The USD/LKR has halted its slide temporarily. The main factor had being CBSL “Moral Suasion” and regular intervention in the spot market. Despite these measure the external environment vulnerability had seen the currency slip by 19pct in 2018.
The analysis below indicates the rupee weakness over the past 2 years. Thus we continue to believe that the overall trend of a stronger Dollar viz a viz the LKR would continue in 2019.
The Central Bank has made it position clear as they are going stick to an exchange rate policy of cautious intervention at times of excessive volatility in the forex market, Central Bank Governor Dr. Indrajit Coomaraswamy said on 4th January 2019 at the launching of the economic road map for 2019.
Recommendation by Econsult – Stay long Dollars and use opportunity of selling by the CBSL / Moral Suasion to buy Dollars on dips
Forward Market Quotes For USD/LKR- FWD prices must be used in pricing of Cost of sales
Federal Reserve Chair Jerome Powell mentioned that US Monetary policy is “well positioned” to support the strong labor market, which is just now starting to benefit workers on the margins. He added that “the benefits of the long expansion are only now reaching many communities, and there is plenty of room to build on the impressive gains achieved so far,” a close look at the adjustments to employment data suggested the labor market may not have been as strong last year as previously thought, and thus we could once again witness a shift for lower interest rates. The September data released by the Bureau of Labor Statistics indicated a downward revision of the estimated job creation numbers. The agency said the economy added 170,000 jobs a month in the 12 months through March 2019, half a million fewer jobs than previously estimated. Powell in fact commenting on the job data numbers mentioned that “While this news did not dramatically alter our outlook, it pointed to an economy with somewhat less momentum than we had thought,”.
Germany Consumer Demand Shines
The mood among German consumers rose unexpectedly heading into December, a survey showed this week that household spending will continue to prop up growth in Europe’s biggest economy at the end of the year. Record-high employment, inflation-busting pay hikes and historically low borrowing costs have turned household spending into a steady and reliable driver of growth in Germany, helping to cushion its export-dependent economy from trade problems. The consumer sentiment indicator, published by the Nuremberg-based GfK Institute and based on a survey of around 2,000 Germans, improved to 9.7 from 9.6 in November. A Reuter’s poll of analysts had predicted a stable reading. GfK said a subindex measuring economic expectations jumped as Germans became more optimistic about the growth outlook due to “tentative signs of easing”
Australian economy continues to struggle
Wage growth in Australia looks to be stuck in the slow lane and it will take a sustained fall in unemployment to lift it to more economically desirable levels, a top central banker said on Tuesday. In a speech on employment and wages, Reserve Bank of Australia (RBA) Deputy Governor Guy Debelle said there was growing evidence that wage growth had become entrenched in a 2-3% range, down from the former 3-4% norm. This trend has been weighing on household incomes and spending, as well as dragging on the economy more broadly. “A gradual lift in wages growth would be a welcome development for the workforce and the economy,” said Debelle. “It is also needed for inflation to be sustainably within the 2–3% target range”. However, he held out little hope for acceleration any time soon, noting the bank’s liaison with firms showed 80% of companies expected steady wages growth and only 10% anticipated anything faster.” The more wages growth is entrenched in the 2s (2-3% range), the more likely it is that a sustained period of labour market tightness will be necessary to move away from that,” said Debelle. The central bank has cut interest rates three times since June, taking them to a record low of 0.75%, in part to try and drive unemployment down toward its goal of 4.5%.
China looks fragile
Oil prices slipped on Tuesday on concerns about economic growth and fuel demand as uncertainty remains about the ability of the United States and China, the world’s biggest oil users, to agree a preliminary deal to end their trade war. Brent crude futures were down 5 cents at $63.60, after rising 0.4% in the previous session. West Texas Intermediate crude futures fell 9 cents to $57.92, having risen 0.4% on Monday. Top trade negotiators from China and the United States held a phone call on Tuesday morning, China’s Commerce Ministry said, as the two sides try to hammer out a preliminary “phase one” deal in a trade war that has dragged on for 16 months. “Oil traders remain hopeful a trade deal will get signed,” said Stephen Innes, chief Asia market strategist at AxiTrader. “Still, the lack of clarity around the tariff rollbacks, which is the key to economic growth and bullish for oil, continues to somewhat cloud sentiment. “China and the United States are “moving closer to agreeing” on a “phase one” trade deal, the Global Times – a tabloid run by the Chinese Communist Party’s official People’s Daily – reported earlier.
