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Sunday May 19th, 2024

Sri Lanka’s plantations lose Rs2.6bn in six months ahead of mandated wage

ECONOMYNEXT- Sri Lanka’s publicly traded plantations companies, growing commercial crops such as tea, which have been asked by the government to pay higher wages to workers have lost 2.6 billion rupees in the six months to September amid erratic weather and low commodity prices.

The plantations represented by the Planters Association of Ceylon are now negotiating with the government on how to pay a wage floor of 1,000 rupees a day mandated by the cabinet of ministers.

Government spokesmen have said a wage supplement from the Treasury or some other support may come.

Publicly listed plantation firms have posted losses totaling 2.26 billion rupees for the six months ending September, interim accounts show.

Revenue at regional plantation companies (RPCs) fell 3.6 percent to 28.47 billion rupees in the six months to September, while cost of sales grew 3.2 percent to 28.8 billion rupees, leading to losses at gross margin levels.

The plantations were privatized in the mid-1990s, after running large losses and the Treasury was forking out 400 million rupees a month to pay wages.

Despite the losses, plantation stock prices have risen 3.4 percent from end-March to end-December, although the entire stock market had risen 10.3 percent during the same period with elections and a general rise in business confidence.

Companies that produce tea, which is most labour intensive, usually suffer bigger losses than firms that have more rubber and oil palm. Oil palm is tax protected and tends to draw higher prices and is also less labour intensive.

Rising Costs

Excessive rains have pushed up operating costs in 2019.

“It has been a challenging year for all tea producers,” Planters’ Association of Ceylon Spokesperson Roshan Rajadurai told EconomyNext.

“Plantations were severely impacted by unfavorable weather. Excess rain brought with it additional costs like more chemicals to fight fungal growth, weeds and other problems like soil erosion.

“This condition made plucking harder since workers couldn’t pluck if the ground was too wet.”

Costs have meanwhile also been escalating amid constantly rising wages over the past decade.

Plantation wages grow every two years, following collective agreements signed between RPCs and labour unions.

Wages were last revised in 2019, when the wages were set at 700 rupees a day with a 50 rupee price supplement, increasing from 500 rupees, which had collectively increased costs by 9 billion rupees for all regional plantations companies.

However, the current government has forced a wage high a year earlier, after ordering the planters to hike the minimum wage to 1,000 rupees by March 01.

Research at the Institute of Policy Studies, a leading think tank, shows that under the 2019 wage agreement, plantation workers are paid 3,055 rupees below a ‘living wage’.

A living wage is defined as the ability to procure basic nutrition, water, housing, education, healthcare, and transportation.

Plantations workers usually reside inside an estate are given some additional facilities.

Wage Model

Rajadurei said there is a need to move from the current attendance-based model, in which workers are paid for attending 25 days even if they do not work a full day, to a productivity-based model.

He said RPCs private companies, plantations and trade unions had already agreed to migrate into a revenue cum productivity model by abandoning the daily wage model.

Other countries have already transitioned into productivity based models which gives better incentive to workers and boost productivity, he said.

“The bottom-line is, ours is an industry which is highly regulated on labour but we do not receive a compensating output from our labour force,” Rajadurai said.

“However, at the end of the day, producers remain unsatisfied as we are only price takers and have no other option but to sell at the auction price.”

Under longstanding rules Sri Lanka tea farms have to put up their produce for auction preventing the development of regional brands, some sector analysts have said.

Some tea companies are now selling limited quantities of tea directly, developing international and local marketing skills and brands.

In Sri Lanka workers pluck 16-18 kilogram’s a day, and if they pluck over 18 kilogrammes they are paid an ‘over-kilo’ rate to reward productivity.

Meanwhile in Kenya and India, pluckers average 36-60 kilogrammes a day, and get paid an over kilo rate for plucking above 24-40 kilogrammes.

Critics have blamed plantations for not innovating on production techniques to lower costs as well as downstream supply chains to boost revenue.

