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Monday June 3rd, 2024

Sri Lanka exporters protest rupee appreciation, forced conversion rules

THE PEG: Changes in Net Domestic Assets, which are not parallel to Reserve Money (the note-issue) points to a pegged exchange rate not a float. NDA moving in opposite direction to Net Foreign Assets is also a tell-tale sign of a soft-peg. When NDA falls due to deflationary policy, a pegged note-issue bank can decide the exchange rate through its purchase price (exchange rate policy).

ECONOMYNEXT – Sri Lanka’s export associations have protested the recent sharp appreciation of the rupee saying forex conversion rules have been forced on them and some costs are not falling in line with rupee gains, leading to a loss of cost competitiveness.

Sri Lanka’s central bank is operating a de facto pegged exchange rate where the agency’s domestic assets are being reduced against dollar purchases (reversing ‘money printing’), triggering a balance of payments surplus, allowing the exchange rate to be appreciated if the agency wishes, analysts have shown.

RELATED: Why is Sri Lanka’s rupee appreciating?

There is however a widespread belief that suspending debt repayments have helped appreciate the rupee, though the financial account turned into a deficit in the last quarter of 2022, just as monetary stability was restored allowing out payments to be made and reserves to be collected.

In the five quarters ending in December 2023, the external financial account was 1.35 billion dollars in deficit, before adjusting for errors and omissions, from an earlier surplus, official data show.

Currency depreciation helps widen exporter margins in countries with monetary instability as there is a delay in wages catching up, triggering social unrest and outmigration and – if energy and water tariffs are not raised regularly – through losses in state utilities.

But if wages are raised and any domestically purchased inputs, including items like domestic transport, do not immediately fall with rupee appreciation, exporter margins may be squeezed.

Sri Lanka electricity prices were cut this year and interest rates are falling.

The central bank had allowed the rupee to appreciate from 360 to the US dollar to 300 now, after a surrender rule imposed on commercial banks to force-sell dollars to the central bank against new rupees while taking dollars out of the interbank forex market, was lifted in March 2023.

However, a surrender rule imposed on exporters to sell to banks by the central bank (which does not create new rupees nor take money away dollars from the forex market), remains in place, constraining the ability to delay or sell dollars as they wish at the best price.

The Exporters Association of Sri Lanka, Joint Apparel Association Forum of Sri Lanka, the National Chamber of Exporters, Tea Exporters Association, Sri Lanka Association of Manufacturers and Exporters of Rubber Products say the rupee appreciation is harming them.

Tea exporters who buy at an auction in rupees, are also squeezed, if the exchange rate changes between the time materials are bought and tea is blended and packaged and finally shipped, unless all dollars are sold forward, analysts say.

The central bank had earlier denied a request to conduct tea auctions in US dollars, using a money monopoly given to economic bureaucrats by legislators.

The central bank had also blocked the exporters’ dollars from being moved from bank to bank.

“Today, we stand united in urging the authorities to address the pressing challenges posed by the appreciation of the Sri Lankan Rupee (LKR) against the US Dollar (USD), further compounded by restrictions on the movement of foreign currency between commercial banks, and the mandatory conversion of export earnings into Sri Lankan Rupees,” the exporter associations said.

The association said the exchange rate, which peaked at over 364 per USD in May 2022, led to increased operational costs, compelling them to adjust their cost base in line with higher inflation experienced in the country.  

“The rapid appreciation of the Rupee, with rates falling below Rs. 300 per USD since March 19th, has placed us in a precarious position, threatening the sustainability of our businesses and the livelihoods of those we employ,” the statement said.

“Despite the appreciation of the Rupee, the cost of living remains high, continuing to level pressure on worker wages.”

The exporters did not say by which percentage wages were raised, but analysts say progressive income taxes imposed by the International Monetary Fund as part of ‘revenue based fiscal consolidation’ where government cost-cutting is abandoned, also force exporters to raise salaries beyond rupee depreciation to maintain staff living standards.

“It is crucial to recognize that the landscape of our foreign exchange reserves has significantly transformed and the continued enforcement of the mandatory conversion policy, considering the current positive reserves, is counterproductive,” the exporters said.

“Persisting with this approach has placed exporters at a market disadvantage and forced them to operate on an unleveled playing field, eroding their competitiveness.

“It further acts as and is viewed as an anti-export policy measure.”

Sri Lanka’s rupee, as well as most other unstable countries, started to depreciate their currencies from 1978 in particular, after the Second Amendment to the IMF’s articles, generating high levels of inflation and social unrest while the best performing East Asian export powerhouses either ran actual currency boards or mostly fixed exchange rates (which some classical economists call exchange rate fixity) providing domestic stability through external anchoring of money.

