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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Sri Lanka industrialists forging ahead amid uncertainty....

Sri Lanka industrialists forging ahead amid uncertainty....

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Manager - Equity Analytics
Manager - Equity Analytics

June 8, 2012 (LBO) – Sri Lanka's see sawing policy ranging from labour, exchange rate, taxation and interest rates are challenging manufacturers, who are also finding ways to remain competitive in the export market, officials said.

"We need policy consistency from the government," said Dankotuwa Porcelain PLC chairman Sunil Wijesinha, referring to a sharp drop in the exchange rate, higher interest rates that has chipped away earnings last year.
Sri Lanka rupee fell from late 2011, with the sharpest drop in March from 110 to 130 rupees, after the Central Bank started to sterilise foreign exchange sales to prevent interest rates going up.

Policy Contradiction

To keep an exchange rate fixed, interest rates have to be allowed to float. Such a monetary arrangement, where monetary and exchange rate policy is complementary, is known as a hard peg or currency board.

Sterilising foreign exchange sales with freshly printed money is also a 'stimulus', boosting domestic demand and bank credit to an unsustainable level which then spills over to the balance of payments via imports.

To correct the problem coming from contradictory monetary and exchange rate policies, high interest rates or a steep depreciation or both is needed.

"In the early 2000s, when we were importing machinery, we knew where the exchange rate was heading broadly, what the government’s direction was on ceramics, energy and so forth," Wijesinha told the LBR-LBO CEO Forum, a gathering of senior executives in Colombo on Thursday.

"Now we don't know. It's very haphazard."

No monetary authority which has powers to sterilise foreign exchange sales, or engages in open market operations to target an interest rate can defend an exchange rate.
Wijesinha said his company, was unable to take advantage of the recent weak rupee, as it was saddled with dollar debts, borrowed at high rates months earlier.

Many industries borrowed in dollars, lulled into a false sense of security, unaware that a central bank that tries to control both the interest rates and exchange rate, can do neither in practice, as East Asia and Latim America has learned to their cost.

The phenomenon is identified by economists as 'liability dollarisation' and is found in countries where a central bank improves its monetary policy after a period chronic inflation and currency depreciation.

When the currency depreciates steadily for a long time 'deposit dollarisation' occurs.

Economic Nationalism

Wijesinghe said taxes on foreign ceramic imports were raised in the November budget, but then lowered 10-days later, which showed a lack of clear policy direction.

"So I am asking, is manufacturing being encouraged or imports being encouraged?," he queried.

Pulling back from a promise of nationalist protectionism to give freedom to ordinary citizens is somewhat unusual in Sri Lanka.

Critics say that policy in Sri Lanka has tended to err on the side of undermining economic freedoms, rule of law, justice and promoting nationalism - economic and otherwise - since gaining self-determination from the British.

In recent years, protectionist industrial oligarchs have scored several successes in curbing the freedoms of ordinary citizens, managing to scuttle an entire free trade deal in at least one case.

Former banker Moksevi Prelis, commented that a topsy-turvy policy indirection continues to prevail, despite government intentions to keep growth high and employment low.

Wijesingha, who also specialises in productivity improvements and labour management, said a number of workers now looked for easy jobs, with easy money, that did not require them to get their hands dirty.

"The 3Ds are no more, the dirty, difficult and dangerous jobs no one wants. Today more female labour prefers to work in Cargills Food City (a supermarket chain) than factories," he said.

"Their social life is outside the factory, 20 years ago it was within the factory."

Protectionism which gives rents to some industries in the economy can result in wages being bid up with no improvements in productivity and an import duty becomes a tax on exports (Lerner theorem).

Countries like Vietnam, which have freed trade rapidly, have become large exporters, though imports are also growing fast, resulting in a virtuous cycle giving higher living standards to workers.


Sanjay Tiwari, who heads the Indian-run Piramal Glass Plc, said rigid labour laws in addition to making termination difficult also made it more difficult to devise productivity linked wages when dealing with trade unions.

"The big issue here is labour reforms, people are not very receptive with productivity linked raises," said Tiwari.

"We have JVP unions (linked to the Marxist-Nationalist JVP political party). We give staff transport, food and other benefits. But it took awhile to implement productivity based wages," he said.

He said Sri Lanka also had a lot of public holidays. Productivity linked wages, can result in workers getting better pay.

Sri Lanka recently raised fuel prices to mitigate losses incurred by state-run Ceylon Electricity Board.

DSI chief Kulatunga Rajapakse said his group of companies, which largely engages in footwear was forced to look at biomass energy to offset electricity costs.

Rajapakse said though local sales was healthy, his group is forced to look at export to get the economy’s of scale to produce.

"For this, we need to know, what exactly the government plans to do, wants us to do. You need industries to survive in an emerging economy. We are not asking for protectionism,” he said.

Footware is already a protected industry.

Brandix casual wear chief Dhananjaya Rajapaksha urged the government to allow flexible working hours, which can allow employees to earn more.

Apparel is Sri Lanka's most successful export and enjoys no protection.

"Many people do more than one job today. Because factories are governed by the 60 hour work rule," Brandix's Rajapaksha said. "Even if a worker is willing to work, he can’t work, so he goes next door and does sub-contract.

"I must also caution, that extending the working hours can be abused. It has to be carefully thought through," he said.

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