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The exchange rate debate goes on...
Exporters ask exchange rate to be relaxed further

A leading exporter said it was absolutely necessary to allow the rupee to depreciate by at least 15 percent if the country’s exports are to remain competitive and survive the global recession.

Many export companies will not be able to pull through a long period of problems they are facing today and I expect there to be a large number of well known export companies going into bankruptcy or serious financial difficulties," said Dr. T. Nihal Jinasena, Chairman Jinasena Ltd, whose subsidiary Loadstar (Pvt) Ltd won the Gold Award for the Most Outstanding Exporter of the National Chamber of Exporters for 2007.

Dr. Jinasena said countries competing with Sri Lanka’s exports had devalued (a specific reduction as determined by policy makers) their currencies by significant levels, as much as 20 percent in India, while the Sri Lankan rupee was kept stable, more or less.

"Our exchange rate has shown tiny movement in this direction (depreciation- devaluing through market forces, not a specific reduction), but the adjustments are not anywhere near the magnitude that is required to keep our hands and heads above the water in a competitive world," he said.

When high inflation pushes up domestic costs, particularly wages, exporters cannot easily pass on these costs through price increments.

Dr. Jinasena said a depreciating rupee had in the past made it possible for exporters to absorb these costs which also took care of the aspirations of the workforce who wanted their wages to increase in line with the cost of living.

"But this has not been the case over the past one and a half years where we have seen the rupee strengthen against some of the other major trading currencies," he said.

While inflation is on the downward trend, Dr. Jinasena said there are no signs to suggest that government has control over this important factor. He attributes the fall in global commodity prices as the reason why the inflation rate continues to fall.

Dr. Jinasena said companies have the following options to deal with the problems caused by the global financial crisis; cutting down inventories, operational expenditures, reducing wastage, cutting down on capital expenditure and reducing staff.

"Reducing the workforce is the first thing we usually look at but this can be counter productive and the most dangerous route to take with archaic labour laws making it difficult for us to respond to a global crisis that has been thrust upon us.

"But this is not an easy option either as there is a human element involved and workers have not contributed to the global financial crisis, they did not cause it. Laying-off workers will actually make things worse for the economy," Dr. Jinasena said.

Director General of the Employers’ Federation of Ceylon Ravi Peiris told the seminar that labour laws will have to be reformed so as to encourage productivity and that the legal framework must be moulded to prepare for job losses and temporary lay-offs as the manufacturing sector is bound to face turbulent times ahead.

The Chairman of the Planters’ Association of Ceylon C. D. V. Perera said the relief package to bailout the industry from the effects of the global financial crisis was taking too long to materialize.

"The relief package unfortunately, seems to be negotiating a long corner," Perera said.

"The government must not only make promises but deliver," he said.

"The relief package needs to be delivered fast, the benefits must filter down and delays avoided. There is no point in administering a blood transfusion after the patient dies."

Perera said that Sri Lanka’s major competitors for tea had devalued their currencies to counter the effects of the global recession which hampered the competitiveness of Sri Lanka’s teas.

"Kenya, India and Indonesia have devalued their currencies by 26, 30 and 12 percent respectively while the rupee had only depreciated around 2 to 3 percent," he said.

Perera said the industry was still experiencing escalating production costs which are highest among the tea growing countries.

He said banks are unaware of the methodology in restructuring loans granted to modernize factories.

The Chairman of Hayleys Group, N. G. Wickremeratne said Sri Lanka’s did not enter the global financial tsunami from a strong position as inflation and high interest rates had eroded margins long before the crisis.

With inflation higher than most of our competitor nations, exporters were not in a position to pass on the additional costs (labour, raw material and utility costs) on to buyers.

"Historically, the exchange rate had followed the trend of the rate of inflation. However, in the past two to three years we have seen the rupee remain stable while inflation moved up.

"This has resulted in exporters losing about 2 to 3 percent of their margins each year," Wickremeratne said, addressing another seminar the next day on the same theme.

"Relaxing the exchange rate would help but if this is not an option then we must look at what else we must do," he said.

Dr. Saman Kelegama, Executive Director of the Institute of Policy Studies said relaxing the exchange rate was the most effective policy in an open economy for confronting the global crisis and preventing a foreign exchange crisis.

"But undertaking a depreciation is not an easy decision," he cautioned.

"The fiscal position is vulnerable to exchange rate depreciation with a large external debt, which is 38 percent of GDP, being the major factor along with concerns that the cost of living too could be affected which is making authorities go slow with depreciating the rupee," he said.

He said, however, that allowing the rupee to depreciate will cut imports, increase exports and remittances and bring the required adjustments in the economy to increase foreign exchange reserves.

Dr. Kelegama said the Central Bank’s Road Map for Monetary Policy for 2009 and Beyond says that foreign reserves can be boosted without having to depreciate the exchange rate by way of entering into currency swaps with other Central Bank’s and attracting remittances from the Diaspora through bonus interests and tax concessions on RFC and NRFC accounts and opening up treasury securities.

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