Exports have declined by 10.2 per cent year on year to US$836 million in March 2012 against 3.9 per cent growth of imports reaching US$1,697 million.
Pressured by the growing import bill and the widening trade deficit, Sri Lankan Rupee continued its depreciation to a record level of Rs. 134 recently. In the absence of prudent and long- term FOREX plans, most economists expect the current depreciation to stabilise between Rs.140 – Rs.145 level against the US dollar within the next six months, while seriously impacting the general consumer.
One of the few economists in the Parliament, United National Party MP Eran Wickramaratne expects LKR depreciation to continue reaching lowest-ever unless “the Government successfully controls the import of intermediate and capital goods, obtain another facility from the International Monetary Fund (IMF) accepting all conditions, and build strong investor and business community confidence.”
However, a senior official at the International Operations Department of Central Bank of Sri Lanka disagreed to any possibility of further depreciation of the rupee expected within the second half of this year. “Although the exchange rates are volatile, it is a temporary event that rates reached Rs.134 recently. Due to measures taken by the Central Bank we expect the rate to settle at Rs.125 or below. The trade deficit is also an issue, which is being addressed currently,” the official said.
Based on the policy measures taken by the Central Bank in January and February this year, the exports have declined by 10.2 per cent year on year to US$836 million in March 2012 against 3.9 per cent growth of imports reaching US$1,697 million compared with the corresponding period of the last year recording a deficit of US$ 861 million. The growth in imports was primarily driven by investment goods, which includes transport equipment and building material.
“Some 15% – 20% of our total imports are consumer goods. Intermediate goods and capital goods remain at 55% – 60% and 25% respectively. Government policy has been to reduce the import of consumer goods. The recent increase of taxes on motor vehicles is part of this control. Compared to labour supplied largely to low paying countries, other goods and services exports are given less prominence in the government strategy,” reasoned Eran Wickramaratne (MP – UNP).
Sri Lanka’s Stand-by Arrangement (SBA) facility with the IMF coming to an end this month with the much anticipated final disbursement of US$400 million tranche of the US$2.5 billion bailout package will also help to bring stability to the rupee, according to Capital Trust Securities (Pvt.) Ltd. Executive Director Sarath Rajapakse. “IMF funds will strengthen the rupee against the US dollar. But to a certain extent it is good to have an undervalued currency, which will boost exports. But unfortunately the trade gap is wider and the
economy cannot be sustained with high imports and low exports. The real issue that hinders the expected 7.2 per cent GDP growth is the very high interest rates to prop-up the rupee,” explained Rajapakse.
Adding more to this burden, the macro weaknesses in Europe will also have significant negative ramifications on Sri Lanka. From the local standpoint managing inflation and achieving currency stability whilst at the same time expanding the GDP, will rank high in the agenda, which will definitely make 2012 a challenging year for the Mahinda Rajapaksa regime.
Mohamed Inthikab, Head of Research of Heraymila Business Solutions Ltd., a subsidiary of Heraymila Investments Ltd. of Dubai that manages investments in over 33 countries, says Sri Lanka is going through a phase of economic reality check.
“The challenges in 2012 will also be of multi sphere. From a global viewpoint, owing to Iran’s nuclear ambitions, the tension between the West in conjunction to a weakening Europe could impact us in many ways with Sri Lanka importing over 90 per cent of the national crude oil requirements from Iran. In 2011, the tourists from Europe were reported to be 360,000 or 40 per cent of the total number of all visitors. The slowdown in Europe will also mean fewer visitors to the island and less purchases of Sri Lanka garments (Europe accounts for over 50 per cent of the total garment exports),” says Mohamed Inthikab.