India Cuts Monetary Policy Rates for the six time
The Reserve Bank of India will cut interest rates in December for the sixth time this year, and again before July, according to economists in a Reuters poll which forecast those reductions would either marginally boost the economy or have no impact. Currently the most aggressive major central bank in the world, the RBI has cut rates by 135 basis points this year to 5.15%, but inflation has remained low by historical standards and policymakers have barely moved the needle on growth. The Indian economy expanded 5.0% in the April-June quarter on a year earlier, its slowest annual pace since 2013, and was expected to grow 4.7% last quarter, according to the latest Reuters poll, taken Nov. 20-25.That was significantly lower than the 5.6% rate predicted in the last poll, and would mark six consecutive quarters of slowing growth, a first since 2012.
It also comes despite a recent series of fiscal stimulus from Prime Minister Narendra Modi’s government, which was re-elected in a landslide in May. “Further rate cuts are likely to have a limited impact on the economy as cost of borrowing is not the pressing issue. The lack of risk appetite and fragile sentiment are holding back fresh investment in the economy,” said Sakshi Gupta, senior India economist at HDFC Bank. “While further interest rate cuts would support growth at the margin, we need to see a turnaround in sentiment to restart the investment cycle.
The inception of my career as a banker in the late 70s was about the same time that Sri Lanka acted on a revolutionizing move to become the first South Asian nation to liberalize its trading economy. Ever since I have been hearing Sri Lanka as a “developing” nation. Fast forward to four decades and several regimes later we are still a “developing nation”. What is it to be a developing nation; What is to be a rich nation and what is it to be a poor nation. The Department of Census and Statistics records Sri Lankans per capita GDP for the year 2019 at $ 3,852 per annum whilst Singapore, who’s open trade regime were developed much later recorded a thumping $65,977. Singapore’s benchmark strategies are spoken of at many forums to highlight its economic ascension from what was once a poor country with a GDP per capita of only $320 in par with Sri Lanka. The success story of Singapore’s economic and demographic development surpasses a single systematic exposition, however, it is crucial in this context to act as an expediential comparison and maybe give an insight or two for Sri Lankans.
Following an economic growth of just 5.3% after the civil war ended and low fiscal revenues combined with mountains of debt,Sri Lanka is classified as among the developing economies by the United Nations Secretariat (UN/ DESA). Comparatively, Singapore ranks sixth highest in the world for a country that possesses half the natural resources as Sri Lanka.
How do we allow this term to dominate us?
I have been hearing of Sri Lanka being trapped by this economic definition for as long as fifty years. Our present standard of living is at least ten times behind that of Singapore, and our drastically slow pace is only weighed down by our debt portfolio. Whilst searching for answers, numerous evidence pointed to the lack of persistence and political instability coupled with low demographic development with a relatively large population earning an income that is just enough to survive.
A radical change is required to overcome this crisis, but what will continue to be a barrier to growth is only ourselves, which arrives at the core lesson to be learned before we begin our mandate. To be nationally poor is a public choice; to navigate this crisis is dependent on our determination. Only we are stopping ourselves from capitalizing on our potential.
Mynt (1973) suggests the key indicators of economic development are the level of per capita income, rate of growth of per capita income, and the widening inequality in the distribution of income, but there is much debate on the contribution of economic production to the country’s prosperity. Sri Lanka’s current account deficit in 2018 amounted to $7.57 billion which was exacerbated by a challenging external environment with the Easter attacks and now the latest COVID-19 outbreak. The country’s export performance declined from a growth rate of 4.1% to 1.44% by the end of 2019, losing out on much-needed foreign exchange that can be utilized to pay off debts. With little to no reserves and a declining rate in the exports, a call for transformation in the policies is imperative to focus on export growth.
Performance into perspective:
In 1969 following the independence of Singapore from the Malaysian Federation, a Singaporean Dollar was exchanged at $0.35 against the Sterling Pound whilst the same could be purchased at SLRS 13.40 in Ceylon. Since 1981, the monetary policy in Singapore was centered on the control of the exchange rate, and today, their currency is equal to £0.57 whilst the SLRS is 237. How did we get here? Is it not by choice? Sri Lanka like any other developing nation is a political economy. What does it mean? It means that every economic policy has the flavour or influence of the political agenda of the incumbent regime. The result is that our direct debt to GDP is around 70% and nearly 90% of our national revenue is expended to service these debts. How do we survive? Just imagine if 90% of your family income is used to service debts, how could you sustain your family without sinking deeper into debt?
