To depreciate or not to depreciate – The Island
The government’s intention was to reduce imports and encourage exports. The policy paper, “Prospects for Prosperity and Splendor,” page 36, refers to trade deficit reduction, import substitution, and export encouragement. Thus, the general public expects a decline in imports in 2021. In fact, imports increased to US$20.6 billion in 2021. This may be partly due to the fixed exchange rate policy which has a relatively lower value for the US dollar in 2021. Rupee terms and high international commodity prices. The trade deficit also increased to US$8 billion, with export earnings standing at US$12.5 billion, an increase from 2020 and 2019 export figures of US$10 billion. US dollars and 11.9 billion US dollars respectively.
I give below the actual expenditures for imports of selected consumer foodstuffs (in millions of US dollars): (see table 1)
It also appears from the data published by the Central Bank that the import expenditure of vegetables incl. onions, potatoes, which was US$353 million in 2020 further increased to US$384 million in 2021. The country spent some US$1.4 billion on these four import items, this which is more than tea export earnings (USD 1.3 billion) How did Sri Lanka manage to bear this heavy import bill and finance the deficit?
Our foreign exchange earnings were not sufficient and as a result we were forced to borrow funds through foreign loans and also used our precious foreign exchange reserves to pay for these imports and repay foreign loans amounting to 6 billion US dollars. In 2021, the FDI figure is only US$560 million and foreign remittances are also only US$5.5 billion. If this trend continues, our external debt obligations will increase further.
Compared to other regional counterparts, Sri Lanka’s export performance has declined. Exports as a % of GDP have declined over the past 12 years. Export performance reflects 26% of GDP in the two decades ending in 1999 in the 1980s and 1990s. However, in the following two decades from 2000 to the end of 2019 Sri Lanka fell significantly to 16% of the corresponding GDP figures. (See Table 2 – How the trade deficit widened over the four decades (annual average in billions of US dollars)
As can be seen, our trade deficit over the period 2010 to ’19 widened to 78% of total exports and our exports as a % of GDP also declined from 28% over the period 1990- 99 to 14% over the ’10 year period’ from 2010 to ’19. In fact, it averaged just 13% over the 2015 to ’19 period.
Exchange rate policy has created competitiveness issues for exporters as foreign trade counterparts have become more competitive in the global market due to faster depreciation of their currencies. We would like to see our rupee strengthen, but the reality is that due to continued trade deficits, our rupee has depreciated. If the dollar is artificially controlled and pegged at 202 rupees, this encourages importers to buy dollars even at higher rates on the black market and to arrange the import of goods. This is because they know that in the future the rupee will depreciate more.
Exporters will also be discouraged from converting dollars at this rate. As a result, some exporters have now become indirect importers outside the banking system, some get an additional 25 rupees per US dollar from importers outside the system. However, allowing the rupee to float freely based on market forces (will automatically depreciate the rupee further) will also create serious problems such as the revaluation of the external debt portion and the book value of the debt service will rise and rise further the budget deficit. The cost of living will skyrocket as imported goods will cost more, but this will discourage non-essential imports and encourage the search for domestic alternatives.
As I mentioned, the government’s intention was to restrain and reduce import spending and encourage exports, however, the current account deficit as well as government budget deficits keep increasing. From the economic indicators above, it can be seen that over the past seven years the economic situation has been severely affected, of which in the past two years this was mainly due to Covid-19, regardless of the weaknesses structural.
No FDI or foreign remittances will flow in without addressing these structural weaknesses in macroeconomic fundamentals – otherwise inflation will skyrocket and banks will also be forced to raise interest rates. Foreign inputs such as fossil fuels and fertilizers should be partially replaced by domestic materials and other inputs whenever possible. It is in this context that the Presidents’ initiatives on renewable energy and green natural farming methods must be seen. India, Kenya and many other countries have also decided to follow these initiatives to address the ever-increasing social and environmental costs associated with not adopting mitigation strategies to overcome the adverse effects of climate change at worldwide.
It is necessary to closely monitor foreign exchange expenditure for non-essential imports each month. The government must deploy people, including our armed forces, in the agricultural sector and associated agricultural activities with appropriate technology and increase national production by using our underutilized arable agricultural land on the basis of a carefully prepared cropping calendar. for different districts.