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Friday June 21st, 2024

Sri Lanka apparel exporters ask for forex conversion rule to end

ECONOMYNEXT – Sri Lanka’s Apparel Exporters have appealed to the central bank to end a mandatory conversion rule for exports proceeds as the rupee is allowed to appreciate with deflationary monetary policy.

A request to end a ban on shifting dollar proceeds from one bank to another, which was slapped when the central bank was conducting inflationary policy leading to forex shortages has been removed.

“Exporters recognize the Central Bank’s positive move to meet their request to remove restrictions on the movement of foreign exchange between commercial banks,” the Joint Apparel Exporters Association said.

“The export sector has weathered turbulent times and continues to reinvent itself to convert to lean manufacturing, diversify its offerings and to actively pursue new markets.

“However, for fair trade to persist and to enable these critical industries to continue to trade with the world and to retain their profitability, fiscal common sense and timely policy support through the immediate removal of the mandatory conversion of export proceeds is urgently required.”

Sri Lanka’s central bank is currently conducting deflationary domestic operations (selling central bank-held securities to banks and taking in their deposits) triggering a balance of payments surplus.

Under deflationary ‘monetary policy’, a reserve collecting (de facto pegged) central bank can either appreciate the rupee, keep the peg fixed or depreciate the peg by deploying its ‘exchange rate policy’ as it wishes.

Before 1978 and the IMF’s second amendment to its Articles (after the Fed floated away from gold) Sri Lanka had a domestic legal requirement and also an obligation to the Fund as a member to maintain a fixed anchor.

However, Sri Lanka was left without a credible anchor after 1978, leading to severe depreciation and inflation as various dual anchor conflicting operational frameworks were tried out, analysts say.

Currency flexible inflation targeting (inflation targeting without a clean float) and potential output targeting (printing money for growth) is being carried out.

Most East Asia nations including Malaysia, Thailand, Hong Kong (the country from which Singapore got the first large flows of FDI), China after 1993 maintained external anchors.

Sri Lanka’s central bank is allowing the rupee to appreciate after a steep collapse in 2022 to 370 from 200, after a float failed due to a surrender rule. Rates were hiked to kill private credit and the currency was then pegged at around 360 to the US dollar to stop possible hyperinflation.

An appreciating currency tends to squeeze margins of exporters when inputs (usually domestic non-traded items, like wages or transport, or public utilities) do not fall in step. A stable exchange rate however will prevent social unrest and strikes for higher wages.

While some countries like Singapore have deliberately appreciated their currency over time in a slow process, leading to higher real wages, quick appreciations do not give enough time for companies to invest to boost productivity.

Depreciation on the other hand tends to give temporary benefits to exporters, at the expense of social unrest, inflated away real savings (which leads to capital imports and current account deficits), critics say.

Sri Lanka’s currency was under severe pressure and collapsed with the worst import controls in recent history. Most of the controls have been relaxed but vehicles remain.

Sri Lanka imposes import controls due to confused Mercantilist ideology regarding trade (trade and current account deficits) that revived from the 1920s onwards after the Fed invented the policy rate, that were defeated by classical economists before the ‘age of inflation’ started.

Classical economists have been saying from the 1960s that import controls based on Mercantilist ideology, have no effect on the external sector as long money is printed.

The full statement is reproduced below:

A hollow rupee: the high cost of mandatory currency conversions on Sri Lanka’s ability to earn foreign exchange.

Politics and economics are concepts that are fundamentally intertwined. Yet the unprecedented economic crisis of 2022 highlighted the complex challenges of aligning short-term political goals with long-term economic strategies.

While the sharp appreciation of the Sri Lankan rupee in recent months has been roundly welcomed by most sectors of society as a positive signal, this optimism overlooks the nuanced factors influencing our currency’s strength and the medium-long-term challenges that could arise from volatile fluctuations in the price of the rupee.

