floating can kill finance companies and banks.

“When dying banks are bailed out with printed money, it is generally even more difficult to control the exchange rate.

“Inflation and cash shortages will lead to a consumption collapse which will also destroy businesses. Low reserves will lead to a default on foreign debt as happened to the Weimar Republic.

CAA, NMRA a big threat

“When the rupee starts to fall, the price controls will come. The Consumer Affairs Authority (CAA) had already stopped Laugfs Gas.

“It will impose many more price controls. Many more shortages will occur. It will be a big threat to the ordinary people. People will be branded ‘black marketers’.

“The money printers are already getting ready to hike the fine on those who break price controls by 100 times.

“The National Medicinal Drugs Authority (NMRA) could be an even bigger threat. NMRA price controls will make it impossible for drug importers to operate. There may be shortages of some types of medicines.

“The import substitution firms, also called ‘cronies’ will manage.

“It is even possible that oil imports will have to be curtailed, if more money is printed to pay state “workers and meet other expenses.

“What happens to soft-pegs countries is that eventually the currency is floated when it becomes apparent to the Keynesians driving policy, that there is no way to rebuild reserves. When the rupee is floated price controls may again cause havoc.

Avoiding Worst Case Scenario – Monetary Meltdown

“So what is the worst case scenario?

“The worst case scenario is that the nothing will be done and the central bank will continue to print money to keep the ceiling yield on Treasury bill yields.

“Whatever Keynesian or post – Keynesian economist, have been taught at university, reality always hits eventually. Keynesian models are fine in theory, but they do not exist in the real world. The Hicks-Hansen model (IS-LM) was dismissed by Hicks himself later.

“The central bank itself is likely to be insolvent on its dollar liabilities before the end of the year unless money printing is halted.

“However any kind of half-hearted Treasury bill and bond auctions, partially failed bond or bill auctions with some volumes of printed money will lead to progressively higher interest rates but the reserve losses and currency depreciation will continue.

“Soft-peggers are not good at floating. Partial interventions (flexible exchange rate) will lead to even higher interest rates and more losses of confidence.

“In Argentina, short term rates went up to 60 percent due to the ‘flexible exchange rate’ (which is neither floating nor pegged) that had caused so much damage to Sri Lanka since 2015 coupled with an unsterilized disorderly market conditions (DMC) rule, which also lacks credibility.

“The high interest rates can kill many businesses.

“The high rates from partial floating can kill finance companies and banks. When dying banks are bailed out with printed money, it is generally even more difficult to control the exchange rate.

“Inflation and cash shortages will lead to a consumption collapse which will also destroy businesses. Low reserves will lead to a default on foreign debt as happened to the Weimar Republic.

Food Heroes

When a country defaults trade takes a big hit because foreign suppliers refused to accept Letters of Credit. But in Sri Lanka’s case this happened in incremental steps from around late 2020 when the country was downgraded to CCC.

First some suppliers stopped accepting LCs of local banks which were not counter signed by an international bank. Suppliers need LCs to get packing credit. Then banks in Japan and Western countries stopped counter signing them. For a while Indian banks did it at a high premium.

The Indian banks also stopped counter signing. They also stopped giving supplier credit against Sri Lanka LCs.

Then as the central bank tightened controls, surrender rules and so on, without halting money printing banks stopped giving LCs because they could not find dollars to settle them on time.

However Sri Lanka’s Pettah traders, like a mother hen feeding her chicks under the greatest challenges continued to import food using traditional relationships, sometimes running back several generations, with suppliers sending goods on open papers.

Farmers are also doing it despite the lack of fertilizer. Some fertilizer is smuggled from India to feed the people (boat urea).

Suppliers in South Asia and Dubai are familiar with Undiya/Hawala and are willing to trust personal relationships more than LCs. Their word is their bond.

Food importers will tell that banks only give small amounts of money. They have in fact cleared most of the containers in the port.

That is why there is food. Through the Undiyal/Hawala system they get priority. And they can get a dollar at 20 rupees higher and feed the nation while banks have to listen to various dictates of authorities and powerful suppliers including in building materials.

The Undiyal/Hawala system is not a threat to anyone. It does not create new money and drive up excess liquidity of the good banks, unlike the surrender rule of the ‘official channels’.

It does not reduce the rupee reserves of state banks in particular and lead to printed money borrowing from the SLF window unlike the ‘official channel’.

It is harmless a gross settlement system where the currency floats without influencing reserve money. It is feeding a nation with remittances.

What should be done is not to force food importers to use LCs, but to fix the broken peg (rates have already been raised which will reduce domestic credit and investments and imports in a step in the right direction) or have a clean float so that imports can be done freely.

Forcing food importers to use LCs can create food shortages. Setting the CAA hounds after the food heroes will also create shortages. (Colombo/Apr29/2022)