Ups and downs of devaluation

Exporters naturally applauded a move they had been long clamouring for while on the other side importers were bracing themselves for a hard hit.

Central Bank economists say that the country's Balance of Payments (BOP) will show a surplus this year with increased export earning and privatization proceeds and the Gross Domestic Product (GDP) will also improve on account of higher dollar earnings. 

Consumers who has sustained a round of utility price hikes over the last two months are resigned to another round of consumer price increases on account of increased prices of imported raw materials and finished goods

Most analysts and economist have welcomed the move as a long overdue one.

Mr. Mangala Boyagoda

Mr. Boyagoda said that the change permitted commercial banks to fix the exchange rate based on demand and supply within the new spread of 5 per cent with the cap and the floor of Central Bank acting as benchmarks for maximum and minimum rates. Since the Central Bank will also not announce middle rates on a daily basis, this new move has effectively removed the uncertainty and volatility in the forex market and allowed the rupee to trade freely within the new spread.

Importers and exporters should be aware that the new rates relevant to their trading are not based on a cap and a floor of the Central Bank. All rates will be now based on inter-bank spot rates, he said. The inter-bank spot rate will be based on demand and supply within the new 5% spread, he explaained..Importers now have the opportunity to bring the foreign currency they held outside the country and take advantage of the current high exchange rates prevailing he added.

It is also expected that the banking sector will release more dollars into the market form huge reserves they were holding due to uncertainty in the market. .

Mr. Arjuna Mahendran

Echoing his comments Mr. Arjuna Mahendran, Director Head of Economic Research, South Asia, SG Securities (Singapore) Pte. Ltd. who was in Colombo last week said that the dollar has appreciated against major currencies in recent weeks. He pointed out that the central bank admits to a need to 'correct for any loss of competitiveness which Sri Lanka exports may have experienced', in a news release on the devaluation. 

"To ascribe this loss to a strengthening dollar is strange at this point in time since the dollar had strengthened continually against many export competitor Asian nations' currencies after the 97 crisis and at that time the rupee only adjusted marginally.

This raises the question of whether export competitors' currencies, especially Asian nations such as Indonesia and Thailand, have an adequate representation in the central banks basket of currencies against which it evaluates the competitiveness of the rupee."

"Anyhow, any measure at this stage to boost exports is welcome. The next thing to be done is to re-balance the structure of BOI incentives towards exports and away from services and infrastructure projects for the domestic market," he added.

Importers hit

Chairman, Import section Ceylon Chamber of Commerce, Mr. Anton Abeysekera told the Sunday Times Business that the devaluation will create a snowballing effect on the final landing price of goods.

Since we import the majority of our raw material requirement the devaluation, will increase the price of locally produced goods.

Vehicle importers the lubricant industry and the electrical appliances industry said they could not shake off the impact of the rising dollar. Unlike importers of essential food and consumer items, they may find it difficult to pass on the entire burden to the consumer.

Asst. Marketing Manager of Toyota Lanka, Mr. Janak Badugama said as a importer of Brand new Japanese vehicles will invariably suffer because the yen is also expected to appreciate against the rupee. This will result in an increase in sale prices and lead to a drop in sales."

The Finance Manager of Caltex Lubricants Mr. Anura Perera said the current Rupee devaluation will have a unfavourable effect the lubricant industry due to increased cost of raw materials that are imported. Part of the burden will invariably be put on the customer since the company cannot absorb the full burden of increased costs in order to stay viable in the industry.

" The growth of the lubricant industry will suffer and profitability of the industry will be at the lowest, " he added.

Jardine Fleming says...

De-facto devaluation of Rupee 

Sector/stock impacts

Devaluation would have significant positive impacts on all banks, as revaluation of bank holdings denominated in foreign currency would lead to an appreciation of the nominal value of such holdings. The impact on various banks would differ with the value of foreign currency holdings held by the respective banks. Banks that are 'long' (net positive position) on the dollar in their dealing positions will benefit more, while banks that are 'short' (net negative position) would lose out. The general trend for Sri-Lankan banks is to be long on the dollar.

Hotels - positive

As the hotel room rates are fixed in USD, hotels will have a positive impact (by way of increased revenue in Rupee terms) from the depreciation. The hotels will be in a better position to absorb the 12.5% GST imposed from April 2000, which was a concern to the hotels. However, the depreciation will not offset the negative sentiments prevailing about the country and the depreciation will thus, have no impact on tourist arrivals for the year 2000.

Plantations sector

South Korean liners top list at Colombo port

By Gunapala Ranasinghe

These investments and continued goodwill are attributed to the results achieved by the high-powered delegation, led by Her Excellency Chandrika Bandaranaike Kumaratunga, to Korea a few years ago.