While a stronger rupee certainly promises cheaper imports of essentials like petroleum, electricity, food medicine and other essentials in the short term, as a nation that is surviving on borrowed time and foreign currency, we cannot afford to ignore the other side of the equation – exports.

Dynamism at a time of unprecedented volatility

Already, Sri Lanka’s manufacturing and services sector exports have underperformed in the first quarter of 2024. The tentative recovery that we have seen in the first quarter also needs to be considered relative to the major setbacks of 2023 and 2022, which left no industry undisturbed.

While the tourism and exports sectors were the most adversely affected, they persevered and found strategies to deal with the dual impact of local and global challenges. The economy was stripped of foreign reserves for the purchase of raw materials and external pressures caused serious buyer dissatisfaction and changing priorities of customers.

These impediments were compounded by post-Covid recessionary effects on world markets, the Ukraine-Russia war and fluctuating world petroleum prices, which in turn, resulted in reduced orders for Asian manufacturers and as the data shows Sri Lankan manufacturers in particular. The war in the Middle East now presents new challenges both in market sentiment and costs of moving goods from East to West.

Wedged between these challenges, the export industries in Sri Lanka, with apparel leading the charge, rallied their industries and met these challenges head-on. Sri Lankan exporters were flexible and drove product diversification while simultaneously exploring new markets. Manufacturers sought quality through innovation, value addition and sustainable manufacture, instead of depending only on traditional markets.

Moreover, export manufacturers including the apparel sector, have actively contributed to and aided the government in garnering the support required locally and internationally for the negotiations of Free Trade Agreements, especially in emerging markets such as India and China.

Parallel to these developments the Rupee has been buoyed by improved worker remittances and a booming tourism sector. However, it must be reiterated that this boom which has contributed to an appreciated Rupee has been artificially sustained by policies such as the mandatory conversion of export proceeds. Initially implemented in 2021 as a temporary measure to stabilize our economy, the policy’s continued enforcement is now undermining the very competitiveness of Sri Lanka’s exports.

If Sri Lanka is to sustain long-term economic success the role of goods exports cannot be understated nor dismissed.

A period of painful readjustment

The Government of Sri Lanka, steering the country amidst the worst economic crisis the island had faced since independence, put in place a mandatory foreign exchange conversion policy. This required that all export proceeds once received can only be retained in USD for specified payments as identified in Gazette No.2251/42, while the remaining foreign exchange in earnings must be converted into Sri Lanka Rupees by the 7th of the following month.

The purpose of the policy was to conserve the rapidly dwindling foreign exchange reserves. In fact, even before the policy was implemented, at the peak of the crisis the apparel sector supported the country with the provision of foreign exchange to meet urgent payments that had to be made for the supply of fuel and medicines. In a time of grave national need when the tourism sector and remittances collapsed no one can accuse the export industries and the apparel sector in particular of failing to rise and serve the national interest.

The issue with the aforementioned gazette is that “the mandatory conversion policy especially affected export industries like apparel, which brings in over half of all export revenue into the country. Despite the harshest challenges, the apparel industry withstood the turbulence and managed to bring in revenue and much-needed foreign exchange of up to USD 5.9 billion in 2022. The impact of the policy and other geopolitical occurrences were felt in 2023 when apparel earned USD 4.5 billion in 2023, which saw a dip in nearly 20 percent in earnings, as the post-Covid bubble burst and global apparel imports slumped.” Yohan Lawrence, Secretary General of the Joint Apparel Association Forum (JAAF), explained.

Except for the most unviable and loss-making locations, the apparel industry worked tirelessly to retain most of its 350,000-strong employee base and continued to meet its sustainability and compliance targets with stoic resilience.
Gradually there was light at the end of the tunnel with the International Monetary Fund (IMF) striking an agreement for a bailout in 2022. With it came a battery of reforms aimed at weeding out corruption and establishing standards for greater structural and systemic efficiency in the economy.

