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FINANCIAL CHRONICLE™ » CORPORATE CHRONICLE™ » Foreign Exchange Crisis in Sri Lanka

Foreign Exchange Crisis in Sri Lanka

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1Foreign Exchange Crisis in Sri Lanka Empty Foreign Exchange Crisis in Sri Lanka Wed Feb 09, 2022 7:24 am

ChooBoy


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics

By Dr. C. S. Weeraratna

Sri Lanka is facing a deepening financial crisis. According to media reports there is a short supply of essential items such as fuel, medicine and gas for domestic use attributed to the foreign exchange (FE) crisis. Dhammika Perera (DP) has proposed a seven-pronged strategy to overcome Sri Lanka’s foreign exchange crisis (The Island 30 January).

One of the strategies suggested by DP is that the government build a university town consisting of five universities within 30 minutes from the Bandaranaike International Airport at Katunayake, to accommodate 150,000 students (30,000 at each university). This is an excellent idea but it will cost the government at least Rs10 billion at the rate of Rs 2 billion per university. Once the universities are built, it will be necessary to get qualified academic staff and suitable accommodation. Further it will take a couple of years to build the five universities. Some need to have laboratories and equipping these adequately is expensive, time consuming and requires a substantial amount of FE. It is a long-term project. Currently, there are 17 universities located in different parts of the country. Perhaps, it may be more realistic if five selected universities already functioning are developed to meet the required standards. Instead of having all the five selected universities in Katunayaka it would be desirable if there is at least one in the north and another one in the east so that those in these regions are also benefited.

Another strategy proposed by DP is to build two hospitals like Singapore’s Mount Elizabeth with internationally recognised facilities. As in the case of establishing new universities, building two such hospitals will take a long time, perhaps two to three years and will require a great deal of foreign exchange. Developing some existing hospitals to meet the stipulated standards may be a realistic alternative.

The total extent under coconut cultivation in Sri Lanka is around 400,000 ha and about 325,000 ha are small holdings. The annual production of coconut has been fluctuating around 3,000 million nuts, (approximately 6000 nuts per hectare). As suggested by DP, developing the coconut industry by planting 1.5 million nuts annually is very timely. At the same time the state of the existing coconut plantations should be looked into. If the production of the existing coconut lands is increased by 1000 nuts per hectare per year through better management and applying organic and inorganic fertilisers, the total production can be increased substantially within a year which will increase the export income from coconut.

One of the main strategies to solve the current FE crisis would be to increase export earnings and reduce expenditure on imports. Most of the activities involved are short term while the others are medium or long term.

Increase export earnings

The dire need to increase our export earnings to meet the severe financial crisis we are facing today has been emphasised by many. Increasing exports is of paramount importance to improve the present FE situation. A major source of FE is the plantation sector. Around 800,000 ha are cultivated with plantation crops tea, rubber and coconut and this sector, in the last few years, earned nearly Rs. 360 billion annually. However, as indicated in table 1, these major export crops do not show a substantial increase in production during the last five years and the contribution from this sector has remained at nearly 20 percent of the export income. Consequently, strategies need to be implemented to increase production and thereby, FE earnings from this sector. There are many state sector organisations to implement such strategies.

As shown in Table 1 tea production has been fluctuating around 300 million kg per year during the last five years, in spite of several institutions assigned to the tea sector. The average tea yields are considerably lower than the potential yields. It has been reported that some of the cultivars developed by the Tea Research Institute of Sri Lanka had been yielding around 8,000 kg per hectare in South India under commercial conditions but the average tea yield in Sri Lanka is much lower. In the smallholder tea sector the average yield is around 1800 kg per hectare and in the estate sector it is about 1200 kg per hectare. In 2020 tea earned Rs. 230 billion in FE. Better management practices in the short term would increase the quantity and quality of the tea produced making it possible to increase FE earnings substantially from the current Rs. 230 billion.

Rubber is another important export crop. In 2017 it earned nearly Rs. 6 billion in foreign exchange but has decreased during the following three years. Based on Central Bank annual reports, the total Rubber production in 2010 was 152.9 million kg and by 2019 it had plummeted to 74.8 million kg. The corresponding average yields are 1561 kg per hectare and 665 kg per hectare respectively. These figures indicate that the Sri Lankan rubber sector is ailing in spite of several institutions assigned to promote rubber production in the country. With the current higher rubber prices it would be possible to earn more FE by increasing rubber production through better management practices which would produce results in the short term. In the last few years the rubber sector was affected by many factors, one of which is ineffective management.

