President Mahinda Rajapaksa has ruled out a devaluation of the Sri Lanka rupee to levels of currencies in other countries, because of the impact on import costs.“At a meeting on Monday, the President explained that it is not possible to devalue the rupee to the levels that other countries have devalued their currencies, because of the impact on the import bill,” said the Chairman of the Tea Board, Lalith Hettiarachchi.
A major worry for exporters is that currency devaluation by buyers of Sri Lankan goods and also competitors, would out-price Sri Lanka from international markets. To counter this threat, exporters wanted the government to allow the rupee to depreciate or even devalue the rupee.
But other industry sectors noted that devaluing the rupee would also hurt import dependent industries, on top of putting up prices of consumer goods.
“Industries also have to import raw materials and machinery. So if the rupee is devalued it may benefit some export sectors but it will hurt others,” said the President of the Federations of Chambers of Commerce and Industries (FCCISL), Kosala Wickramanayake.
Meanwhile, analysts noted that the demand for dollars itself, has eased, reducing pressure on the rupee. “Imports have reduced because of recent taxes and oil and commodity prices have also reduced.
So the demand for dollars has reduced. Because of this, the rupee, at this point, may not be as over-valued as it was. We expect the rupee to go up to about Rs 118 to the US dollar but not immediately,” said a market analyst.
Industries appeared happy with the government’s economic stimulus package, announced this week, but are waiting for details before venturing any strong opinions.
Meanwhile, the Ministry of Finance said there are no immediate moves to introduce new taxes to cover the costs of the reportedly Rs 16 billion stimulus package. “So far, outside of the taxes proposed in the budget, there are no plans for new taxes because of the economic stimulus package,” said senior tax advisor, Ministry of Finance, R P L Weerasinghe.
The Finance Ministry says it is looking at ways to reduce taxes to help industries hit by global recession and to encourage inflows of foreign exchange. “We are considering exempting tea factories from the NBL (Nation Building Levy). We are also trying to increase foreign exchange inflows. So we are considering exempting even foreign earners from NBL,” said Mr Weerasinghe.
Money, money every
where but no credit
While the government dished out billions in a stimulus package, exporters say they are suffering from an acute credit shortage. “Because of the global financial crisis, buyers want extended credit from our exporters. But banks are now even more cautions about giving credit and even when they do lend, the interest rates are prohibitive,” said the vice chairman of the Exporters Association of Sri Lanka, Lasantha Wickremasekera. To ease the situation, industries are hoping the government can bring down lending rates.
“The interest rates are so high companies cannot afford credit. Everyone is affected. So we are hoping that because the rate of inflation has reduced, interest rates will also reduce soon,” said FCCISL’s Mr Wickramanayake.
Tea prices to improve
The tea sector is hoping the start of the new year would be better than the end of the old year. The Colombo Tea Auctions will reopen for business on January 5, 6, 2009.
“We are hoping for better prices in the new year, because output has been low and prices were showing signs of improving towards the close of 2008,” said Mr Hettiarchchi from the Tea Board.
The garment industry says it’s hoping to sustain 2008 levels of exports in 2009, supported by the government stimulus package. “We expect total export earnings for 2008, to be around US$ 3.2 billion. So given the external global situation our ambition is to at least maintain this in 2009,” said the head of the Joint Apparel Association Forum (JAAF), Ajith Dias.
Meanwhile trade unions say the difficult times are rubbing off on the country’s working people. One immediate outcome is the expansion of the informal sector because Sri Lanka’s strong labour laws are making it difficult for companies to lay off workers. Trade unions say this is already happening in the garment sector.
“Outsourcing to the informal sector is increasing fast. We can see this particularly in the garment sector,” said the joint secretary of the Free Trade Zones and General Services Union, Anton Marcus.
To retain profits, factories are adopting a low-cost, high-output, model. This means getting more work out of workers, but the labour laws limit the number of over time hours. So factories are shifting business to the informal sector, where labour laws are not enforced, say trade unions.