News
Dollar crunch throws supply chains, businesses into disarray
The worsening forex crisis is severely disrupting supply chains, especially of small and medium businesses, and damaging their relationship with foreign suppliers, several sectors lament.
“Many banks are asking for collateral in rupees to the values of Letters of Credit we want to open,” said Kavinda Makalanda, Managing Director of Schering Life Sciences, a pharmaceutical company.
He said he felt the request was unreasonable, especially during a severe economic downturn.
Pharmaceutical companies generally get three-month credit periods, he noted. The bank’s new condition meant that businesses would have to block out the money for purchases several months before the goods even come to Sri Lanka, he said. “We have to lock money in for our LCs for the duration of the credit period and the bank delays often prolong this to at least six months.”
He expressed fears that the situation could only worsen as the country’s foreign reserves deplete.
The dollar-deficit-driven payment delays are also significantly impairing suppliers’ relationships with local importers. As Sri Lanka is not a major market for pharmaceuticals, many multinationals had pulled out, Mr. Makalanda noted. “Suppliers are losing interest in sending us the goods because of inconsistent payments.”
Foreign exporters are outright refusing to supply anymore goods to Lankan importers.
Essential Food Commodities Importers and Traders Association President Gnanam Rajendran told the Sunday Times that almost 2,500 containers were stuck in ports because of pending LCs. “We owe millions in payments that have now backlogged for more than four months, simply because the dollars aren’t there,” he said.
Agitated suppliers were, therefore, refusing to send goods on credit any more. “We don’t know how we’ll manage any further. We owe them money for goods bought on credit. We owe them money for the containers in the port, and we need to pay for future imports.”
Mr. Rajendran said the credit line Sri Lanka was negotiating with India would help but only for the import of Indian goods such as sugar, chick peas, chilies, fennel and cumin.
He noted that artificial shortages caused by panic purchasing had also made the situation worse. “Exporters aren’t sending goods, so when people stock up for months the daily wage earners will end up suffering.”
While companies based in Sri Lanka struggled to survive amid the dollar crisis, those with branches and parent companies overseas had managed to overcome the situation over the past few months. “Our parent company is in Dubai and they have assisted us,” said Kalinga Wijesekara, Head of Marketing and Communications at Serendib Flour Mills.
He noted that despite this temporary measure that helped the company to bypass the dollar crunch, it still owed millions to the parent company.
Serendib primarily raises LCs through a bank but resorted to seek the parent company’s help as a secondary measure.
The company, one of the two main suppliers of wheat flour and wheat-flour products in Sri Lanka, needs a shipment every month. It says it has enough stocks till the end of March. “This doesn’t mean we will stop supplying by then,” he assured. “We will continue seeing to the food security of the country but the continued dollar shortage will mean that we have to get extremely creative with how we pay for the supplies.”
Mr. Wijesekara said the company had, for the past few months, oversupplied beyond its regular market share of 25 percent. The increased demand was most likely due to the price hikes in other staple carbohydrates like rice.
He said the industry had held multiple discussions with the trade minister, the finance secretary and various other government authorities. “They promised they would assist us, but nothing had come about from those discussions” he said, adding that they were still hopeful.
While importers complain of difficulties they go through due to the dollar shortage, Central Bank Governor Ajith Nivard Cabraal denies the existence of a “forex crisis”.
“Even though there are claims that there is a “forex crisis”, Sri Lanka imported goods to the value of USD 21 billion last year, and to the value of around USD 2 billion in January 2022,” he told the Sunday Times. He said that such high import values did not indicate a “crisis”.
He admitted, however, that when there was a high demand for imports, it could sometimes lead to temporary mismatches of forex inflows and outflows. “Those mismatches are almost always resolved over a period of time, and with tourist arrivals improving and remittances expected to perform better these temporary mismatches are likely to abate in due course,” he said.
Responding to small and medium enterprises’ complaint that the banks were making unfair collateral demands, the Governor said risk management was an integral function of banking and banks had the freedom to decide on collateral when providing facilities to clients.
In the meantime, the Central Bank claims it has urged banks to ensure that LCs pertaining to fuel, medicine, food, coal, gas and raw materials for local industries are supported.
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