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Sri Lanka: Import controls benefit consumer names; offset by lower real incomes

  • Pre-emptive measures by govt to maintain dollar liquidity; positive for trade balance

  • Inflationary impact to be minimal; ban likely to be in place until dollar inflows improve following SLA

  • Near-term benefit from import restrictions to be mitigated by declining disposable income levels

Asia Securities
24 August 2022
Published byAsia Securities

Pre-emptive measures by govt to maintain dollar liquidity; positive for trade balance

  • The government imposed an import ban on a number of non-essential consumer and investment goods yesterday

  • This comes as foreign reserves cover just above a month of imports, at USD 1.8bn in July

  • This ban also comes amidst a sharp increase in the price of imported goods, given the approx. 80.1% YTD depreciation of the USD/LKR

  • Pressure on consumer spending has also increased with historically high inflation

  • This has resulted in a contraction in growth, further reducing non-essential import demand

Inflationary impact to be minimal; ban likely to be in place until dollar inflows improve following SLA

  • In our view, the import ban comes as a pre-emptive measure to secure Dollar inflows, which according to the Central Bank has improved in recent weeks

  • Banks have also noted that the ease of opening LCs have improved to some extent compared to May/June months where Dollar liquidity was at concerningly low levels

  • With the Government’s priority of ensuring continued essential imports of fuel, cooking gas and medicine, this will likely support the trade balance in the short term

  • On the inflationary front, while there is likely to be a price increase of the items under the ban, given that majority of these are non-essential goods, we see little impact to headline inflation

  • In our view, the ban is likely to be in place until Dollar inflows improve further following an IMF Staff Level Agreement

Near-term benefit from import restrictions to be mitigated by declining disposable income levels

  • The government further tightened imports for certain consumer goods last night via an extraordinary gazette, suspending these imports indefinitely.

  • Given the current macro circumstances and pressure on dollar liquidity, these import restrictions are likely to be in place at least until the end of the current year.

  • In our view, the near-term implications on the consumer sector is as follows;

    1) Local manufacturers of the import items impacted will see a short-term benefit and will likely increase market share although we are cautious on the extent of the benefit given the declining consumer disposable incomes in the current economic environment.

    2) Risk of expansion of grey/black market for these goods which can have a longer-term impact on local manufacturers and demand for their goods.

  • We see a positive impact from the restrictions on the following consumer counters:

    • HHL

    • CARG

    • CCS

    • DIST

    • SINS