Price Takers

Tea prices goes through cyclical commodity price booms and busts, along with other food commodities sometimes linked to Federal Reserve monetary policy.

In Sri Lanka the rupee price may pick up due to currency depreciation. In 2018 the rupee fell from 153 to 182 to the US dollar amid liquidity injections.

A weak dollar tends to push up prices of commodities while tighter policy which contracts credit tends to push down commodity prices measured in nominal currency, analysts say.

The Colombo auction average had fallen from 637.75 rupees a kilo (4.16 US dollars) in January 2018, to 512 rupees a kilogram (2.88 dollars a kilo) by September 2019.

Prices have picked up to 588.8 rupees a kilo (3.17 dollars) by January 2020.

Rajadurei said buyers at the tea auction were not offering good prices for tea leaves, although the buyers were getting premium prices at the world market for their brands.

“We have to deal with the risks of climate change and rising wages, but we are price takers at the auction,” he said.

Tea Board Chairman Jayampathy Molligoda said it is “an integrated productivity and quality problem.”

“We have noticed a gradual decline in quality of the green leaf. The good leaf count, which has come down, needs to increase subsequently.”

Auction prices fall if the plucked leaves are of lower quality.

“If the quality of raw material continues to deteriorate, we are in trouble,” Molligoda said.

Planters in Sri Lanka believe that the ‘Ceylon Tea’ brand would ensure survival of the industry.

However, traditional tea brewing is facing severe competition globally with blended ready-to-drink beverages such as iced-tea and drinks with tea extracts gaining popularity.

Molligoda said Sri Lanka’s planters cannot hold on to a belief that the Ceylon Tea brand will continue to provide dividends.

“People are no longer interested in the country of origin as long as the quality of tea is maintained,” Molligoda said.

“It has come to a point where we have to ask all industry stakeholders to adhere to the parameters of raw material standards.”

“Regarding the price factor, yes there is some truth to the price taker mindset in the context of this commodity trap.”

“However, you cannot generalize because you do receive a higher price if the quality is maintained,” Molligoda said.

Kenya, which had overtaken Sri Lanka as the top tea exporter in the world with CTC (crush, tear, curl tea) is now attempting to break through into the orthodox black tea Sri Lanka is famous for.

Sri Lanka tea industry is now trying to prevent stakeholders from losing out through new plans and reforms maximizing quality and productivity in the product.

“The CTTA has given a roadmap and the Chamber has also contributed with plans, thereby we are hopeful for this new year to turn out better than the last,” Rajadurai said.

The new tea industry roadmap for 2030 envisions growing export earnings to 3.5 billion US dollars after fluctuating between 1-1.6 billion rupees between 2007 and 2018. (Colombo/Feb21/2020)

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Sri Lanka may have to depend on India or nuclear to reach low carbon target: researcher

DOUBLE WHAMMY: In Sri Lanka’s driest period, wind potential also goes down, a researcher and policy advocate says

ECONOMYNEXT – Sri Lanka will need to either connect to India or set up a nuclear power plant if the country is to reach its renewable energy targets due the country’s weather patterns, a researcher and policy advocate has said.

Sri Lanka has set ambitious goals for renewable electricity generation by 2030, apparently without much prior study or any costs being revealed when the target was set by President Gotabaya Rajapaksa.

Rohan Pethiyagoda, a taxonomist and researcher who had also been senior state officials involved in policy at one time said overall Sri Lanka used a large volume of biomass (firewood) for cooking.

“We need to recognize, of course, that about 60 percent of Sri Lankan households still use firewood as their primary fuel,” Pethiyagoda told a climate forum organized by Sri Lanka’s Ceylon Chamber of Commerce.

“Bless them, because they reduce our dependence on fossil fuels for cooking. Even the tea industry, one of our largest exports, uses biomass as its primary fuel for about 90 percent of its production.”

In the electricity sector, where the renewable lobby and other activists oppose coal on the basis of carbon emissions based on international trends, as well as dust, base load still has to be generated if thermal generators are replaced.