Rising calls for exports-led growth clash with a stronger rupee

Aided by multilateral and bilateral grants and loans, the Government committed to floating the Rupee in 2022, which thereafter reflected more accurately the exchange rate and reduced its artificially inflated value. This made exports competitive and Sri Lanka apparel began to regain traditional and new buyers. This in turn helped us to maintain our hard fought position as one of the world’s top 10 apparel sourcing destinations, holding 1 – 2% of the global apparel market share.

In that regard, President Wickremesinghe himself lauded the Board of Investment, approved export manufacturers’ efforts and reiterated the need for an exports-led economic recovery.

He stressed that the Government was garnering support for a favourable agreement on repayment of Sri Lanka’s external debt and working out a more comprehensive and efficient policy framework to encourage foreign direct investments into the country. He reiterated that the export industries would always be critical for the country’s economic prosperity.

Particularly in view of the recovery of the tourism earnings and sharp improvements in worker remittances, that have already at pre-COVID levels. State Finance Minister, Ranjith Siyambalapitiya, recently declared that Sri Lanka’s foreign reserves could hit the USD 5 billion mark by mid-year.

In such a backdrop, it is clear that the mandatory conversion policy which was introduced as short term crisis measure is no longer required and policy makers are urged to withdrawn it and allow level playing field in terms of timing of conversions based on commercial needs which will allow currency market to operate at optimum equilibrium based on market forces of both import and exports.

The export industries sustainability remains threatened among geopolitical and other external shocks and challenges. The World Bank predicts the country will grow at 2.4% this year. The export sector’s expansion is critical to meet the predicted growth targets. “External shocks and geopolitical phenomena may be beyond their control however, the Government is within reach of stemming the challenges faced by the export industries by removing the mandatory conversion policy,” Lawrence contends.

“This will give export industries a breathing space to gain, even marginally, some benefit from their labour and efforts, even as the Rupee continues to appreciate and reduce price competitiveness of our exports in the global markets,” he reiterates.

The impact of uncompetitive exports will be felt with a 9-month lag

There is speculation by monetary experts that the Rupee, presently appreciating amidst a controlled float and with the ban in place on the import of vehicles for personal use, and the suspension of payment of foreign debt, will soar when these variables change.

Experts forecast that the Rupee will likely settle at LKR 310 – 320 by the end of the year. In the interim, the Rupee’s gain against harder currencies is already reducing the competitiveness of Sri Lanka’s exports. The impact of these dynamics will be felt in terms of reduced export revenue, within approximately nine months – which is the typical lead time on apparel orders. This will ultimately be a difficult precipice from which to build back Sri Lanka’s most lucrative industries.

Continued reductions in export earnings could also see the real danger of exporters being forced to shed their workforce to stay competitive, agile, and cost-effective. The apparel industry presently employs over 15 per cent of the country’s skilled workforce.

Retraining and re-skilling new workers in the future will debilitate Sri Lanka’s economy and disrupt its industrial output. The only way to stem these devastating projections is to create a more conducive policy framework within which to operate for the long-term benefit of the country and to ensure its prosperity.

The export industries, led by the Joint Apparel Association Forum, the Exporters Association of Sri Lanka, the National Chamber of Exporters, the Tea Exporters Association and the Sri Lanka Association of Manufacturers and Exporters of Rubber Products, have already appealed to the Central Bank of Sri Lanka and the Government to remove the mandatory conversion policy to enable stronger growth of export revenue into the country.

The plight of export manufacturers will impact the larger players in the export sector, but will severely diminish the micro, small and medium exporters upon which many are dependent in Sri Lanka.

Exporters recognize the Central Bank’s positive move to meet their request to remove restrictions on the movement of foreign exchange between commercial banks. The export sector has weathered turbulent times and continues to reinvent itself to convert to lean manufacturing, diversify its offerings and to actively pursue new markets.

However, for fair trade to persist and to enable these critical industries to continue to trade with the world and to retain their profitability, fiscal common sense and timely policy support through the immediate removal of the mandatory conversion of export proceeds is urgently required.