Coconut production too has declined during the last five years as shown in Table 1. This appalling situation in the plantation sector can be attributed to many factors. If the productivity of this sector is raised, by implementing better management practices it would be possible to increase foreign exchange earnings. Most of these practices would produce results in the short term.

A large number of crops, other than tea, rubber and coconut, cultivated in Sri Lanka have high potential as export crops. There are 24 agro ecological zones, each characterised by a specific climate and soil. This makes possible the cultivation of different types of crops such as spice crops, tuberous crops, horticultural (fruit crops) and floricultural crops and medicinal herbs.

Sri Lanka is famous for spices. The most sought after spice crops are cinnamon, pepper, cloves, cardamoms, nutmeg, mace and vanilla which grow in abundance mainly in the wet and intermediate zone. In 2020 the county earned nearly Rs.60 billion by exporting spice crops.

Cinnamon is the most important spice commodity in the spice sector. In 2019, it earned around Rs. 32 billion in FE. The production of cinnamon has been fluctuating around 20,000 tonnes per year during the last few years. Sri Lanka received its first ever Geographical Indication (GI) certification when the European Union (EU) Commission on 2 February, 2022 granted GI status to Ceylon Cinnamon. This would increase the demand for Sri Lanka cinnamon.

Pepper is the second most important commodity among spices. It is grown in the wet and intermediate zones mostly as a mixed crop. The Sri Lankan Pepper has a higher piperine content which gives it a superior quality and pungency. Annual production of pepper too has remained stagnant at around 20,000 kg.

Other spices such as cloves, cardamom, nutmeg and mace have the potential to earn a substantial amount of FE. With the increase of international demand for natural products, and the government’s focus on enhancing and diversifying its value added range, spices and essential oils extracted from these crops will continue to earn more FE.

Dehydrated food is another agricultural product which has the potential to earn much needed FE. During some months there is a glut of fruits and exporting dehydrated or canned fruits would bring in an appreciable amount of FE.

In any programme or plan to increase foreign exchange earnings from the agriculture sector, agro-industries have to be given much emphasis. A large number of crops cultivated in Sri Lanka have considerable potential in various agro-industries. However only rubber, coconut and a few fruit crops are used in industries. Crops such as cassava, horticultural and floricultural crops, medicinal herbs, cane, bamboo, sunflower, castor and ayurvedic herbs have a considerable industrial or export potential but are not cultivated to any appreciable extent. Development of agro-industries will also increase export income and will have a tremendous impact on the economy of the country and also provide employment opportunities to rural people. The private sector can get involved in such projects for which appropriate technical assistance needs to be provided by the relevant public organisations.

Decrease expenditure on imports

While implementing strategies to increase our FE income by promoting exports, action also needs to be taken to decrease our expenditure on imports. During the period between 2017 and 2020 annual expenditure on importing food has been around Rs. 320 billion. The current expenditure on food imports is likely to be even higher due to the depreciation of the SL rupee, and shortage of rice and other food crops, the result of banning import of agrochemicals.

One of the problems the country is facing is the fuel crisis, which is likely to have extremely undesirable repercussions. A large sum of money is spent on importing petroleum to Sri Lanka. In 2020 we have imported fuel worth Rs 540 billion. If we are going to consume petroleum products at the current rate, at least an additional Rs. 50 billion will have to be spent in 2022. Consequently, it is essential to reduce petrol and diesel consumption. In many other countries such as China, Thailand and Singapore, action has already been taken to reduce fuel or power consumption and cut down wastage. If we reduce our power consumption by 10 percent, it will result in a saving of Rs 60 billion in foreign exchange.

Studies conducted in many countries have found that ethanol is a viable alternative for petrol. Many countries are either producing or using ethanol in large quantities or are providing incentives to expand ethanol production and use. Prompted by the increase in oil prices in the 1970s, Brazil introduced a program to produce ethanol for use in automobiles to reduce oil imports. Brazilian ethanol is made mainly from sugar cane. Among other countries using ethanol as a bio fuel are Australia, France, India, Sweden, USA and South Africa. Use of ethanol tends to reduce environmental pollution caused by compounds such as tetraethyl lead, used in petrol. Ethanol can be made from high starch containing crops such as manioc and maize, or high sugar containing crops such as sugarcane. These crops are cultivated in Sri Lanka. Around 10 million litres of alcohol are produced annually at Pelwatta and Sevanagala sugar factories. These can be mixed with petrol to be used at least in three wheelers so that those who use them need not pay higher fares. A few years ago former Science and Technology Minister Dr. Thissa Witharana appointed a committee to look into the possibility of using substitutes for fuel. The committee recommended the use of ethyl alcohol and Jatropha oil as bio-fuels. No follow-up action was taken by the subsequent governments to promote these alternatives as biofuels. Oil from Jatropha (Weta Erandu), a crop that can be grown widely in the Dry Zone of Sri lanka, can be used as a biofuel.

