By Dilshani Samaraweera
Local export industries are urgently calling on the government to allow the rupee to depreciate to a competitive level saying the rupee is over-valued and needs to depreciate against international currencies for Sri Lankan exports to remain competitive.
Exporters point out that production costs are increasing, while the over-valued rupee is reducing export earnings. The global economic slowdown is also reducing exports and export incomes. Trying to prop-up the rupee under these conditions is seen as a pointless exercise.
“You need foreign exchange to be able to defend the rupee. But when the rupee is over-valued the demand for our goods will reduce. Anyway, exports are reducing because of the global situation. When exports reduce, the foreign exchange inflows reduce. So what are you going to defend the rupee with? You need foreign exchange to come in, to be able to defend the rupee,” said Managing Director, Samson Rajarata Tiles, Dr Bandula Perera, speaking at a press conference organised by the Sri Lanka Ceramic Council this week.
The Exporters Association also said the rupee is “seriously” over-valued. “We feel the rupee is seriously over-valued. The British pound, a few months ago, was Rs 212, now it is around Rs 160. The euro was around Rs 160 and is now around Rs 140. This has caused a large drop in income, but our exports are not increasing to compensate for the loss. Exports have actually reduced. So this is a very serous situation,” said the Vice Chairman of the Exporters Association of Sri Lanka, Lasantha Wickremasekera.
The present rupee depreciation against the dollar is seen as inadequate. “The US dollar was allowed to depreciate but the depreciation is not adequate. The dollar should be around Rs 120 – Rs 125, at least,” said Mr Wickremasekera.
Exporters say the rupee should be allowed to depreciate to a realistic level at this point, before various export sectors go into the red, and the country loses its handful of export-oriented manufacturing sectors.
Garments unravelling
The country’s largest export sector, the garment industry, says the rupee needs to depreciate by at least 20% for the industry to survive regional competition. “The rupee should have been depreciating for the last 6 months, at least. By now, the garment trade needs about 20% depreciation of the rupee,” said the head of the Joint Apparel Association Forum, Ajith Dias.
The garment sector says factories of all sizes are in trouble with even very large factories facing financial difficulties. “Other major global exporters like India and China have given stimulus packages to their industries. But at this point, all we ask for is good macro management. That is, control the inflation and to correct the exchange rate. If we can correct these two areas it will help us regain competitiveness in international markets,” said Mr Dias.
Tea in trouble
Tea exporters said the over-valued rupee is one reason for the tea market crash and also for its slow recovery. “The rupee should be at least Rs 120 to the US dollar.
The over-valued rupee is one reason why the tea markets crashed, because many of the major tea buying countries have depreciated their own currencies. Which means they have to pay more to buy Sri Lankan tea. So they adopted a wait-and-see policy,” said Chairman of the Tea Exporters Association, Jayantha Keragala.
Tea exporters said the market has improved after government intervention but the industry is still not out of the red. “The wait-and-see attitude of buyers has relaxed a bit. Over the last few weeks tea sales have improved. But the global financial situation is such that we are not out of the danger yet,” said Mr Keragala.Bringing the exchange rate to a realistic level is seen as a requirement for sector recovery.
Ceramics cracking up
The ceramic export sector says it is cracking up under the combined pressure of increasing production costs and the loss of income because of the over-valued rupee and reducing export orders.
“In the past, high inflation has been mitigated by the depreciation of the rupee. But from late 2007, while inflation increased, the rupee depreciation reduced and the rupee even started to appreciate,” said the Chairman of Dankotuwa Porcelain, Sunil Wijesinha.
A tile producer, Lanka Walltiles, says it lost Rs 30 million over the last 3 months, on the exchange rate alone.
Tableware producer, Noritake, said it loses Rs 10 million for every one rupee appreciation against the dollar.
"We lost 50 million rupees in foreign exchange. If there is a one rupee appreciation against the dollar we will lose 10 million rupees," said Managing Director of Noritake, K Nakanishi.
Sri Lanka has also not reduced its fuel prices in line with global price reductions. This means the ceramic sector, which is energy intensive, consuming large amounts of fuel, cannot cut costs to compete with other lower-cost countries. With exports reducing, local ceramic manufacturers are asking the government to allow the rupee to depreciate and to cut fuel prices.
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