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Indian FM meets Sri Lanka political leaders; focuses on committed deals

ECONOMYNEXT – Indian External Affairs Minister (EAM) S. Jaishankar met President Ranil Wickremesinghe and a range of political leaders during his visit to Sri Lanka, focusing on commitments made by Sri Lanka to India, including land and energy pipeline connectivity.

Sri Lanka has committed to renewable energy deals for the Indian Adani group, Trincomalee port development, an investment zone around the port, a bridge between the island nation’s Northern Mannar and South India’s Rameshwaram, a power grid, and an oil and gas pipeline between the two nations.

Though most of the committed projects have been discussed and some already signed, they face delays amid public protests, court cases on environmental concerns, anti-Indian sentiments triggered by high prices of renewable projects, local politicians as well as perceived Chinese influence, analysts say.

India has been pushing Sri Lanka to fast-track these deals under Prime Minister Narendra Modi.Jaishankar’s visit also comes ahead of Sri Lanka’s presidential polls later this year.

Jaishankar met President Wickremesinghe in a one-on-one meeting, Prime Minister Dinesh Gunawardena, and Foreign Minister Ali Sabry before delegation-level talks with Ports, Shipping and Aviation Minister Nimal Siripala de Silva, Agriculture and Plantation Industries Minister Mahinda Amaraweera, and Power and Energy Minister Kanchana Wijesekera.

“Appreciated the progress made on various bilateral projects and initiatives. Under President Ranil Wickremesinghe’s guidance, we discussed the way forward for India-Sri Lanka cooperation, especially in power, energy, connectivity, port infrastructure, aviation, digital, health, food security, education, and tourism sectors,” Jaishankar said on his official Twitter platform.

He also met former President Mahinda Rajapaksa, opposition leader Sajith Premadasa, and leaders of various political parties from the North, East, and the upcountry region.

“Interaction of EAM with the leadership of the Government of Sri Lanka provided an opportunity to review and accelerate progress in the multifaceted India-Sri Lanka partnership,” the Indian External Affairs Ministry said in a statement.

One of the key focus areas of discussion was the Vision Document adopted by President Wickremesinghe and Prime Minister Modi during the Sri Lankan leader’s visit to India in July 2023.

“Discussions added momentum to the ongoing projects as well as initiatives for promoting connectivity in all its dimensions, particularly in domains of energy, physical infrastructure as well as economic and people-to-people ties.”

Jaishankar also met leaders of Sri Lanka’s upcountry Tamils, who originally came from India as plantation workers. He discussed development and devolution of power with an eight-member delegation of Tamil leaders from the Northern and Eastern provinces, including Shanakiyan Rasamanikkam and M. A. Sumanthiran.

India helped Sri Lanka with financial and humanitarian aid when the island nation faced an unprecedented economic crisis amid delays by the International Monetary Fund loan to rescue Sri Lanka.

“Following Sri Lanka’s economic recovery and stabilization, forging deeper long-term economic cooperation was underlined as a priority for sustainable and equitable growth of Sri Lanka, and mutual prosperity in the Indian Ocean Region,” the Indian External Affairs Ministry said.

Though the Sri Lankan government has claimed that Jaishankar’s visit was a precursor to Indian Prime Minister’s visit, the Indian External Affairs Ministry did not mention anything about a possible Modi visit.

This visit is Jaishankar’s first bilateral visit after the formation of the new government.

The Adani wind power project in the Northern district of Mannar has seen some public protests over environmental concerns after some experts said the project has failed to conduct a proper Environmental Impact Assessment (EIA). Critics also protest against its transparency.

President Wickremesinghe, opposition leader Premadasa, and Marxist Janatha Vimukthi Peramuna (JVP) leader Anura Kumara Dissanayaka are expected to contest in the election to choose the island nation’s 8th leader.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation, seen as a security threat to India, analysts say.

The docking of a Chinese nuclear submarine in 2014 led to a dramatic government change in the 2015 presidential poll with the ousting of former leader Mahinda Rajapaksa, who later accused India of orchestrating his defeat.

