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Tuesday January 31st, 2023

Sri Lanka exporters concerned over mandatory dollar conversion

ECONOMYNEXT – Some Sri Lanka exporter have expressed concern over a mandatory dollar conversion rule imposed amid unprecedented money printing that under modern monetary theory, that created foreign exchange shortages and reserves losses.

Sri Lanka ordered exporters to bring back export proceeds within 180 days and convert 25 percent of the proceeds into rupees, using provisions of the central bank law.

While some exporters had domestic expenses including salaries and overheads of over 25 percent some in highly efficient sectors with thin margins had problems.

Some labour intensive apparel exporters and those with domestic raw material purchases had domestic costs above 25 percent.

The unprecedented money printing pushed up domestic dollar yields over rupees, and turned forward premiums negative.

By keeping rupee interest rates down, the soft-pegged agency incentivized exporters to borrow rupees and loan dollars at high rates.

In the absence of money printing, exporter rupee borrowings should have crowded out some other credit, but when credit is taken from printed excess liquidity, the peg is pressured.

However among the hardest hit by the conversion are those firms that had dollar loans to settle, not those who had borrowed rupees.

“All companies borrow in US dollars and the remittance that company must be used to pay back those loans and that portion can be larger than 25 percent,” an exporter explained.

“There was no consultation done with the industry officials.”

In the cost structure, some firms had domestic purchases of raw materials above the gross profit level and staff costs and overheads below the GP level.

However what came as depreciation is actually financed by dollar loans in some cases.

Authorities have called exporters for a meeting to discuss their concerns.

The Board of Investment had earlier called for quarterly report on foreign exchange remittance from companies, trying to pressure companies, exporters said.

They had been given the reports but a mis-understanding still seemed to exist, an exporter said.

“Imposing a draconian rule, forcing exporters to convert their proceeds creates an unfriendly situation and this doesn’t motivate them,” another exporter explained.

“At the end of the when you are doing things like this it shows that situation is desperate, we have a serious balance of payment issue.

“This is not a question about if somebody will be impacted or not it is about being draconian and forcing them to do it. This is not the way you encourage your exporters.”

Related

Sri Lanka orders exporters to convert 25-pct of forex earnings

Sri Lanka banks to surrender 12-5-pct of export receipts to central bank

Some exporters that produced intermediate goods also got some revenues domestically and only a part of their produce was exported directly.

Analysts and economists have pointed out that the only lasting solution to ending foreign exchange shortages is to reform the central bank to restrains its open market operations through an inflation target below 2 percent or close it in favour of a currency board or dollarization.

Sri Lanka’s forex shortages and monetary instability started after a soft-pegged central bank was set up in 1950/51 by the US Federal Reserve in the style of several in Latin America and Asia inspired by Argentina central bank creator Raul Prebisch, which led to import substitution, revolution and sovereign default.

Sri Lanka’s central bank printed money in 2021 despite having a soft-peg that had made the agency a top client of the International Monetary Fund in the past.

In the past when money printing led to a steady fall in reserves rates had been raised and the currency floated, despite monetary policy statements in the run-up giving various excuses as to why money should be printed to keep rates down including that ‘inflation was low’.

Rates then go up suddenly and precipitately on account of the imbalance that had been built up through open market operations/call money rate targeting or outright monetization (failed bill auctions).

Analysts have called for central bank reform or the abolition of the agency into a currency board so that it can no longer print money, depreciate the currency, trigger monetary instability and drive the country closer to sovereign default and become a frequent client of the IMF.

Related

How Sri Lanka, Latin America was busted by Fed money doctors creating strongmen, anti-Americanism: Bellwether

Some of the so-called Triffin-Prebisch central banks had gone bankrupt partly due to swap contracts (Philippines-John Exter), or excessive domestic issued that had led to zeroes being struck off notes and new money issued under a new law (Korea-Arthur Bloomfield 1953) while others had gone bankrupt and led to the dollarization (Ecuador – Gomez Morin 1937/Robert Triffin 1948) of those countries.

In 2018, when policy similar to Modern Monetary Theory was used to ‘target an output gap’ analysts had warned that dollarization may come, unless such interventionism was abandoned.

RelatedSri Lanka and Ecuador; a cautionary tale of the Rupee and Sucre: Bellwether

(Colombo/Feb22/2021)

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Sri Lanka shares down for 2nd day as tax hike, delay in Chinese debt assurance weigh

ECONOMYNEXT – Sri Lanka’s shares edged down on Tuesday as worries over delay in financial assurances from China which is mandatory for a $2.9 billion dollar IMF loan and rise in protests against tax hike kept investors in check, analysts said.

The main All Share Price Index (ASPI) edged down by 0.28 percent or 24.62 points to 8,865.05. It fell for the second session after hitting more than three-month high.

“The market is looking for more macro cues because of faster Chinese debt assurance was expected. The market is also hit by fall in corporate earnings due to high taxes,” an analyst said.

