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Tightening grip on imports: CBSL’s move may trigger price hikes

18 Sep 2021

  • Some SMEs can get driven out of the market: Economists
By Yoshitha Perera The move by the Central Bank of Sri Lanka (CBSL) to impose a 100% cash margin deposit requirement when opening Letters of Credit (LCs) and documents against acceptance (D/As) for the importation of over 600 items would pose additional challenges when conducting business, introduce uncertainty into the market, and impact commodity prices in the upcoming months. Speaking to The Sunday Morning, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando said the small and medium-scale businesses would be driven out of the market due to this 100% cash margin deposit requirement. He said that after the CBSL announced its decision, certain large-scale traders and companies increased the prices of goods it had imported previously. Several leading electronics and textile importers and traders, speaking to The Sunday Morning on the condition of anonymity, said they had opened LCs last month and the stocks were coming in. “The current CBSL move will definitely pose challenges to future imports. At the moment, we are going into the festive season – the months of November and December – which will be the peak for retail items like textiles and electronics. We will definitely see an impact with this move,” they explained. Leading importers and traders further said that even large-scale importers have to start the re-ordering process within the next two months in order to get their stocks, due to which there would be a definite price hike in these goods in the local market. “Mainly there are two problems – the 100% cash deposit requirement and the depreciation of the Sri Lanka rupee against the dollar – which are clearly putting pressure on the importers and traders of these products,” they said. Importers and traders further claimed that they have to clear the incoming shipments at much higher prices, which would in turn cause a price increase in the local market. They said: “Even now, the prices of most of the electronic devices, mobile phones, and other accessories in the local market have gone up.” Meanwhile, speaking to The Sunday Morning, Pettah Textile Merchants’ Association Vice President (VP) V. Thiyagaraja said that they have ample stocks in the market to meet the current local demand. He added, however, that merchants are still uncertain about the impact of the Monetary Board’s decision to impose the 100% cash margin deposit requirement. “This is not an essential service, so we have plenty of stocks in the market at the moment. At this stage, we cannot say how the present decision by the CBSL will affect our market. We have to observe it,” he said. Essential Food Commodities Importers’ and Traders’ Association Spokesman Nihal Seneviratne said that essential food importers and traders were not affected by CBSL’s decision. “The current CBSL move will affect mainly small and medium-scale electronic and telecommunication device importers and traders. It is a risk for them to import at this moment.” The Government imposed the 100% cash margin deposit requirement when opening LCs or D/As for 623 items ranging from electronic devices and mobile phones to chocolates, wine, textiles, cosmetics, and other food and beverage items deemed as “non-essential” due to the shortage in US dollars in the market. Economists raise concerns Explaining the effects of CBSL’s move on the economy, Advocata Institute COO Fernando said that it would lead to an increase in prices, since small and medium-scale businesses would be driven out of the market. “Small and medium-scale businesses may not have savings to deposit 100% of the value of the LCs. Generally, these people take loans from banks and it’s on a rollover basis, and now, banks cannot provide facilitatory loans to open these LCs. As a result, small and micro businesses are completely going out of the market,” he explained. Fernando further clarified that due to the current dollar shortage in the country, certain large-scale traders and companies had imported these goods in advance for the next six months. “After the CBSL announced this decision, the same traders and retailers had increased prices of these goods by keeping higher margins – it is a normal market reaction. These people are uncertain about the dollar availability in the country, and they are trying to keep up a margin for the next year or till the time they think this issue will be solved. It is an obvious reaction by the market,” he added. He further explained that certain industries need electronic devices and appliances which are essential for them to operate their products or services; however, due to the 100% cash margin deposit requirement, the prices of these products and services would increase sharply. Fernando further noted that it was not fair for the Government to categorise products as essential and non-essential, since the essentiality of the product depends on its usability for each person. “For example, a vehicle tyre will not be essential for some individuals at this moment, but for a private bus owner, it is important, as his ability to earn a living depends on getting that tyre. When it comes to product categories, we don’t really know what is essential and what is non-essential. It really depends on the usability,” he reiterated. Government response Speaking to The Sunday Morning, Minister of Trade Bandula Gunawardana said the Government would intervene and take stern action against traders and retailers who manipulate the 100% cash margin deposit requirement to gain unnecessary profits by increasing the price of these selected goods in the market. The 100% cash margin deposit requirement applies to 623 items that were named by the CBSL. “If traders and retailers, especially those who are handling electronic appliances and telecommunication devices, are making unnecessary profits by increasing the prices of these goods due to the cash margin deposit requirement, the Government will have to intervene in the future and take stern action,” Gunawardana said. “There had been no increase in taxes on any of these selected goods. Fair trading must take place. If not, stern action will be taken against the relevant companies through the Consumer Affairs Authority (CAA),” he added.


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