The exchange rate policy is found to be at fault and exporters believe the Central Bank ought to do something about it if an export driven economy is to emerge as envisioned for the country. Reporting to the generals about the situation of the forward defence lines, in the trenches, soldiers would naturally expect their superiors to find solutions to their problems so the battle can be won. However, it is the soldier who knows best about the prevailing ground situation, not the generals. With almost a similar allegory, Chairman of Hayleys PLC, N. G. Wickremeratne, began to bring out the private sector’s concerns and expectations at the Sri Lanka Economic Summit at a session on inflation, interest rates and exchange rates. Central Bank Governor Ajith Nivard Cabraal had delivered his presentation prior to Wickremeratne and said the present role of the Central Bank was that of juggler on a shaky platform. Cabraal had defended the exchange rate policy. Comparing statistical data of the Central Bank and Department of Census and Statistics, he showed that average inflation and the exchange rate shared similar trajectories. "However, the problem arises in the last three years or so. While average inflation has increased the exchange rate had appreciated," he said. The Central Bank is pursuing a tight monetary policy in a bid to curtail domestic credit growth and mitigate inflation’s upward trend. The resulting high interest rates have increased financial costs. SMEs find it difficult to meet working capital requirements while larger companies see their bottom lines shrink. "Competitiveness had eroded because of high interest rates as against our competitors and this is a problem." Wickremeratne pointed out that because of escalating working capital costs adopting lean manufacturing practice would improve productivity and reduce working capital. However, achieving economies of scale is critical for competitiveness and capacity expansion is needed for economies of scale but capital costs are too high which means that productivity improvenment would not be of much help. While inflation in competitor countries hovers below 10 percent, Sri Lanka’s inflation rate is nearing the 30 percent mark. Wickremeratne sited a model trading, profit and loss account to show how a stagnant exchange rate and rising inflation impacted on an exporter. With an inflation rate 15 percent above many of our competitors a typical manufacturer would barely make a profit as inflationary pressure on local costs eats into profit margins resulting in losses. Even if productivity was to be increased by 5 percent the results would be negligible and would only reduce the level of loss. His calculations showed that even a special marketing effort with a 2 percent increase still result in the losses being reduced. Increasing wages are further eroding into profit margins and the economic platform has become even shakier with the masses clamouring for increased wages. Wickremeratne said that the private sector could help the Central Bank in its balancing act to manage inflation. "But do not allow the rupee to appreciate," he warned adding that many companies could exist as they were but that things would get very serious over a period of time. He urged the Central Bank to manage inflation by devaluing the rupee which would reduce imports. The devalued rupee would increase local value addition by driving exports. The export sector could then create more employment opportunities. This will also reduce the trade deficit. Wickremeratne was not only expressing the concerns of Hayleys but that of the entire export sector. Earlier this year, even before oil and food prices hit the ceiling, the Chamber of Garment Exporters told the Island Financial Review that after the post quota era (MFA), the industry has been struggling to stay alive. "Rising inflation, rising interest rates and high manufacturing costs, which are the highest in the region, forced our margins down just so that we can compete with the region," they said. The SMEs of the apparel sector said that it was difficult to finance working capital as bank’s seemed reluctant to lend because the extension of GSP+ was hanging in the balance. This prompted Cabraal to urge banks to work closely with the apparel sector to mitigate the problems faced by them at a forum for bank directors early in the year. "The private sector is finding it difficult to survive in this environment of high interest rates particularly the SMEs who depend on borrowings for day to day expenses and expansion. High interest rates have created a bottle neck for expansion for many middle-level companies," CEO, The National Chamber of Commerce of Sri Lanka, E M Wijetilleke said. He said that the private sector had been lobbying for a reduction in interest rates and have asked the government to reduce rates so as to facilitate growth of the SME sector. Some exporters said that worker remittances, tsunami donations and development grants and loans affect the exchange rate but distorts the real exchange rate in terms of the trade balance. |
