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Sri Lanka economist-legislator warns on currency weakness

ECONOMYNEXT – The Sri Lankan rupee may be allowed to weaken further as the island’s exports performance is weak, a top government policy maker has said as the rupee came under pressure from money printing and deficit spending.

"I don’t know how long we can hold this currency as exports are falling," said Harsha de Silva, Deputy Minister of Policy Planning and Economic Affairs.

The rupee closed at 134.00 per US dollar with the Central Bank intervening at 134 to keep the currency falling while printing money heavily to keep interest rates down.

 This week reverse repo auctions were resumed to print money and keep rates down. In July 350 million US dollars were busted to keep the rupee stable as tens of billions of rupees were printed by acquiring Treasury bills with freshly minted money.

By cutting policy rates amid deficit spending the new administration has also triggered capital flight.

That hard goods exports have something to do with currency weakness is a Mercantilist idea that is prevalent in some countries. In any case Sri Lanka’s service exports including tourism and labour has been booming. While hard goods exports fell 34 million US dollars in the six months to June, tourism exports rose 163 million US dollars and remmittances rose 72 million US dollars.

But all export revenues whether from hard goods, tourism or remittances ultimately general imports as their proceeds are spent. But currencies fall when the Central Bank prints money and generates demand in excess of exports, remittances, tourism receipts or even financial inflows.

Currency depreciation is a money and credit phenomenon and has very little to do with trade, except for the unsustainable imports that are generated from low interest rates and money printing.

When Sri Lanka had double digit export growth in the 1980s and early 1990s, the currency steadily collapsed due to money printing.

In 2012 the rupee collapsed from 110 to 130 to the US dollar due to money printed to finance fuel subsidies but exports fell from 10.5 billion US dollars in 2011 to 9.7 billion US dollars in 2012.





De Silva said the island’s export competitiveness has been weakening in recent years, with exports’ share of gross domestic products dropping to about 15 percent from 35 percent 10 years ago.

"Exports have really suffered," he told the annual general meeting of the Spices and Allied Products Producers and Traders Association (SAPPTA).

His comments came as official data showed that spice exports rocketed 43.4 percent to 39.9 million US dollars in July 2015 from a year earlier. In the six months to June spice exports rose 55.2 percent to 170.8 million US dollars.

The new government elected in Monday’s parliamentary polls would act fast to restore the nation’s export competitiveness, removing constraints and getting policy right, he added.

The central bank reported Friday that Sri Lanka’s trade deficit widened in June 2015 as exports fell, dragged down by lower earnings from tea and textiles, while imports rose, led by car imports.

Vehicle imports have been rising due to cheap credit.

Export earnings in June 2015 fell 4.2 percent to 944 million US dollars from the previous year while imports rose by 13.5 percent to 1,633 million US dollars, with the trade deficit widening by 51.9 percent to 689 million US dollars.

The central bank said that the trade deficit during the first six months of 2015 increased by 15.6 percent to 4,086 million US dollars.

The concerns over the currency is now coming despite the International Monetary Fund and even rating agencies predicting favourable outcomes for the balance of payments due to low oil prices.

But non-Mercantilist analysts even then warned that cutting oil prices by the new administration will spur non-oil import demand as domestic spending increased due to deficit spending and excess liquidity in money markets were loaned out to the economy, driven by deficit spending.

Analysts expect local policy makers to point to other currencies like the Yuan (which fell 2 percent) as well as export competitiveness to justify the devaluation when it happens as has happened in the past, ever since a central bank was created to print money and manipulate interest rates.

Depreciation will however set of a bout of inflation, impoverishing the people, boosting nominal revenues of the state and reducing the real cost of recent state salary hikes.

Due to a sharply appreciating dollar, which has pushed down commodity prices, Sri Lanka can now depreciate the rupee without generating excessively high inflation analysts have said.

Total exports from Sri Lanka has also fallen when measured in dollars because of the same phenomenon.

Even in areas like export apparel, input costs have fallen as yarn and fabric prices fell in dollar terms and buyers also press manufacturers to cut final product prices in line with the rest of the world. (Colombo/Agu22/2015).

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