Solar power is available only for a few hours in daytime and it can also vary depending on cloud cover.

Hydro power (run of the river plants) is more stable but is dependent on rain. Large hydros with storage can be used for peaks, industry analysts say.

Wind is available throughout the day but can also be unstable. The problem of variability (non-firm energy) can be solved to some extent through ramping and battery storage at additional cost, analysts say.

A renewable plant in Poonakary with battery storage was priced at around 48 to 49 rupees (about 15 US cents) based on public statements.

Meanwhile Pethiyagoda said Sri Lanka’s weather patterns created an additional problem.

“We have this unusual thing for our renewable energy in Sri Lanka, that at the tail end of the northeast monsoon, from about December to April, we have a dry period in this country, which means that our hydro potential during those months goes down,” Pethiyagoda said.

“Now, as luck would have it, our wind potential goes down at the same time.”

As a result, Sri Lanka needs a reliable alternative to the current coal baseload.

“So for that reason especially, we need to look at either connecting to India’s grid in the long term or having a nuclear facility in Sri Lanka if we want to be low carbon. And of course, we need to replace our vehicle fleet.”

“And our base load can probably come from nuclear,” Pethiyagoda said.

“But whichever way we do it, the cheaper way would be for us to connect to India’s grid.

“Whichever way we do it, we’re looking at an investment of about 40 billion dollars. And then we have the problem of looking at how wind and solar will behave.”

It was not clear what the 40 billion dollar investments would be made up of.

Sri Lanka’s external debt as at December 2024, including unpaid principal after default was 37.3 billion US dollars.

In 2021 when the 70 percent target was unveiled in President Gotabaya Rajapaksa’s election manifesto power engineers said a 53 percent energy share planned for 2030 in a general plan at the time was was equal to that of Germany.

Pushing up the share to 70 percent would require billions of dollars of extra investments, they said.

Related

Sri Lanka generation plan renewable power share for 2030 equal to Germany: CEB engineers

After the central bank cut rates and triggered an external default however, Sri Lanka growth, and power demand in the next few years is expected to be lower than before extreme macro-economic policy.

Related Sri Lanka to invest US$11bn by 2030 to meet renewable target

In 2023, the CEB said about 11 billion US dollars would be needed to meet the 70 percent target. (Colombo/June19/2024)

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Sri Lanka President discusses Starlink with Elon Musk

ECONOMYNEXT – Sri Lanka President Ranil Wickremesinghe has discussed connecting the island to the Starlink satellite system with its founder Elon Musk, his office said in a statement.

President Wickremesinghe has met Musk at a World Water Forum High-Level Meeting in Indonesia.

President Wickremesinghe discussed “the implementation of Starlink in Sri Lanka & committed to fast-tracking the application process to connect SL with the global Starlink network,” the statement said.

Starlink is a low earth orbit satellite network, connected to Musk’s SpaceX group. (Colombo/Jun19/2024)

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Sri Lanka’s CEB March 2024 profits Rs84bn with capital gain, fx strength

ECONOMYNEXT – Sri Lanka’s state-run Ceylon Electricity Board group has reported profits of 86 billion rupees with the help of 25.9 billion rupees of capital gains from a transfer of shares, interim accounts show.

The rupee also appreciated in the quarter which keeps imported fuel prices low.

As a standalone entity, the Ceylon Electricity Board, made profits of 84.6 billion rupees in the March quarter.

CEB’s revenues rose 38.5 percent to 167 billion rupees in the March 2024 quarter, while cost of sales fell 26.1 percent to 105.0 billion rupees giving gross profits of 62.7 billion rupees.

The CEB also reported 30.6 billion rupees of other incomes and gains in the March quarter, up from 3.1 billion rupees last year.

Other Income and Gains

The utility said it made a 25.9 billion rupee capital gain from transferring LTL Holdings shares to West Coast Power an IPP in which other entities have a majority holding.