The carriers calling at Colombo are Hyundai Marine Corp, Hanjin Shipping and Choyang Line. Two more Korean shipping lines, namely Dongnama Shipping and Korean Maritime Transport Corp, have shown great interest in commencing their liner operations to Colombo by the end of this year.

S H Rhee, President Dongnama Shipping, who is a well known personality in global shipping circles, sent a team to explore the possibility of appointing an agency company to represent the line to Sri Lanka. Korean Transport Maritime Corp, another Korean shipping giant, also sent their experts last month to locate a strategic partner to represent them in Sri Lanka.

Maritime Holdings win top award

Maritime Holdings has been committed to exemplary corporate governance practices including corporate planning, policy framework and transparency in corporate reporting. In the past few years the company has launched numerous continuous improvement initiatives (CI) towards a culture of total excellence. 

The company has an emphasis on improving both internal information systems to facilitate result-oriented decision making and the quality of reporting to shareholders and interested parties. The outlook of this year's annual report is a clear result of this commitment. 

The first report which was published in 1996/97 received a certificate of compliance which was followed with a merit certificate for their report of 1997/98. The company firmly believes that this series of awards is a clear result of its drive towards continuously improved quality and professionalism in all areas of service delivery, customer focus and team building. This effort has secured yet another accolade for the group bringing them ever closer to realising the 'maritime vision.'

Container trades begin to recover

United Arab Shipping Company's (UASC) regional director, Waleed Al-Dawood, comments: "I believe the situation this year will be much better, as a result of the forces of supply and demand. There is for the moment relatively little increase in capacity, the strong demand we have seen westbound is solid, while now also the Europe to Mid-East sector cargo volumes are improving." 

His comments are echoed by Jim Robb, trade manager for Andrew Weir Shipping, which participates in the weekly EPIC service between Europe and the Mid-East Gulf. 

"We are very upbeat, and there is a lot more confidence now than there was this time last year. There was a fear of a millennium bust rather than millennium boom, but if anything, cargo volumes so far this year are exceeding expectations," says Robb.

Robb anticipates a seven to eight per cent increase in volumes in 2000 eastbound. The increases in the oil price, and the devaluation of the Euro, are likely to be key drivers behind this trend, he suggests.

For much of the past 12 months, freight rates on the North Europe/Mid-East Gulf route have been depressed, falling to extremely low levels from late 1998 to mid-1999.

Asia's economic and currency crises in 1998 triggered a slump in European exports to Asia, and a concurrent surge in shipments into Europe. 

Consequently most shipping lines found their large container vessels sailing well below capacity eastbound, while volumes increased significantly westbound. As a result of this trend, carriers attempted to secure at least a marginal contribution towards the cost of repositioning empty containers back to Asia by targeting European cargo bound for the Mid-East. 

This lead to a serious oversupply of slots into the Mid-East, a situation that was further aggravated by the development of new, larger ships on the trade by some players, including UASC for example.

Over the course of the recent months, there has been a hardening of rates within the Europe/Mid-East Gulf and Europe/red Sea trades. On the Europe/Mid-East Gulf trades, for instance, freight rates being quoted in February 2000 were around 20 to 25 per cent higher than they were the previous February. 

Again this is to the large extent a reflection of the fact that container traffic between Europe and Asia is stronger, and vessels are sailing fuller, thereby reducing the need for line to 'dump' excess capacity to the Mid-East.

Further rate increases are almost certain, as the fundamental conditions seem to exist to support lies rate restoration efforts. Last October, the Europe Middle East Rate Agreement (EMERA) implemented an official rate restoration of US$150 per 20ft and US$250 for each 40ft dry freight container. A further increase of US$200 per container is due from April 2000.

Not all of this increase will stick, but most carriers in the trade are optimistic that they will be able to collect a large proportion of the general rate increase. Certainly, the ability of lines to collect their increased freight charges should be enhanced by the prevailing trends in the Europe/Asia sector, and by increased cargo flows into the Mid-East itself.

Focus on the economy-June

The vulnerability of the economy 

By. Nimal Sanderatne 

This, in a context when war expenditures are also adding a further strain on the balance of payments. 

The fundamental reasons for this lie in the structure of the economy and the large trade dependence. Sri Lanka has been a trade dependent economy for over a century. In 1950 our trade dependence( imports and exports as a percentage of GDP) amounted to 70 per cent. 

The extent of the trade dependence has not changed much. In 1999 our trade dependence was as high as 67 per cent.While the extent of our trade dependence has not changed much its nature has. In 1950, we were dependent on a narrow range of agricultural crops for our export incomes and spent a large proportion of it on imports of food.Today it is different. Our exports are both agricultural and industrial and our imports of food accounted for only 11 per cent of our imports in 1999. 

It was the import of intermediate goods which accounted for the lion share of our imports, 51 per cent of our imports to be exact. 