There is no doubt that our country is in dire need of an effective policy to reduce an approximate one billion trade deficit a month. The deficit stems from importing more than we export which impacts our reserves. The exchange rate against the dollar reached an alltime high of Rs. 191 in April 2020. The early 2000s experienced a 2.8% yearly depreciation and it was as high as 9.1% for the four year period of 2015-2018 alone. The public has failed to grasp the reason behind the depreciation over the rupee – but the Central Bank’s quick-fixes through injection of money contributed towards a further hindrance to the growth.
In attempts to achieve the government’s export target or rather reduce the trade deficit, stringent measures and banning mechanisms have come into play. However, the effectiveness of these proposals are far from favourable along with strong opposition from the public. From an accountant’s point of view, where we are today as a nation with political interventions on the implementation of policies, fiscal account deterioration and racks of debt; we will easily be written off as ‘bankrupt’. Sri Lanka is in a fight for survival and it is our responsibility to help the nation get back on its feet.
An appeal for long-term change:
The late Prime Minister Hon. Sirimavo Bandaranaike took oath in 1960 as the world’s first female Prime Minister, yet another disruption against the conventional norms in the political economy. Her regime prioritized incentivizing the local industries and capitalizing on domestic knowledge for production. It is agreeable that the lack of an open economy failed to drive economic opportunities, however, the brutal “produce or perish” notion encourages self-sufficiency that which we lack today due to our dependency on international trade.
‘Tea, rubber, cocoa and coconut is a common man’s answer to what our main drivers of export revenue were, yet it is shameful that during 2018, our imports consisted of 5.13% of rubber and 1.89% of tea. We even import coconuts.
Lee Kuan Yew, the founding father of Modern Singapore implemented systems based upon the development of the country’s resources to improve trade and the quality of life. A notable example being the revival of the Singapore River around which businesses and factories developed. The project which took up to 10 years created a foundation for innovation, improvements in transportation, tourism, and water supply.
We possess abundant resources for our island to thrive; the agriculture industry, tea destinations and massive potential to become a global tourism hub. Known as the pearl of the Indian Ocean, our island is at a prominent location which is of the essence to create a competitive advantage. Yet, it is ironic that we import salt and fish when the sea surrounds us. In 1978 when I embarked on my first trip to India, we carried bags full of spices to be locally sold to a country where the demand for our spices was unaccountable but now we are importing spices from India. The largest contributor to export revenue of spices in 2018 was Cinnamon, which totaled at only 11.1% traded to India. The great voyager Vasco da Gama referred to then Ceylon as the land of spices and we chose to lose out on that status.
Paddy cultivation in Sri Lanka traces its roots back to 161 B.C. when Sri Lankans were skilled at making a living out of this industry. Rice crops occupy 34% of total cultivation with over 1.8 million of our population engaged in producing around 2.7 million metric tons of rice annually. The trading of cheaper and quality rice from other nations exerts pressure on Sri Lanka to improve on production. Sri Lanka has the capacity to gain international recognition as the primary rice exporter as well as create a source of employment to improve the livelihoods of many.
However, the policymakers must prioritize their earnings to invest in equipment for pre-harvest operations and marketing of the produce. According to research done by TB Adhikarinayake, the majority of the problems farmers face are related to high losses in the production chain and lack of skilled workers.
The Choice – a change in direction:
Where are we heading? We are importing what we can produce, increasing the trade deficit, increasing the pressure on the exchange rates, and depriving our children of foreign education. In such a competitive world, the need to solve the Balance of Payment crisis is pivotal to managing the country’s finances in order to avoid a disastrous downfall. The government’s attempt to reduce the deficit by imposing import controls will only create inflationary pressures in the country if we don’t optimize the encouragement given by the government to grow.
Science and technology have given us “formula one” seeds for rice, chilies, and potatoes which can treble the output per acre. Are we making a choice to optimize these opportunities to be self-sufficient?
We have a choice, to change our destiny. Can we, yes, we can! We are poor because we chose to be so. Likewise, we can make the choice to be rich as a nation. Let’s look at a change in direction by seizing opportunities to make exports competitive, using innovative methods of technology, and by utilizing our human resources. It is about time we make use of our knowledge in agriculture, natural resources, land, diverse cultures, and our climate to attract foreign investors.
Every generation has a responsibility towards creating a sustainable nation. It is our choice to change directions to reach the destination we intend. It is our obligation to ensure that majority of our children do not experience a poor quality of life, rather a high standard of living and not to be referred to as people of a poor nation.