Export or perish
View(s):Last week one of my friends from Delhi University – Dr. Mihir Pandey, was making arrangements with the SriLankan Airlines office in Delhi to purchase a few tickets for the Delhi-Colombo flight. Since he had also kept me in the loop of their email correspondence, I also happened to receive their mails and, occasionally I glanced at them.
In one of the emails from the airline office to Mihir, I found the instructions saying that the customer should check with the office the exact amount on the day of paying for the ticket because “tax amount keeps changing on a daily basis.”
What this meant was that you cannot book the flight on an agreed airfare and, you will know the exact price only when you go to purchase it! Therefore, Mihir received the advice that the price he had to pay for the ticket will be different from what he was informed earlier at the point of making the reservation.
The passengers should be aware that the prices keep changing on “daily basis”. This customer information must be received by the airline passengers all over the world.
If there is anything now certain in this economy, it is no doubt nothing other than “uncertainty”. Uncertainty hurts the businesses and through that the economy and it is an economy which has already been performing poorly for many years now.
Better strategy
The above problem is caused by actually not the change in tax rate, but the problem of rupee depreciation on a “daily basis” now.
While agreeing on that explanation, my question is why doesn’t the government or the industry make any effort to maintain reasonably stable prices at least on a short-term basis? I am sure it would be a better business strategy than letting the industry get hurt by uncertain, external shocks. I believe that it would improve the competitive vigour of the industry that is operating on a global scale.
If it is the government which has to adopt business strategies for one of its state- owned enterprise (SOE), I understand this is not the right time for that from a political point of view. There are much more important businesses for those which represent the government than figuring out strategies to improve business competitiveness of a state enterprise.
If the economic repercussion had been more important than political or even personal mileages, the economy would have not been in a dire state as it has been now.
My focus is, however, on the uncertainty created by the rupee depreciation and, not the business strategies of the industry.
More a solution than a problem
Depreciation of the rupee is not the problem in the first place, but the market-prescribed “solution” to a problem which the government allowed to worsen.
The problem was that foreign exchange payments have been growing above earnings. If the government took it seriously and into account, at least over the past 10 years, it had enough opportunities to do so – put the export drive on the right path.
Bangladesh is one of our neighbouring countries which is still poorer than Sri Lanka. In 2004, the value of exports of goods and services from Bangladesh was the same as that of Sri Lanka – US$7 billion. By 2017, Sri Lanka exported $19 billion worth exports while Bangladesh had $38 billion.
Vietnam adopted liberalisation policy reforms in 1990 – much later than Sri Lanka and, it is also still poorer than Sri Lanka. Twenty five years ago in 1992, both countries were exporting almost the same amount of exports worth $2.5 billion. Last year, while Sri Lanka exported $19 billion worth exports, Vietnam exported $227 billion worth exports.
A manufacturer works at an assembly line of Vingroup's Vsmart phone in Hai Phong, Vietnam December 4, 2018. REUTERS/Kham,. Vietnam has made giant strides in attracting foreign investment and exports unlike Sri Lanka.
That is where the problem is – insufficient export performance. As I included exports of both goods and services, the airline seats that are sold to foreigners are also included. Service exports include foreign exchange earnings from any service sold in the international market: Tourism, port and aviation services, IT and communication, health and education, banking and finance and many others.
Whither exports
If there is a higher rate of economic growth it should be consistent with better export performance. What I mean by this is that if we have a higher rate of economic growth without better export performance, we have reasonable ground to suspect it. For sure, it will not last long!
Primarily it is the private investment that will guarantee a sustainable export growth, because government contribution to exports anywhere in the world remains rather small.
Private investment comes from two sources — domestic sources and foreign sources. A few decades ago the developing world had placed emphasis on domestic sources as their policies promoted and matched it and as there was no much foreign investment flows in the world. But today we have a different focus.
We know investment from domestic savings collected little by little and cent by cent in 200 years, can be accomplished in 20 years with foreign investment in achieving a major export drive. Foreign investment flows have grown at an exponential rate.
But the issue is that foreign investment does not flow everywhere. It comes to those countries which provide them with “better” investment locations only. This is the second failure of the government; even if after achieving a military success and established peace in the country, the government has failed to generate investment inflows.
Double punch
When the government continued to fail in achieving and sustaining a rapid export drive, the importance of volatile foreign exchange inflows became unwarrantedly dominant in influencing the exchange rate. Thus, the exchange rate is vulnerable to any shock within the country or outside the country. We are saddled with both issues.
The first is the tight monetary policy stance of the US and led to many other countries draining volatile foreign exchange from both the stock market and the government security markets. As a result, for a few months now the exchange rate began to depreciate rapidly – it was the “prescription” of the market to remedy the exchange rate issue.
The second was the knockout punch: The political chaos that was initiated by the President’s move on October 26 and, a series of afterward tremors accompanied by that. This political chaos has so far produced a series of adverse effects on even the existing foreign exchange inflows and outflows; the inflows of foreign exchange got further weakened and, the outflows aggravated; thus, the rupee is bound to depreciate further at a faster rate.
Overdosing antibiotics
The purpose of the market-prescribed solution is to make foreign payments more expensive and, actually if the problem gets worse they would be ruthlessly more expensive. It might even go out of control just like what recently happened in Venezuela.
Someone can boast saying that it can be stopped overnight: It is true. With an antibiotic dose a day it can be stopped by asking the Central Bank to release its foreign exchange reserves to the market.
Overdose of antibiotics can even be more dangerous than the market solution, as the Central Bank needs its $8 billion foreign reserves to pay the forthcoming foreign debts over the next month and next year, and further. The Central Bank cannot do miracles, after it exhausts its foreign exchange reserves. We will end up with another issue. While the exchange rate issue continues to remain, on the top of that there will be a problem of paying foreign debt.
(The writer is a Professor of Economics at the University of Colombo. He can be reached at sirimal@econ.cmb.ac.lk)