China has given an initial response on debt re-structuring to Sri Lanka though analysts familiar with the process say it is not a ‘hard assurance’ sufficient for the IMF program to go through.

The International Monetary Fund is working with China on extending maturities of Chinese loans to defaulted countries like Sri Lanka, as there is resistance to hair-cuts, Managing Director Kristalina Georgieva told reporters on January 14.
The earnings for first quarter are expected to be negative for many corporates with higher taxes and rising costs. However, investors had not expected earnings to be low in the December quarter because of year end pick ups on heavy counters, the analyst said.
Earnings in the second quarter of 2023 are expected to be more positive with the anticipation of IMF loan and possible reduction in the market interest rates as the tax revenue has started to generate funds.

However, the central bank said the IMF deal is likely in the first quarter or in the first month of the second quarter.

The most liquid index S&P SL20 dropped by 0.64 percent or 17.74 points to 2,764.51 points.

The central bank has said it could cut interest rates in future when the country sees fall in inflation, which has already started decelerating.

The market saw a turnover of 1.7 billion rupees, slightly lower than the month’s daily average of 1.8 billion rupees and while being significantly lower than 2022’s daily average turnover of 2.9 billion rupees.

The bourse saw a net foreign inflow (NFI) of 93 million rupees extending the net offshore buying to 413 million rupees so far this year.

Top losers were LOLC, Royal Ceramics Limited and Hayleys. (Colombo/Jan31/2023)

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Sri Lanka exports fall in December as global recession weighs

ECONOMYNEXT – Sri Lanka’s merchandise exports earnings fell 9.7 percent in December year-on-year as the island nation saw a drop in buying from its key export destinations which are facing a looming recession after the Russia-Ukraine war.

The earnings from the merchandise exports recorded $1.04 billion  in December 2022 compared to the same month in the previous year as per the data released by the Sri Lanka Customs.

“This was mainly due to the decrease in export earnings from Apparel & Textiles, Tea, Rubber based Products, and Coconut based Products, Food & Beverages, Spices & Essential Oils and Fisheries products,” the Export Development Board (EDB) said in a statement.

“The reason for this decline was due to the ongoing recession in major markets due to rising cost of production, energy etc. Imports declined sharply due to inflation and demand for goods and services are reduced.”

However, Sri Lanka saw a record export earning of $13.1 billion in 2022 due to increased demand in the key exports throughout the year

Earnings from all major product sectors except Electrical & Electronic components as well as Diamonds, Gems & Jewellery fell in December.

Exports of Apparel & Textiles decreased by 9.6 percent to $480.3 million in December 2022.  Export earnings from Tea fell by 3 percent to $107.3 million, Rubber and Rubber Finished products dropped 20.3 percent to $74.5 million,

However, export earnings from the Electrical & Electronics Components increased by 16.18 percent to $42.9 million in December 2022, while Diamond, Gems & Jewelry jumped 35.7 percent to $30.8 million. (Colombo/Jan31/2023)

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Sri Lanka records over 6,000 dengue cases in first three weeks of January

ECONOMYNEXT – Sri Lanka recorded over than 6,000 dengue cases in the first three weeks of January 2023 after a spell of heavy monsoon rain though a drop in cases is likely from February, officials said.

Health officials identified 6,204 dengue patients by January 22, up from 5,793 recorded in the corresponding period last year.

“A rise in cases can be observed in the November-January period with the heavy rain due to the northeast monsoon,” an official from the National Dengue Control Unit told EconomyNext.

Of all reported cases, 46.3 percent were from the Western Province, official reports showed.

Akuressa, Batticaloa, Eravur, Trincomalee, Madampe, Badulla, Eheliyagoda, Kegalle, Kalmunai North and Alayadivembu MOH areas were identified as high-risk areas for dengue during the third week of January by the health officials.

“We are expecting a decline in dengue cases soon. The Western province is always in the top position with the highest number of dengue cases. Apart from that, we are seeing a higher number of cases during this period in areas like Puttalam, Jaffna districts. A certain number of cases have also been recorded in the Kandy district,” the official said.

“Usually the cases peak in December, but they decline by February. This year, too, we are facing this scenario. There is an increase of dengue during the months of November, December and January”.

Due to the economic situation in the country, the Public Health Inspectors (PHIs) in an earlier report said, diesel and pesticides are not being provided by the ministry.

However, rejecting the allegation, the official from the NDCU said the government has provided enough funds for get the necessary pesticides but it is being used according to a scientific method to avoid building a resistance in the dengue mosquito.

“The recommendation is to do the fogging if there is a dengue outbreak or if there are few patients reported from the same locality.

“If you use this pesticide haphazardly, the mosquitos will develop resistance against it,” the official said, adding that there are adequate stocks of the chemical available. (Colombo/ Jan 31/2023)

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