Sri Lanka prematurely commended for avoiding trade sanctions

Apr 20, 2012 (LBO) – The International Monetary Fund has prematurely commended Sri Lanka for not imposing trade sanctions on itself, in a bid to end a balance of payment crisis brought by loose monetary policy, newly released documents show.

Trade sanctions can reduce economic activity and deprive tax revenues for rulers to keep spending. Lower revenue in turn expands the budget deficit requiring even higher interest rates or fresh taxes to stop balance of payments pressure.

The Great Depression was also worsened in ther US by self-imposed trade sanctions that came from the Smoot-Hawley Tariff Act of 1930.

During the current balance of payments crisis, rather than solely blaming the trade deficit – which is a symptom rather than an underlying cause the problem – more emphasis has been placed by authorities on curbing credit.

LBO’s economics columnist fuss-budget also prematurely commended authorities for not imposing trade sanctions on citizens but instead taking steps to limit credit growth, shortly before car taxes were jacked up.

So far no new exchange controls have been imposed. The Central Bank brought draconian exchange controls barely