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Wednesday December 7th, 2022

Sri Lanka tea exporters urged to cut credit to buyers

ECONOMYNEXT- Sri Lanka’s tea exporters can reduce the current high interest costs by reducing the credit periods given to buyers, Central Bank Governor Nandalal Weerasinghe said, while the industry officials said credit was a key reason for high Ceylon Tea prices.

Sri Lankas’s central bank has allowed rates to go up in April 2022 to prevent possible hyper-inflation and further collapses of the rupee which fell from 200 to 360 to the US dollar after two years of money printing to mis-target market interest rates.

Now lending rates are above 25 percent and 12-moth inflation to September was 68.2 percent by the most widely watched Colombo Consumer Price Index with prices in the non-traded sector yet to go up.

With the rupee falling and dollar tea prices also up, the trade required about 9 billion rupees in financing for an auction or around 450 billion rupees a year, which was treble the volume last year, outgoing Ceylon Tea Traders Association Chairman Jayantha Karunaratne said.

In rupee terms tea prices were up around 150 percent, he said.

“The sharp increase in lending rates is a major cost to the industry,” Karunaratne said. Exporters have to go for working capital and when you have to borrow three times more at a very expensive interest cost it is a burden on the business.

“Furthermore the sharp increase in interest costs has stopped infrastructure development of the industry.

“Factories and exporters are not that keen to invest, borrowing at these prices. This has a negative impact on the development of the tea industry. ”

Governor Weerasinghe said high interest rates were needed for some time given the need to bring down inflation which was running above 60 percent.

Exporters were given 180 days to bring down export proceeds by the central bank.

“That does not mean you have to give 180 days credit to your buyers abroad when the country is in a balance of payments crisis, when our banks are in a situation when they cannot open an LC for the other side to import without advance payment here,” Governor Weerasinghe said.

“One can bring down the cost of finance by bringing down the period that you bring your proceeds to this country and convert that to rupees.”

Sri Lanka’s nominal interest rates tend to jump suddenly as previously suppressed rates are suddenly corrected when balance of payments troubles emerge.

High interest rates usually encourage exporters to convert and invest any savings domestically to get a higher yield, helping in the correction of the balance of payments, especially if the rupee is floated for a time.

Reserve currency central banks which also mis-targeted rates blaming supply bottlenecks and transient inflation driving up global commodity prices are now hiking rates after firing commodity and inflation bubble.

Usually when reserve currency central banks hike rates, commodity prices – including tea – falls.

Sri Lanka’s tea auction prices tend to be higher than other tea producing countries partly due to credit, tea industry officials said.

Branded tea exporters for example were bound by contracts with foreign supermarkets to give credit, Ceylon Tea Board Chairman Niraj de Mel explained.

Sri Lanka’s tea auction prices were about 2 dollars above other countries, Karunarantne said.

Some of Sri Lanka’s low grown teas, which enjoy the highest prices are bought by developing or emerging countries in Central Asia, Middle East and also Turkey which are burdened by some of the worst central banks in the world with high nominal rates and sometime difficulties in remitting foreign exchange.

Sri Lanka’s tea prices are high also due to fast shipping times as well as credit, which reduced the total costs of importing and selling Ceylon Tea, industry officials have said, compared to other auctions which are not located near ports where mainlines call several times a week.

Sri Lankan tea exporters were also well versed in selling to countries in turmoil and hit by sanctions without formal pre-shipment credit, Karunaratne said. (Colombo/Oct30/2022)

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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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Crisis-hit Sri Lanka sees recovery in cruise ship tourism from zero

ECONOMYNEXT – Seventeen cruise ships are scheduled to arrive in Sri Lanka next year with
Queen Mary 2, one of the largest and popular ships, Colombo’s harbor master said, as the island nation is looking for alternative avenues to boost its faltered tourism sector.

The rise is expected to bring thousands of high end tourists with higher spending capacity after two years. The island nation saw a record high 54 ships in 2019, rising from the previous year’s 42, Nimal Silva, Colombo Port Harbor Master said.

“The 2019 was one of the best years and in 2020 there were more than 60 scheduled vessels to
call but with COVID pandemic all hell broke loose,” Silva told EconomyNext.

Fourteen cruise ships are scheduled to call from January-May next year and another three are scheduled to arrive in Colombo in November, when the peak tourism season begins.

Cruise tourism cycle begins in Sri Lanka from October to May with a dip during the monsoon

Sri Lanka welcomed two cruise ships in November after almost two years.

Three ships are scheduled to arrive in December and Azamara Quest, carrying at least 722 tourists, arrived in Colombo on December 3 and is now heading to Hambantota.

On December 18, Le Champion carrying 264 will arrive in Colombo and depart to Mumbai and the third vessel, Silver Spirit will arrive in Colombo on December 23 carrying up to 648 passengers.

There are two scheduled in January, one in February, and four in March next year, according to the harbormaster.

“Next year more ships could schedule, so far these are the confirmed ones now,” he said.

This also generates income for the port and the prices are charged according to the size of the

Silva said the first medium sized-cruise vessel, 229 meters long, generated about 14,000 dollars
for docking in the port for a day.

He said Queen Mary 2, a 325 meter long ship and one of the largest cruise ships in the world, is also
scheduled to call at Colombo in February. It can carry up to 3200 passengers.

Silva said almost all the ships that were scheduled have arrived on the island and therefore, he is
confident all the ships including Queen Mary 2 will arrive in Sri Lanka.

“Only one ship has been canceled thus far. There are no last minute cancellations if there were some they would have informed us by now,” Silva said. (Colombo/Dec07/2022)

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