The full statement is reproduced below:

Urgent Appeal from Sri Lankan Exporters on Rupee Appreciation and Policy Concerns

As a collective body of exporters, we have been at the forefront of sustaining employment and ensuring a steady flow of foreign exchange, even amidst the most severe economic downturns faced by our nation. Our membership covers the majority of merchandise exports, which account for some 13% of Sri Lanka’s GDP. Today, we stand united in urging the authorities to address the pressing challenges posed by the appreciation of the Sri Lankan Rupee (LKR) against the US Dollar (USD), further compounded by restrictions on the movement of foreign currency between commercial banks, and the mandatory conversion of export earnings into Sri Lankan Rupees.

Impact of Rupee Appreciation

The appreciating Rupee has had a multifaceted negative impact on our business.  A stronger Rupee means our goods become more expensive for international buyers, directly affecting our competitiveness in the global market. The exchange rate peaked at over Rs. 364 per USD in May 2022, which led to increased operational costs, compelling us to adjust our cost base in line with higher inflation experienced in the country.  

The rapid appreciation of the Rupee, with rates falling below Rs. 300 per USD since March 19th, has placed us in a precarious position, threatening the sustainability of our businesses and the livelihoods of those we employ. Despite the appreciation of the Rupee, the cost of living remains high, continuing to level pressure on worker wages.

The timing of the Rupee’s appreciation coincides with weak global demand for the majority of our merchandise exports and severe competition from competing countries.  Factors such as global inflation and geopolitical tensions have continued to affect sentiment and purchasing power in the primary markets of our merchandise exports.

Background to the appreciation of the Sri Lankan Rupee

The painful economic stabilization process implemented with significant monetary and fiscal policy measures by way of policy rate, inflation, and tax adjustments; import controls; and debt service suspension, has had the desired impact to constrain economic activity and, in turn, adjust and constrain import demand. At the same time the collective efforts of the Government, export community, tourism industry and remittances have continued to have a positive inflow and enhance foreign reserve positions to more comfortable levels.  

This is in the backdrop of the extraordinary circumstances when the debt servicing by the country remains at a standstill, which is a temporary situation.    

During the height of the crisis, the Central Bank of Sri Lanka implemented a policy for exporters, by Gazette No.2251/42, dated October 28, 2021, to mandatorily convert foreign exchange receipts as a temporary measure. This policy enforced the conversion of all repatriated export proceeds into Rupees within a stipulated timeframe, except for specified exempt payments. The exporters do not have the freedom to plan the conversion as per cash flow needs or choice of bank, often forcing conversion at an overvalued exchange rate, and placing further strain on our export operations.  

Revisiting Policies in a Changed Economic Landscape

It is crucial to recognize that the landscape of our foreign exchange reserves has significantly transformed and the continued enforcement of the mandatory conversion policy, considering the current positive reserves, is counterproductive. Persisting with this approach has placed exporters at a market disadvantage and forced them to operate on an unleveled playing field, eroding their competitiveness. It further acts as and is viewed as an anti-export policy measure.  Export-led recovery needs to be prioritized to ensure the inflow of vital export earnings and to encourage investments in the future.

Call for Policy Reevaluation

In light of these considerations, we urgently request the Central Bank to revisit and repeal the aforementioned Gazette, in alignment with the evolving economic context. This appeal is made with a vision towards fostering an environment that not only enables but actively supports the growth and competitiveness of Sri Lanka’s exports. By addressing these policy concerns, we can lay the groundwork for sustainable economic development, secure employment for our citizens, and ensure the continued prosperity of our nation.

We invite the Government of Sri Lanka to join us in taking decisive action towards these ends. Together, we can chart a course towards a brighter, more resilient future for the Sri Lankan export sector and, by extension, our economy at large.

Signed,

Exporters Association of Sri Lanka Joint Apparel Association Forum of Sri Lanka
National Chamber of Exporters Tea Exporters Association
Sri Lanka Association of Manufacturers and Exporters of Rubber Products

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UNP gen secy defends call for postponing Sri Lanka poll, claims opposition silent

The UNP party headquarters in Pitakotte/EconomyNext

ECONOMYNEXT — United National Party (UNP) General Secretary Palitha Range Bandara has defended his call for postponing Sri Lanka’s presidential election by two years, claiming that his proposal was not undemocratic nor unconstitutional.

Speaking to reporters at the UNP headquarters Monday June 03 morning, Bandara also claimed that neither opposition leader Sajith Premadasa nor National People’s Power (NPP) leader Anura Kumara Dissanayake have spoken against his proposal.

“I have made no statement that’s undemocratic. My statement was in line with provisions of the constitution,” the former UNP parliamentarian said.

He quoted Section 86 of Chapter XIII of the constitution which says: “The President may, subject to the provisions of Article 85, submit to the People by Referendum any matter which in the opinion of the President is of national importance.”

Sections 87.1, 87.2 also elaborates on the matter and describes the parliament’s role, said Bandara.