In the quarter the rupee also appreciated.

A rupee appreciation will help reduce the carrying cost of dollar loans and also reduce the cost of imported thermal fuels and maintenance costs of spares.

The central bank allowed Sri Lanka’s exchange rate to appreciate from 324.40 rupees in December 2023 to 300.17 on March 2024 amid deflationary policy and weak private credit allowing imported fuel costs also to fall.

Especially after 1978, after rate cuts drove the country into balance of payments crises, the central bank had collected reserves with free market interest rates, but has not usually allowed the exchange rate to re-appreciate despite generating a BOP surplus with deflationary policy.

Un-anchored Bad Money

Before 1978, when an apparently doctrinally foxed International Monetary Fund abandoned both external and specie anchors simultaneously after the Fed closed its gold window triggering the Great Inflation period, Sri Lanka also did not depreciate its currency, analysts have pointed out.

Related Why the IMF is hated now and is backing bad money in Sri Lanka and Latin America

Since it was set up in 1951, the central bank has printed money under various dual anchor conflicting Saltwater-Cambridge ideologies (re-financing rural credit, sterilizing outflows, potential output targeting, yield curve targeting) to create forex shortages and currency crises and started to go the IMF from the mid-1960s.

From 1978, after the IMF’s second amendment to its Articles denied the central bank a credible external and domestic anchor simultaneously, the currency stated to depreciate steeply.

The government was therefore unable to balance its budget and state enterprises were also unable to balance their budgets running large losses whenever the rupee fell and energy prices went up.

After abandoning its external and specie anchor the central bank followed a anchor conflicting regime involving money supply targeting without a floating exchange rate in the 1980s.

The ideology was rejected in toto by Singapore, Malaysia, Hong Kong, Thailand and China.

Since the end of a civil war macro-economists have followed inflation targeting without a floating exchange combined with extreme macro-economic policy to target potential output, eventually driving the country into external default.

Budgets went haywire in the early 1980s as the rupee fell, despite then President JR Jayawardene cutting subsidies and ending price controls (administered prices) two years earlier, in reforms that Singapore’s economic architect and one-time Finance Minister Goh Keng Swee said were “economic reforms which most people had considered politically impossible.”

Goh who set up a currency board in Singapore rejecting Cambridge-Saltwater ideology, warned JR not to destroy the rupee.

“Exchange rate policies involve many complicated technical issues which I do want to discuss here,” he said.

“On balance, the disadvantage of a depreciating rupee will, I believe, outweigh the advantages. Most of the products whose prices are administered are ether wholly imported or contain a high import content. 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 ware largely determined by the rupee price of imported oil and spare parts. Fertilizers are also mostly imported.”

At the time Sri Lanka had hydro-electricity.

Capital Injections

Some of the CEB’s dollar loans were been taken over by the central government after the steepest currency collapse in the history of the central bank in 2022 and external default.

The CEB’s contributed capital as at end March 2024 was 991.4 billion rupees up from 865.1 billion rupees.

With the March quarter profits with some financial engineering involving the asset sale and the government equity injection, the CEB’s group accumulated losses reduced to 456 billion rupees from 575 billion rupees.

The CEB ran large losses as the regulator failed to raise tariffs as macro-economists printed money to target potential output over the past decade.

From 2011 to 2022 the rupee fell from 113 to 370 to the US dollars as the central bank ran un-anchored monetary policy the regulator only raised prices in 2022.

Energy Minister Kanchana Wijesekera said the last price cut was also made possible due to rupee appreciation.

With no potential output targeting (no inflationary open market operations), the country has started to recover from the stability that has been provided up to now amid weak private investment credit.

Sri Lanka’s private credit is now starting to recover.

Based on past trends of using statistics instead of classical economic principles (cutting current current interest rates with inflationary open market operations of a money monopoly based on historical inflation rates under ‘data driven monetary policy’ without regard to domestic credit) analysts have warned of a return to monetary instability under potential output targeting. (Colombo/May19/2024)

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