Exporters call for urgent exchange rate adjustment

Exporters say adjusting the exchange rate soon is vital for export industries to survive the global recession that may extend into 2010 and even longer. Loadstar, one of the biggest producers of solid tyres in the world and also one of the exporters hardest hit by the global downturn, noted that competitor countries have already made adjustments to face lower global demand.

“Competitor countries like India and China have responded to these problems by devaluing their currencies,” said the head of Loadstar, Dr Nihal Jinasena speaking at a seminar on the Global Financial Crisis, organised by the Association of Certified Professional Managers this week.
Dr Jinasena explained that export industries have traditionally absorbed Sri Lanka’s high rates of inflation through the rupee depreciation.

“Usually we have been able to accommodate cost increases and worker aspirations by utilising a constantly devaluing rupee. But this has not been the case over the past year or so. In fact the Sri Lankan rupee has strengthened against some currencies with disastrous effect on the export sector,” he said.

A large 15%- 20% devaluation of the Sri Lankan rupee is seen as essential at this point.
“It is now absolutely essential to have a 15% - 20% rupee devaluation for export industries to survive,” said Dr Jinasena. The garment industry, the country’s biggest exporter, also says the rupee must be allowed to depreciate to a “realistic” level immediately, if devaluation is not possible.

“If the rupee is allowed to reach Rs 118- Rs 120, this will address many of our problems. But we need this immediately, or we need a workable stimulus package,” said the head of the Joint Apparel Association Forum, Ajith Dias

Difficult choices
Economists too, noted that rupee depreciation is the most effective policy, in an open economy, to prevent a foreign exchange crisis. But this is difficult for Sri Lanka because of the large external debt (38% of GDP) and other “political-economy” factors.

“Depreciation will cut imports, increase exports, increase remittances and will bring the required adjustment in the economy to increase foreign exchange reserves. It will also give some room to maintain currently reduced interest rates,” said the head of the Institute of Policy Studies, Dr Saman Kelegama. “However, if the government has to consider foreign debt payments, political economy concerns and imports costs, we will have to look at other methods,” said Dr Kelegama.

But with the inflow of foreign funds set to drop further as the global recession worsens, using the limited foreign exchange reserves to prop up the rupee is not seen as the best alternative. “There will be a slow down of exports, a slow down of remittances, a slow down of foreign direct investments and a reduction in dollar liquidity to the government,” said Dr Harsha de Silva, lead economist of Lirne Asia, a local think tank. Given the global cash shortage, even borrowing money from outside may not be easy and servicing the country’s large external debt is going to be a real problem.

“New borrowing will be increasingly difficult and role-over of existing borrowing will also become increasingly difficult,” said Dr de Silva. The government’s present strategy of printing money to offset losses from foreign exchange, said Dr de Silva, will fuel inflation and increase pressure on the rupee.