“I spoke of a referendum and parliament’s duty. Neither of this is antidemocratic or unconstitutional. As per the constitution, priority should be given to ensuring people’s right to life,” he said.

“Some parties may be against what I proposed. They may criticse me. But what I ask them is to come to one position as political parties and make a statement on whether they’re ready to continue the ongoing economic programme,” he added.

Bandara claimed that, though thee has been much criticism of his proposal for a postponement of the presidential election, President Wickremesinghe’s rivals Premadasa and Dissanayake have yet to remark on the matter.

“I suggested that [Premadasa] make this proposal in parliament and for [Dissanayake] to second it. But I don’t see that either Premadasa nor Dissanayake is opposed to it. To date, I have not seen nor heard either of them utter a word against this. I believe they have no objection to my proposal which was made for the betterment of the country,” he said. (Colombo/Jun03/2024)

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Support for AKD drops to SP’s level while RW makes gains, Sri Lanka poll shows

ECONOMYNEXT — Support for leftist candidate Anura Kumara Dissanayake dropped six percentage points to 39 percent in April, levelling with opposition leader Sajith Premadasa, while support for President Ranil Wickremesinghe increased three points to 13 percent in a presidential election voting intent poll.

The Sri Lanka Opinion Tracker Survey (SLOTS) conducted by the Institute for Health Policy showed that, according to its Multilevel Regression and Poststratification (MRP) provisional estimates of presidential election voting intent, National People’s Power (NPP) leader Dissanayake and main opposition Samagi Jana Balawegaya (SJB) lader Premadasa were now neck and neck while United National Party (UNP) leader Wickremesinghe had made some gains. A generic candidate for the ruling Sri Lanka Podujana Peramuna (SLPP) had the support of 9 percent of the people surveyed, up 1 percentage point from March.

These estimates use the January 2024 revision of the IHP’s SLOTS MRP model. The latest update is for all adults and uses data from 17,134 interviews conducted from October 2021 to 19 May 2024, including 444 interviews during April 2024. According to the institute, 100 bootstraps were run to capture model uncertainty. Margins of error are assessed as 1–4% for April.

SLOTS polling director and IHP director Ravi Rannan-Eliya was quoted as saying: “The SLOTS polling in April suffered from a lower response rate owing to the New Year holidays, and we think this may have skewed the sample in favour of SJB supporters. The early May interviews partly compensated for this, and it’s possible that our June interviews may result in further revisions
to our model estimates.

Rannan-Eliya also noted that a number of other internet polls may be overestimating support for the NPP or its main constituent party the Janatha Vimukthi Peramuna (JVP) by about 10 percent.

“We’ve been asked about some other recent internet polls that showed much higher levels of support for the NPP/JVP. We think these over-estimate NPP/JVP support. SLOTS routinely collects data from all respondents on whether they have internet access, and whether they are willing to participate in an internet survey. These data show that NPP/JVP supporters are far more likely to have internet access and even more likely to be willing to respond to internet surveys, and this difference remains even after controlling for past voting behaviour. Our data indicates internet polls may overestimate NPP/JVP support by about 10 percent, and for this kind of reason we have previously decided that the time is not right to do internet polling,” he said.

According to the IHP, its SLOTS MRP methodology first estimates the relationship between a wide variety of characteristics about respondents and their opinions – in this case, ‘If there was a Presidential Election today, who would you vote for?’– in a multilevel statistical model that also smooths month to month changes. It then uses a large data file that is calibrated to the national population to predict voting intent in each month since October 2021, according to what the multilevel model says about their probability of voting for various parties (‘post-stratification’) at each point in time. The multilevel model was estimated 100 times to reflect underlying uncertainties in the model and to obtain margins of error, the institute said. (Colombo/Jun03/2024)

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Sri Lanka’s Expolanka Holdings PLC extends exit offer

ECONOMYNEXT – Expolanka Holdings PLC has said it is extending its Exit Offer till 4.30 PM on Monday, 10th June 2024.

SG Holdings, the parent company of Expolanka Holdings Plc, announced on March 1 it was delisting the company from the Colombo Stock Exchange.

Some minority shareholders have filed a case challenging the delisting of Expolanka Holdings PLC before the Court of Appeal of Sri Lanka.

The court is scheduled to hold a further hearing on June 6.

“By reason of the aforesaid and by reason of the many requests received by Foreign shareholders and representatives of deceased shareholders requesting additional time, the Company has taken the decision to extend the Exit Offer till 4.30 PM on Monday, 10th June 2024,” Expolanka said in a stock exchange filing.

“The Payments for the Offer received from 4th June 2024 to 10th June 2024 hall be made on or before, 28th June 2024.

“The timelines as set out in the original Exit Offer too shall continue to remain.” (Colombo/June3/2024)

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