ECONOMYNEXT – Sri Lanka’s utility price hikes, rising domestic expenses and higher imported material costs are eroding the short-term gains from currency depreciation, at a time when global demand is also under pressure, exporters say.

Electricity tariffs were hiked to account for higher rupee costs of coal and liquid fuels. Renewable operators have also asked for higher future tariffs as capital costs go up. New foreign renewable plants have dollar tariffs.

After the rupee collapse, power tariffs were raised twice and water tariffs once. Power is a key cost of export industries.

Energy and Input Costs

Tea exporters, who have a large domestic input component, have seen costs rise including in packing materials and power. When currencies fall, exported commodities like tea and rubber also go up in domestic currency.

“The tea exporters are complaining about the huge electricity tariff hike, which has affected them starting from the printing materials, packing materials, and the factory cost,” ADFA Plantations Managing Director Piyal Jayawardene told EconomyNext.

“If we estimate the electricity tariff effect, the cost will be elevated by 20 percent, and it is hard for us to price code with the International market and be competitive with countries such as India or Kenya.”

Sri Lanka’s apparel exporters say the impact of power hike is even greater on their industry.

“This has increased the cost of production by an additional 31 percent, and since June 2022, the overall cost of production has increased by 165 percent,” the Joint Apparel Association Forum said.

The main benefit from depreciation comes from imposing an ‘inflation tax’ on the workers which benefits both the government and producers, until people strike for higher wages.

Depreciation Margins Evaporate

Some Sri Lanka exporters say they gave around a 35 percent salary hike to workers after the currency collapse to help them manage their lives.

Meals for workers and transport, which are usually provided by top exporters have also gone up.

Meanwhile the end of money printing in the US and Europe is reducing demand for products. Some commodity prices including cotton have fallen for the same reason. But competition is heavy amid falling demand from the West.

“We had to give some of the profits from depreciation to workers. A part to utility price hikes,” an official  of a top export house said.

“The rest of the margins we had to give to buyers due to competition from other countries.”

With rupee appreciating amid tighter monetary policy, fuel costs are coming down. Electricity tariffs are expected to be revised every six months.

Another export firm said they were planning to generate their own renewable energy to reduce dependency on high cost grid power.

“The impact of the electricity hike will massively impact the coconut exporters’ cost,” a spokesperson for Haycarb Plc, an exporter of coconut shell based activated carbon, told EconomyNext.

“However, we plan to rapidly move into more renewable energy, and we have already implemented solar power projects.”

Anglophone Economics

Post 1930s economists who turned to mercantilism usually claim that monetary instability in the form of currency depreciation, gives an export boost as currencies went off the gold standard and collapsed a few years after the Great Depression triggered by the Federal Reserve.

The ideas spread through Anglophone universities like Cambridge and Harvard, leading to regressive inflation taxes on the poor in most developing countries, critics say.

From the 1980s it was peddled to third world nations without a doctrinal foundation in sound money in the form of real effective exchange rates and basket band crawl (BBC) policy as ‘flexible exchange rates’ are peddled now to countries which eventually default if they have market access, critics say.

East Asian export powerhouses rejected the idea and went for strong currencies or currency boards to fix exchange rates, allow poverty to collapse progressively and eliminate social unrest.

In Sri Lanka prices go up rapidly after economists print money to target high levels of inflation under so-called flexible inflation targeting and output gap targeting which is in conflict with reserve collection.

Controlled prices like fuel and electricity, water or bus fares can be kept down for a while.

Singapore’s Warning

“Most of the products whose prices are administered are either wholly imported or contain a high import content,” Goh Keng Swee, economic architect of Singapore told President J R Jayewardene in 1980 as his economic advisors printed money to prevent Treasury bill rates from going up and also to sterilize interventions.

“About a quarter of rice consumption is imported. All wheat from which four and bread are produced is imported. The same holds true of kerosene and milk powder. Bus fares were largely determined by the rupee price of imported oil and spare parts. Fertilizers are also mostly imported.”

Goh said the Anglophone devaluationist/inflationist hopes for prosperity expressed in a brief given to him by Sri Lanka’s economic advisors was based on false beliefs.

“The brief expressed the fear that an appreciation of the rupee will weaken Sri Lanka’s competitive position and stifle future growth. I believe these fears to be groundless for two reasons,” he said.

He said the prices of agricultural products or tree crops (rubber, tea) are determined globally in foreign currency, and tree crop producers would see a fall in rupee terms. It had to be addressed through efficiency and productivity.

“Prices in foreign commodity markets are the same for similar grads of products from all countries producing them,” Goh said.

“Where prices differ, they result from variations in quality. A stronger rupee would mean, however, that the rupee incomes of tree crop producers would go down.”

“As regards, exports of Sri Lanka’s manufacturing industries, an appreciating currency would have limited net impact,” he said.

“Both in Sri Lanka and Singapore, manufacturing activities consist mainly of processing of imported semi-finished material such as textiles into garments, silicon chips in semi-conductors, steel sheets into refrigerator cabinets, etc.

“A stronger rupee would mean that import costs would be lower and thus offset the effect of currency rate appreciation.

“Contrariwise, a weaker rupee will mean an increase in import costs of raw materials and intermediate goods used in manufacture, largely offsetting the competitive advantages arising from a lower exchange rate.”

An official at a top export firm said they were trying to retain workers as they were hoping for an eventual recovery in Western demand later in the year. In some East Asian nations, which have bigger export sectors, there are wholesale layoffs.

Anglophone Mercantilists call the eventual recovery in Western demand the J-Curve, and attribute the recovery to depreciation, not the returning stability of buyer countries.

Sri Lanka’s rupee which was under a consistent policy where the central bank was collecting dollars for reserves as permitted by domestic credit (buying under a surrender rule and selling as required) for a few is now nder ad hoc pegging from March where sales are limited leading to some instability after an appreciation, though monetary policy still favours the rupee, according to analysts.

Under Anglophone economics of conflicting anchors, money supply targeting with foreign reserve collections in the 1980s or inflation targeting with foreign reserve collections, Sri Lanka is now in the 17th IMF program. (Colombo/Mar30/2023)