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Business

Tread carefully on dollar tea auction
A study initiated by the Ceylon Chamber of Commerce has concluded that there will be wide macro-economic implications if the Colombo tea auctions were conducted in US dollars.

The proposal is supported by tea producers who feel they could access cheap dollar funds if the auction is 'dollarised' but other sections of the industry have reservations about the idea as it could have adverse repercussions.

Reports that the government has already decided to go ahead with the proposal to hold the tea auctions in dollars has caused concern among certain sections of the industry.

However, it seems that no decision has yet been taken. This is because another body of experts - a task force headed by a veteran tea trade official - is still studying the pros and cons of the proposal to hold tea auctions in dollars. The deliberations by the Ceylon Chamber of Commerce sub-committee have revealed conflicting views about the proposal.

The sub-committee considered the views of all stakeholders in the tea industry - the Planters' Association, the Colombo Tea Traders' Association, the Bankers' Association, Brokers' Association, Private Tea Factory Owners' Association and Tea Small Holders' Development Authority.

Producers apparently feel that if they were paid in dollars, they in turn can borrow in dollars for working capital and investment requirements. If producers are paid in dollars, there would be no mismatch between their borrowings and earnings.

Producers would be able to bring down their cost of borrowing because dollar lending rates are in the 3-4 percent range while interest on rupee loans is around 20 percent.
Those in favour have said the government should try to make Colombo an international auction centre and could attract Indian teas if producers are paid in dollars.

Another reason for producers to push for the auction to be held in dollars is the belief that traders were taking advantage of the depreciation of the rupee against the dollar and were keeping the exchange gain.

Advocates of the proposal had cited the Kenyan example where the Mombasa auctions, at which teas from other African producers are sold as well, is held in dollars.

However, this is considered a bad example by some sections of the trade as the 'dollarisation' of the Mombasa auction led to the elimination of many small buyers and its subsequent domination by a few multinationals such as Unilever, Van Rees and Finlays. Sections of the industry fear the Colombo auctions could meet with the same fate if the auction was dollarised.

One fact that was agreed on by all in the Ceylon Chamber of Commerce deliberations was that there are hundreds of buyers at the Colombo auction, large and small. It was established without doubt that it is smaller buyers who drive demand at the auction, in competition with big buyers. They help push prices up simply because there are more of them. If not for the small buyers, the big buyers can dominate the auction.

The top ten exporters account for not more than 30 percent of total exports. Other buyers account for the bulk of exports. They are important.

There are also doubts whether small buyers would have ready access to dollars, given the tendency of bankers to give preference to big customers. The bankers' representatives at the sub-committee deliberations had pointed out that there was a shortage of dollars available and that banks are particular about who they lend dollars to - meaning in effect that bigger buyers have easier access to dollars. If small buyers are not able to operate at the auction, demand could drop and prices might fall. That means producers could lose out if dollar funds are not made available to smaller buyers.

Also, those buyers who buy the 10 percent of production sold locally, especially dust grades in which smaller buyers bid and drive prices up, receive proceeds in rupees and would not be able to pay in dollars.

Another reservation about the proposal is that holding the auction in dollars could lead to demands from other sections of the industry, such as smallholders and even labour, to be paid in dollars, in effect leading to the 'dollarisation' of the entire economy.

The tea industry is undoubtedly influenced by the manner in which industries like tourism enjoy the fruits of dollar earnings.

But the move to have a dollar tea auction could have widespread macro-economic implications. It could lead to the 'dollarisation' of the entire economy. More studies are definitely needed and indeed, are being done.

A previous proposal to hold the tea auction in dollars was shot down by the Central Bank several years ago. Ultimately, it will be the Central Bank that will decide because of its implications for monetary policy.

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