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Tuesday April 23rd, 2024

Sri Lanka exporters protest rupee appreciation, forced conversion rules

THE PEG: Changes in Net Domestic Assets, which are not parallel to Reserve Money (the note-issue) points to a pegged exchange rate not a float. NDA moving in opposite direction to Net Foreign Assets is also a tell-tale sign of a soft-peg. When NDA falls due to deflationary policy, a pegged note-issue bank can decide the exchange rate through its purchase price (exchange rate policy).

ECONOMYNEXT – Sri Lanka’s export associations have protested the recent sharp appreciation of the rupee saying forex conversion rules have been forced on them and some costs are not falling in line with rupee gains, leading to a loss of cost competitiveness.

Sri Lanka’s central bank is operating a de facto pegged exchange rate where the agency’s domestic assets are being reduced against dollar purchases (reversing ‘money printing’), triggering a balance of payments surplus, allowing the exchange rate to be appreciated if the agency wishes, analysts have shown.

RELATED: Why is Sri Lanka’s rupee appreciating?

There is however a widespread belief that suspending debt repayments have helped appreciate the rupee, though the financial account turned into a deficit in the last quarter of 2022, just as monetary stability was restored allowing out payments to be made and reserves to be collected.

In the five quarters ending in December 2023, the external financial account was 1.35 billion dollars in deficit, before adjusting for errors and omissions, from an earlier surplus, official data show.

Currency depreciation helps widen exporter margins in countries with monetary instability as there is a delay in wages catching up, triggering social unrest and outmigration and – if energy and water tariffs are not raised regularly – through losses in state utilities.

But if wages are raised and any domestically purchased inputs, including items like domestic transport, do not immediately fall with rupee appreciation, exporter margins may be squeezed.

Sri Lanka electricity prices were cut this year and interest rates are falling.

The central bank had allowed the rupee to appreciate from 360 to the US dollar to 300 now, after a surrender rule imposed on commercial banks to force-sell dollars to the central bank against new rupees while taking dollars out of the interbank forex market, was lifted in March 2023.

However, a surrender rule imposed on exporters to sell to banks by the central bank (which does not create new rupees nor take money away dollars from the forex market), remains in place, constraining the ability to delay or sell dollars as they wish at the best price.

The Exporters Association of Sri Lanka, Joint Apparel Association Forum of Sri Lanka, the National Chamber of Exporters, Tea Exporters Association, Sri Lanka Association of Manufacturers and Exporters of Rubber Products say the rupee appreciation is harming them.

Tea exporters who buy at an auction in rupees, are also squeezed, if the exchange rate changes between the time materials are bought and tea is blended and packaged and finally shipped, unless all dollars are sold forward, analysts say.

The central bank had earlier denied a request to conduct tea auctions in US dollars, using a money monopoly given to economic bureaucrats by legislators.

The central bank had also blocked the exporters’ dollars from being moved from bank to bank.

“Today, we stand united in urging the authorities to address the pressing challenges posed by the appreciation of the Sri Lankan Rupee (LKR) against the US Dollar (USD), further compounded by restrictions on the movement of foreign currency between commercial banks, and the mandatory conversion of export earnings into Sri Lankan Rupees,” the exporter associations said.

The association said the exchange rate, which peaked at over 364 per USD in May 2022, led to increased operational costs, compelling them to adjust their cost base in line with higher inflation experienced in the country.  

“The rapid appreciation of the Rupee, with rates falling below Rs. 300 per USD since March 19th, has placed us in a precarious position, threatening the sustainability of our businesses and the livelihoods of those we employ,” the statement said.

“Despite the appreciation of the Rupee, the cost of living remains high, continuing to level pressure on worker wages.”

The exporters did not say by which percentage wages were raised, but analysts say progressive income taxes imposed by the International Monetary Fund as part of ‘revenue based fiscal consolidation’ where government cost-cutting is abandoned, also force exporters to raise salaries beyond rupee depreciation to maintain staff living standards.

“It is crucial to recognize that the landscape of our foreign exchange reserves has significantly transformed and the continued enforcement of the mandatory conversion policy, considering the current positive reserves, is counterproductive,” the exporters said.

