Sri Lanka rupee plunges amid money printing as car imports collapse

Sri Lanka’s rupee has plunged to 199 to the US dollar in March as vehicle imports collapsed to almost nothing, official data showed as domestic credit driven by printed money, recovered.

Sri Lanka’s vehicle registrations fell to 3,556 units in March 2021 down from 13,219 units in March 2020 when a lockdown started and down from 34,475 units in January 2020.

Motor car registrations fell to just 149 units in March 2020, down from 1,165 units a year earlier and 2,526 units in January 2020, an analysis of vehicle registry data by JB Securities, a Colombo-based brokerage shows.

Only 11 three wheelers were registered in March down from 762 in March 2020.

However 250 medium trucks were registered up from 95 units a year earlier.

Sri Lanka banned car imports in 2020 as a tax cut in December 2019 followed by unprecedented money printing triggered forex shortages.

There is a strong Mercantilist belief in Sri Lanka that monetary instability involving currency collapses and balance payments deficits are not due to money printing and credit but is due to trade.

Analysts had warned that banning imports does not work in countries because, credit will flow into other permitted sectors and imports will recover. If the credit is financed with printed money outflows will exceed inflows, creating forex shortage and currency pressure.

Sri Lanka had also slapped import controls in past episodes of money printing.

In 2018 Sri Lanka printed money to target a call money rate and an output gap and controlled vehicle imports and gold through taxes and credit restrictions.

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