News
Resurgent dollar, perilous public finances, put businesses in a bind
The US dollar vaulted to its highest level in a year this week, putting further strain on emerging markets currencies including the local rupee that had been under heavy pressure, aided in no small measure by Sri Lanka’s perilous public finances amid profligate spending on luxuries for politicians and yet more vanity projects.
For the moment, it is the remittances of Sri Lankans from Hong Kong to Dubai and everywhere in between that is saving the rupee and the country, which has been sinking deeper into a debt trap. Sri Lanka faces debt repayments of US$4.28 billion just next year.
The rupee has tumbled by more than 4 percent against the US dollar so far this year alone, financial data from Reuters show.
A widely used measure of the greenback, the dollar index, reached a high of 95.56 on Thursday.
The dollar index measures the greenback against a basket of six currencies. It has gained by about 6 percent in the past three months, data show.
Sri Lanka’s economy has slowed to crawl and debts have increased to 82 percent of GDP.
The dollar’s rise is hurting economies with alarming public finances such as Sri Lanka, which is unable to withstand external shocks.
Fitch Ratings has warned that a further rise in the dollar could trigger credit rating downgrades.
Rising US interest rates could further batter Sri Lanka.
Amid this backdrop, local importers are crying wolf and seeking relief.
Among them is the pharmaceutical trade, which says it is also constrained by a government-imposed price ceiling and is demanding price increases.
But some exporters see the advantages of a strong dollar.
Shyam Sathasivam, president of Sri Lanka Chamber of the Pharmaceutical Industry, told the Sunday Times that the strong dollar together with the price-freeze imposed by the Consumer Affairs Authority four years ago was causing cash problems for pharmacies and distributors. He said importers face losses when settling their payments at the end of the credit period.
“With this inflexible law on drug prices, no pharmacy, distributor, or importer can raise prices without the CAA’s permission. Our requests for a revision have gone without response for some time,” Mr Sathasivam said.
A dollar is trading at Rs 160.07. Only three months ago, it was at Rs 155. Mr Sathasivam said this creates uncertainty and cash flow issues. He cited this as one reason that many drugs are out of stock at pharmacies.
“Pharmacies are unable to make payments on time and restock drugs. Distributors also face issues due to rising fuel prices. We are working with the Health Ministry to make a revision to this gazette, and have a more flexible price control that allows for price revisions every six months or so, when external factors impact,” Mr. Sathasivam said.
“The revision in the price control should place an emphasis on quality as well,” he added.
Ahmed Riyaz, the chairman of Harcourts Ltd., one of the top medium-scale pharmaceutical importers and distributors, claimed a loss of over Rs 170 million in the past six months. “With the ever-increasing dollar rate, it is impossible for medium-scale dealers to operate. Other costs in the pharmaceutical industry have risen too since the government took office. Drug registration costs have increased by 500%,” Mr Riyaz said.
“I have a shipment to clear on July 30, which I ordered when the dollar was at Rs. 157. I will be facing a huge loss on this,” he said.
Other sectors are also hurting from the strong dollar.
Sri Lanka Cement Corporation, chairman, Riyaz Salley, said imports have been halted since February.
Mr Salley said two domestic plants were shut down in 1977 and 1990 respectively. “We have been importing since then. But now there is no support from the government,” he said. “The dollar appreciating at this rate is a sign of poor economic management.”
Meanwhile, Lanka Sathosa claims it is not affected as such. Dr Faraz Hameed, the chief executive of Sathosa, said essential items are not imported, rather they are purchased from the Pettah wholesalers through tenders.
The price of potatoes and big onions have increased slightly at Sathosa due to the trickle down of import costs, but Dr Hameed said it was marginal. “We sell potatoes at Rs 110 a kilo, this is a lot less than the retail market price,” he said.
He said that while the dollar was rising against the rupee, the world market price for products like sugar has gone down. “This offsets the currency disadvantage. Therefore, we are able to sell sugar at the low price of Rs 96 per kilo.”
As far as non-essential products are concerned, Dr Hameed said multi-nationals have not yet increased prices.
Wayamba Traders, one of the main suppliers of essential food items to Sathosa and the domestic market, also faced a Rs 20 million loss, chairman S.H. Sadiqeen claimed.
Exporters, on the other hand, benefit from the weak rupee.
Mr Siraj Ali, 50, an exporter of fruit, vegetables and condiments to the Middle East said he is able to enjoy the cost advantage as he buys from local farmers. “This gives Sri Lankan exporters a competitive advantage in the foreign market,” he said.
Meanwhile, the State Minister of National Policies and Economic Affairs, Dr. Harsha De Silva, said the government maintained its position of not tampering with exchange rates too much.
“The central bank steps in to dampen sharp fluctuations, but apart from that we let the market determine the rate,” Dr De Silva said.
“It is important to let demand and supply work without too much interference as that sets the price at a value where people pay the full price of the product’s worth. Overvaluing currency leads to over-use of products. And, the over-use of some products have negative consequences, for example fuel. However, we subsidise essentials to make it accessible to the people,” the minister said.
He also said that if the government sold its foreign reserves as a temporary measure to strengthen the rupee, it would deplete Sri Lanka’s reserves.
“I have stressed repeatedly that the long term solution is to expand our export industry. With the present situation of a weak rupee, we have a competitive advantage in terms of price. However, the goal should be to move up the ladder and compete on quality and technology. A thriving export industry means people’s income increase, and then, the weight of import costs will not be felt as much, it will be proportionately lower. Moreover, increasing exports, directly leads to a strong currency,” he said. “We are tweaking the Inland Revenue Act to make export-oriented investments more lucrative in Sri Lanka.”