“Persisting with this approach has placed exporters at a market disadvantage and forced them to operate on an unleveled playing field, eroding their competitiveness.

“It further acts as and is viewed as an anti-export policy measure.”

Sri Lanka’s rupee, as well as most other unstable countries, started to depreciate their currencies from 1978 in particular, after the Second Amendment to the IMF’s articles, generating high levels of inflation and social unrest while the best performing East Asian export powerhouses either ran actual currency boards or mostly fixed exchange rates (which some classical economists call exchange rate fixity) providing domestic stability through external anchoring of money.

The full statement is reproduced below:

Urgent Appeal from Sri Lankan Exporters on Rupee Appreciation and Policy Concerns

As a collective body of exporters, we have been at the forefront of sustaining employment and ensuring a steady flow of foreign exchange, even amidst the most severe economic downturns faced by our nation. Our membership covers the majority of merchandise exports, which account for some 13% of Sri Lanka’s GDP. Today, we stand united in urging the authorities to address the pressing challenges posed by the appreciation of the Sri Lankan Rupee (LKR) against the US Dollar (USD), further compounded by restrictions on the movement of foreign currency between commercial banks, and the mandatory conversion of export earnings into Sri Lankan Rupees.

Impact of Rupee Appreciation

The appreciating Rupee has had a multifaceted negative impact on our business.  A stronger Rupee means our goods become more expensive for international buyers, directly affecting our competitiveness in the global market. The exchange rate peaked at over Rs. 364 per USD in May 2022, which led to increased operational costs, compelling us to adjust our cost base in line with higher inflation experienced in the country.  

The rapid appreciation of the Rupee, with rates falling below Rs. 300 per USD since March 19th, has placed us in a precarious position, threatening the sustainability of our businesses and the livelihoods of those we employ. Despite the appreciation of the Rupee, the cost of living remains high, continuing to level pressure on worker wages.

The timing of the Rupee’s appreciation coincides with weak global demand for the majority of our merchandise exports and severe competition from competing countries.  Factors such as global inflation and geopolitical tensions have continued to affect sentiment and purchasing power in the primary markets of our merchandise exports.

Background to the appreciation of the Sri Lankan Rupee

The painful economic stabilization process implemented with significant monetary and fiscal policy measures by way of policy rate, inflation, and tax adjustments; import controls; and debt service suspension, has had the desired impact to constrain economic activity and, in turn, adjust and constrain import demand. At the same time the collective efforts of the Government, export community, tourism industry and remittances have continued to have a positive inflow and enhance foreign reserve positions to more comfortable levels.  

This is in the backdrop of the extraordinary circumstances when the debt servicing by the country remains at a standstill, which is a temporary situation.    

During the height of the crisis, the Central Bank of Sri Lanka implemented a policy for exporters, by Gazette No.2251/42, dated October 28, 2021, to mandatorily convert foreign exchange receipts as a temporary measure. This policy enforced the conversion of all repatriated export proceeds into Rupees within a stipulated timeframe, except for specified exempt payments. The exporters do not have the freedom to plan the conversion as per cash flow needs or choice of bank, often forcing conversion at an overvalued exchange rate, and placing further strain on our export operations.  

Revisiting Policies in a Changed Economic Landscape

It is crucial to recognize that the landscape of our foreign exchange reserves has significantly transformed and the continued enforcement of the mandatory conversion policy, considering the current positive reserves, is counterproductive. Persisting with this approach has placed exporters at a market disadvantage and forced them to operate on an unleveled playing field, eroding their competitiveness. It further acts as and is viewed as an anti-export policy measure.  Export-led recovery needs to be prioritized to ensure the inflow of vital export earnings and to encourage investments in the future.

Call for Policy Reevaluation

In light of these considerations, we urgently request the Central Bank to revisit and repeal the aforementioned Gazette, in alignment with the evolving economic context. This appeal is made with a vision towards fostering an environment that not only enables but actively supports the growth and competitiveness of Sri Lanka’s exports. By addressing these policy concerns, we can lay the groundwork for sustainable economic development, secure employment for our citizens, and ensure the continued prosperity of our nation.