Dendro power can be generated using fast growing nitrogen fixing trees such as gliricidia and Leucaena. These crops can be used not only to generate electricity but are also a good source of animal feed and fertilisers. It may be more beneficial to grow these crops in eroded tea lands where the yields are relatively low. Soil erosion in such tea lands can also be reduced by growing these crops. The Bio Energy Association of Sri Lanka has been instrumental in promoting cultivation of gliricidia.

Sri Lanka, a country begging for dollar loans to import medicine and fuel, which are critical, need to have flexible export and import policies. As indicated above, there are 24 agro ecological zones, each characterised by a specific climate and soil. This makes possible the cultivation of different types of crops. Most of the food imported can be locally produced, thereby reducing expenditure on food imports. A closer look at the imports indicate that around Rs. 50 billion (nearly 16 percent of food imports) in FE is spent on importing sugar, most of which can be locally produced. The total annual requirement of sugar in the country is around 620,000 tonnes, but only about 50,000 tonnes are produced locally. Sugarcane has a considerable potential to reduce food import expenditure. Sugar production in the country has not increased by any appreciable amount during the present decade. The Kantale sugar factory remains closed while a plan to cultivate sugarcane in Bibile remains shelved. Jaggery made from kitul, and sugarcane are good substitutes for sugar manufactured from sugarcane.

A substantial amount of foreign exchange is spent on importing milk. In 2020 Rs. 60 billion in FE was spent on importing milk and dairy products. We have around 1 million mostly indigenous cattle. Their productivity is low (one to three litres per day) mainly due to the poor nature of the breeds and inadequate low quality feed supply. The dairy industry has the potential to contribute considerably to solve Sri Lanka’s FE crisis. Milk production can be increased by increasing availability of cattle feed and thereby an appreciable amount of foreign exchange spent on milk imports can be reduced. Milk production also plays an important role in alleviating malnutrition and offers many employment opportunities. If milk production can be increased, an appreciable amount of foreign exchange spent on milk imports can be reduced, while also improving the nutritional status of the people.

Expenditure on subsidiary food crops such as chillies, green gram, ground nut and potato is few billions of rupees. The extent under these crops and their average per hectare yields have not increased by any appreciable amount during the last decade. A few years ago, a former Minister of Agricultural Development, Chamal Rajapaksa appointed an Advisory Panel to make proposals to develop the agricultural sector so that there is a quantitative and qualitative increase in crop production at a lower cost with no damage to the environment. The recommendations of the panel were mainly on the development and use of better varieties of seeds and planting material; effective control of weeds, insect pests and diseases; better water management, and water conservation; proper use of inorganic and organic fertilisers; control of soil degradation and appropriate land use; promotion of agro-industries and carrying out relevant agricultural research and use of their findings. During the last few years numerous programmes such as AMA, ‘Waga Sangramaya’ and ‘Govi Sevana’ were implemented. All these activities and programmes, appear to have not made any appreciable positive impact on the agricultural sector of the country, indicated by increasing expenditure on food.

In addition to sugar, milk and rice, we spend a colossal sum on importing food items which can be locally produced. Among these are lentils (Rs. 20 billion), onions (Rs 16 billion), maize (Rs. 10 billion), fruits and vegetables and spices, mainly chillies. Even herbs such as katuwelbatu and Thippili, which can be produced locally and used in ayurvedic drugs, are imported at a cost of nearly six million US dollars every year. Most of these crops can be cultivated in the dry zone, where only about two million acres are in productive use out of the 4.5 million ha. Non-availability of adequate rainfall during the Yala season is one of the limiting factors of crop production in the dry zone. However, better water management practices and rainwater harvesting would resolve this limitation.

Although hundreds of research projects related to plantation and food crops are carried out by the faculties of agriculture and Department of Agriculture there appears to be very little liaison or interaction between the relevant institutions, to utilise the research findings in our efforts to increase productivity in the agriculture sector, which will result in saving an appreciable amount of FE.

https://island.lk/foreign-exchange-crisis/

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