Rajapaksa’s brother Gotabaya in 2021 unilaterally canceled a key port terminal project given to India’s Adani group after promising Jaishankar to sign the deal.

Gotabaya Rajapaksa was later forced to flee the country in 2022 after mass protests due to his economic policies. (Colombo/June 21/2024)

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Sri Lanka car permit tax losses Rs14bn in two years of partial disclosure

ECONOMYNEXT – Sri Lanka has lost 14.3 billion rupees in taxes from car permits given to public servants, including doctors, military officers, central bankers, finance ministry and tax officials, in 2019 and 2020 information disclosed by the finance ministry shows.

Inclusive of some 2021 tax losses when imports were banned for the rest of the year, 14.4 billion rupees of foregone revenue from a waived luxury tax is shown.

The list only shows waivers of a so-called ‘luxury tax’ imposed on larger vehicles above a certain value and size.

The list does not show other vehicles imported under car permits such as double cabs or cars below a certain size.

The list also does not seem to include tax free cars imported by politicians.

In 2019, Sri Lanka has lost 8.3 billion rupees from the luxury tax on car permits and in 2019 the loss 5.92 billion rupees.

In 2021 when car imports were stopped as the central bank started printing money to cut rates and target ‘potential output’ only 85.6 million rupees were lost.

Among the biggest tax waivers of over 10 million rupees went to some doctors and military officers. Doctors were among the biggest users of tax slashed car permits in the list.

Sri Lanka at one time did not allow cars imported by state workers to be transferred for many years.

But reportedly after Customs raided a finance company involving a fleet of vehicles, the rule was relaxed by the then President.

Among the largest tax waivers listed were given to Rolls Royce and Maclaren assigned to Melwire Rolling (Pvt) Ltd.

The 45.6 million rupee Rolls Royce was given a 42.1 million rupee tax waiver.

The 41.46 million McLaren was given a 37.9 million tax waiver.

There were also a large number of Audi A5 and Q2 vehicles listed at prices over 80 million rupee. It is not clear whether the disclosure is an error. The market value of the A5 and Q2 are much lower.

Up to end 2023, 138 cars imported under a migrant worker remittance scheme was listed to lose 436 million rupees in luxury taxes.
The total for the three years was listed at 14.86 billion rupees, involving 2,034 cars in 2019 and 1,470 cars in 2020.

It is not known how much the total tax losses or total vehicle imported through ‘car permits’ is. (Colombo/June20/2024)

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Construction of Sampur solar power plant to begin mid-July

ECONOMYNEXT – Joint energy projects between India and Sri Lanka, including the Sampur solar power plant due to begin next month, took centre stage during bilateral discussions between president Ranil Wickremesinghe and visiting Indian External Affairs Minister S Jaishankar on Thursday.

Wickremesinghe and Jaishankar discussed initiatives aimed at enhancing energy connectivity and developing the renewable energy sector, a statement by his media division said.

“Significant attention was given to plans for an LNG supply, a proposed petroleum pipeline linking the two countries, and advancing oil and gas exploration projects. Additionally, it was announced that construction of the Sampur Solar Power Plant is set to commence in July 2024.”

The visit comes amid delays in key Indian projects including land, oil and gas pipe, and grid connectivity deals, Adani’s wind power plant deals which are facing a legal battle, and port and investment zone projects in the Eastern port district of Trincomalee.

Indian supported projects for developing Trincomalee and expanding the Kankasanthurai port, the ongoing development of Jaffna Airport and Colombo Airport, and the expediting the unique digital identity card project were discussed.

The efficiency of projects supported by the Indian government aimed at bolstering Sri Lanka’s liquid milk industry and fertilizer production, were also examined.

Sri Lankan leaders have been under pressure from India in the past two decades amid increasing Chinese influence in the island nation as the move is seen as a security threat to India, analysts say. (Colombo/Jun20/2024)

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