We invite the Government of Sri Lanka to join us in taking decisive action towards these ends. Together, we can chart a course towards a brighter, more resilient future for the Sri Lankan export sector and, by extension, our economy at large.

Signed,

Exporters Association of Sri Lanka Joint Apparel Association Forum of Sri Lanka
National Chamber of Exporters Tea Exporters Association
Sri Lanka Association of Manufacturers and Exporters of Rubber Products

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Iran President to open Sri Lanka $514mn irrigation, hydro power project

MULTIPURPOSE: Uma Oya multipurpose development project is the largest since the end of the Mahaweli projects.

ECONOMYNEXT – Iran President Seyyed Ebrahim Raisi will inaugurate an irrigation and hydropower project that was designed and built by Iranian engineering firm and was also initially financed before international sanctions hit the project.

The Uma Oya (River) project will irrigate 4,500 acres of new agricultural land, generate 290 Gigawatt hours of electricity and also provide drinking water, a government statement said.

Sri Lanka had awarded an engineering, procurement, construction (EPC) to Iran’s FARAB engineering group to design and construct the 514 million dollar multipurpose project in 2010.

The project was funded until 2013 with a million US dollar credit from the Export Development Bank of Iran but international sanctions prevented the country from continuing financing, a government statement said.

The project continued with funding from Sri Lanka. Sri Lanka had since repaid 19.3 million dollars of the credit and 35.2 million remains outstanding.

The Uma Oya project has a 120MW of hydro power generators, which can generate 290 Giga Watt hours of energy.

Each year 145 million cubic metres of water will be taken from Uma Oya to the Kirindi Oya river valley after generating electricity in an underground power station.

It will irrigate 1,500 hectares of existing agricultural and 4,500 hectares of new land in the Moneragala district, where crops can be cultivated in both the Maha and Yala seasons.

About 39 million cubic meters of water will be used for drinking and industrial purposes.

Two reservoirs built at Dyraaba and Puhulpola in Uma Oya basin is connected by a 3.98 kilometre conveyance tunnel and water is taken through a 15.2 kilomtre headrace tunnel to an underground power station. A tailrace tunnel takes water from the power station to the Kirindi Oya basin.

The project was originally expected to be completed in 2015, but due to financing delays and later water leaking into the headrace tunnel and the Covid pandemic had delayed it. The project completion date was extended to March 31, 2024 and defect liability date to March 31, 2025.

(Colombo/April23/2024 – CORRECTED Iran President Seyyed Ebrahim Raisi will inaugurate an irrigation and hydropower project that was designed and built by Iranian engineering firm.)

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Sri Lanka state oligopoly allowed to import some black gram

ECONOMYNEXT – Sri Lanka has allowed the import of some black gram, by three state agencies, according to a gazette notice issued under the hand of President Ranil Wickremesinghe.

Import licenses will be given for 2,000 metric tonnes of the seed classified under HS Code 7312.31.22 and 29.

Sri Lanka State Trading Corporation, National Food Promotion Board and Sri Lanka Hadabima Authority is to be given import licenses.

Traders have resorted to smuggling some types of black gram (ulundu) mis classified as chick peas, to get over high taxes and import restrictions.

Tamil legislators have also protested the import controls, which they go into several key ethnic foods they consume. (Colombo/Apr23/2024)

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Sri Lanka Foreign Ministry consular division shifted to Battaramulla

ECONOMYNEXT – Sri Lanka’s Foreign Ministry said it consular division would be shifted to the Suhurupaya building in Subuthipura, Battaramulla from May 02, 2024.

Document authentication services provided by the Consular Affairs Division in Colombo will be suspended on 29 and 30 April 2024 held transfer the Electronic Document Authentication System (e-DAS) to the new premises at Suhurupaya.

Urgent applications for authentication to the Consular Division in Colombo, or any Regional Consular Offices by 4.15 pm on 26 April 2024, the Foreign Ministry said.

Regional Consular Offices in Jaffna, Trincomalee, Kurunegala, Kandy and Matara will remain open to accept applications.

Authenticated documents will be delivered to the applicants only on Thursday, 02 May 2024.

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