Sri Lanka’s current inflation levels are not only surprising but ‘frightening’, a top company executive says.
“Getting over 20 percent is getting into dangerous territory. One gets very worried when inflation hits this rate but the monetary authorities have said they expect a possible slowdown," Hayleys Chairman N.G. (Tanky) Wickremeratne said in an exclusive interview with The Sunday Times FT last week
"However, it's bad news for everyone if inflation goes up. What has been there and what has been feeding into our cost structure cannot be reversed," he explained, adding that the productive base in Sri Lanka is slowly becoming uncompetitive.
More importantly, Mr. Wickremeratne said the exchange rate has depreciated to the extent that Sri Lanka's inflation has been higher than its competitors and trading partners. "If the exchange rate is kept down, you are killing us softly," he said. Even Sri Lankan manufacturers servicing the local market would be facing the same difficulties. "Any national production is also being affected."
Rising energy and fuel costs
With current oil and energy prices soaring, Mr. Wickremeratne said the government should not resort to subsidies. "I am not a big supporter of subsidies," he said. "Prices will look after itself." He said Hayleys anticipated the increase in oil prices based on the trends over the recent past. He added that it was probably fair because the Ceylon Petroleum Corporation (CPC) and the Ceylon Electricity Board (CEB) are in the red but that there is some element of subsidies involved. The domestic, commercial and industrial sectors are being given tariffs and petroleum products with some implicit subsidies which are offset by higher prices, he said. "Largely, there has been a general increase in energy products and we ought to have known that these prices were coming up."
However, Mr. Wickremeratne said energy products and electricity tariffs are much higher in Sri Lanka than regional competitors including India, Malaysia and Thailand who have been subsidizing their energy products for a long time. The end result is that producers in those countries who manufacture products that compete with Sri Lanka are at an advantage. He said it is important that prices are comparable with increases for regional competitors. He also said reforms are needed in the local energy generation and petroleum sectors. "Reforms are due because we are paying the price." Mr. Wickremeratne added that the government should also reduce its budget and exercise fiscal prudence.
He also commented on the GSP+ concessions whose future extension is still uncertain. Mr. Wickremeratne said that for Hayleys and its export business, GSP+ concessions are important but much less than most. For Hayleys apparel sector, Hayleys MGT, it's very important he said, adding that it will be difficult for Sri Lanka if the concessions are not extended.
He said Hayleys is moving out of consumer durables. He added that the resort sector which has been an important part of the economy has been affected by various political and macroeconomic conditions but that it is not the right time to move out. "We have a commitment to it," he said. "We don't actively manage the resort but we are supportive of what they are doing and we hope things will pick up."
Mr. Wickremeratne said the company has a fairly robust investment programme which has been financed from internal generation. However, he said Hayleys has come into a period of time when their borrowings which were also required to finance some investments are becoming a heavy burden. "We are trying to reduce that impact."
Mr. Wickremeratne said Hayleys has big growth areas in activated carbon, the hand protection business, transportation, textiles and activated carbon and the company is focusing on restructuring these areas that have huge potential. "We are trying to focus our energy and grow these businesses to our potential. Sometimes, we don't have the investment capital necessary for them and there is a cost to borrowing as opposed to two or three years." He said businesses can grow if the exchange rate remains largely unchanged.
"What we have today is that we cannot take local cost inflation which is more than what the world is accepting or more than what our competitors are having," he said. "It is a real cost increase. With energy prices, we must be able to move on. If there is a domestic increase in prices and domestic prices go up by five percent more than manufacturing in Thailand and China and Malaysia, for example rubber gloves or activated carbon, this cost increase cannot be passed on. That is the reality of the global market. A five percent increase in your product is a huge increase and a huge difference.".