Though the character of the trade dependence has changed, the vulnerability to international fluctuations of prices and global economic conditions has not changed. Despite significant structural changes in the economy we are perhaps as much vulnerable today as we were in the immediate post independence era.In the words of Premachandra Atukorala and Sisira Jayasuriya: 

"The structural transformation...had been achieved by placing the economy in a new and more precarious posture of trade dependence. The reduced importance of imports in final goods masked greater dependence on imported intermediate and investment goods" 

Last year, only 21 per cent of our import bill was on consumer items. Of these about one half was on food imports. In other words total food imports constituted only around 11 per cent of the total import bill. Raw material imports accounted for 51 per cent and machinery and investment goods accounted for 27 per cent of total import expenditure. 

The economic developments of this year, as well as the experience of last year, illustrate the vulnerability or "more precarious posture of trade dependence" of the Sri Lankan economy. Last year we were faced with both a decline in our industrial exports as well as decreased earnings from our main agricultural exports. Our industrial export earnings declined from US $3607 million in 1998 to US$ 3543 million last year.This is generally attributed to the after effects of the Asian crisis.

There has been a recovery in industrial exports this year, with a growth of 23 per cent in the first four months of this year compared to the dismal performance in the same period last year.

Yet this growth in industrial export earnings is insufficient to compensate for the increased expenditure in intermediate or raw material imports of this year. 

While the increase in industrial export earnings are US$ 226 million, the increase in intermediate import value is US$ 606 million. In fact the value of our intermediate imports exceeded the value of our total industrial exports by about 4 per cent in the first four months of the year. This is perhaps an unprecedented situation.

Our intermediate imports at US$ 1232 million exceeded the value of our total industrial exports of US$ 1185 million. 

Last year our agricultural exports too took a nose dive due to decreased prices for tea and rubber. Despite increased export volumes our tea export earnings fell from US$ 780 million in 1998 to only US$ 621 million in 1999. 

Prices of our agricultural exports recovered this year and agricultural export earnings have increased by about 11 per cent. Yet this increase is nothing compared to the increased expenditures on crude oil imports. 

Tea export earnings are much smaller than the value of crude oil imports and therefore an increase in tea prices in the order of about 25 per cent can not offset the increased costs of petroleum imports of around 80 per cent or more. 

These factors resulting in a deterioration in the terms of trade have increased the trade gap by a large amount. Compared to a trade gap of US$410 million in the first four months of last year, we have notched up a deficit of US$ 746 million for the same period this year. 

The bad news is that the situation is likely to have deteriorated in the last two four months of this year as crude oil prices have continued its up trend and our import requirements have increased owing to the drought conditions resulting in considerably enhanced thermal power generation. 

Meanwhile tea prices are showing a decline. If trade union actions on the plantations affect tea production the blow would be greater still. 

External and internal shocks have been powerful explanatory variables of the country's economic performance.

It appears that the economic performance of this year will once again be a story of a poor performance—in fact an economic crisis— which can once again be explained by these external and internal shocks. Are there ways and means by which the country could mitigate the external shocks to the economy? 

It must be recognised that the Sri Lankan economy would remain a trade dependent economy. The small size of the country and its limited raw material base ensures that. 

It is also through trade that the country could aspire to enhance its economic growth.This export growth would also be largely in industrial exports as the experience of the last two decades have demonstrated. 

The weakness in our export structure is that though we export a large number of manufactured goods, there is high concentration on garment exports,which accounted for 53 per cent of industrial exports last year.

This is a serious concern as any loss in competitiveness in the industry, especially after the Multi Fibre Agreement expires, could jeopardize our export earnings. 

The other factor which makes us vulnerable is that the value addition of our industrial exports is low. There is a need to shift to higher value added industrial exports.

This is easier said than accomplished as several factors determine our capacity to make this important shift.This includes a better security situation ,improvement in economic and social infrastructure, an improvement in skills and a better work ethic. All these are not easy to achieve. They have to be developed over a period of time. 

The other factor that must be realised is that though agricultural exports constituted only around 20 per cent of export earnings, they are more significant than these figures indicate.

This is due to our agricultural exports having a much larger domestic value added component than our industrial exports.This is why though tea exports accounted for only 13.5 per cent of our total export earnings(1999) they are still an important factor in our balance of payments. 

In the face of the vulnerability to international price movements discussed earlier, there may be a need to re-think our approach to import substitution of food items. Although we spend only 11 per cent on our food imports, a greater dependence on food imports could add to our vulnerability and have an important adverse impact on our trade balance, especially if import dependence on food grows, and prices of these items too increase in international markets. 

Rice, wheat, milk and fish imports constitute the bulk of these imports. Should we not increase the production of rice and fish, in particular? 

Trade dependence and external and internal shocks will be with us always. The challenge facing us is to reduce our vulnerability by restructuring the economy and import-export structures to minimise the economic fluctuations.This need has been once again brought to our attention by the recent events. 

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