The Central Bank Governor Ajith Nivard Cabraal says the proposed US$ 150 million support facility for exporters in the event GSP Plus facilities are withdrawn is not being considered by the government, although the offer still stands.

Earlier this year the government said it would allocate US$ 150 million to support exporters to the European Union in the event the GSP Plus trade concessions were withdrawn based on the island’s human rights record, the government vehemently opposing any investigations by the European Union considering it an affront to the country’s sovereignty.

Cabraal speaking to the press last week said the government was no longer considering the US$ 150 million support facility because under present conditions exporters were making better returns as a result of the depreciation of the rupee against the euro and according to the Central Bank, exporters would still be able to maintain better margins even without the seven percent tax concession for exports to Europe.

"The proposed US$ 150 million concession is no longer needed but the offer still stands," Cabraal said.

Cabraal presented the Central Bank’s argument that the recent depreciation of the rupee against the Euro provided ample space for exporters to make returns without GSP Plus.

In January 2009, a Euro 10 export price brought in Rs. 1,469.3 at a Euro/Rupee exchange rate of 146.93.

If GSP Plus is withdrawn, the export price would decline by 7 percent (because the buyer would still want to pay Euro 10) and exporters would therefore earn Euro 9.34.

The Euro has appreciated by 18.5 percent since last January and the Euro/Rupee exchange rate is now 172.09. So when converted to rupees, an exporter would earn Rs. 1,607.31 (9.34 x 172.09) which is higher than what he would have received in January despite losing GSP Plus.

"In effect therefore, because of the depreciation of the rupee against the Euro, there is no loss in rupee terms to the exporter if we were to lose GSP Plus today," Cabraal said.

Questions remain as to how exporters would fare if the euro was to depreciate against the rupee. The Central Bank’s analysis is based on present conditions but no one, not even the Central Bank, can predict which way the exchange rate would go.

Although Central Bank intervention continues to keep the rupee/dollar exchange rate stable, Cabraal’s answer as to whether the Central Bank would intervene to stabilise the rupee/euro exchange rate so that exporters continue to benefit despite a possible GSP Plus removal was, "Why can’t we?"

"Even if the rupee was to appreciate against the euro we have enough space to deal with it," Cabraal said.

Assistant Governor of the Central Bank Dr. Nandalal Weerasinghe said that Sri Lanka’s export competitors Bangladesh and India have appreciated their currencies against major trading currencies.

"Even if we lose GSP Plus our exporters are still in a better position," he said.

The government last December proposed a US$ 150 million relief package to all exporters to the EU if GSP Plus concessions are lost.

However, the package and how it would work was not announced.

"The government is looking at the final cost element and how the package can be used to ease the costs, this is something we will have to justify and convince our trading partners," Sumith Abeysinghe, former Secretary to the Treasury said in November of 2008.

The government also hoped to invest in redeemable shares, which was another option considered last year in delivering the package.

Exporters to the EU say their margins are under constant pressure and maintain prices was difficult, therefore the gains made by the recent depreciation of the rupee against the euro would not be sustainable when buyers bid down prices.

"I was in the private sector for thirty years and proper margins are never disclosed, I never did. We should not get carried away (by the complaints that margins are under pressure," Cabraal said.