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Greatest fall of the Sri Lankan Rupee

We are seeing the greatest fall of the Sri Lankan rupee in our known life time. It seems to be breaking the records it sets the previous day, almost before the end of the fist half of the next day. This is a very dangerous trend for a country like Sri Lanka and if it is not arrested soon, we might be in for some tough times.

On the outset, we must acknowledge that the fall of the rupee is not entirely the fault of our politicians. When I say not entirely the fault, I mean not entirely, but they definitely have a hand in it.

The main contributing factor for the rupee to fall is the strengthening of the US $. The US $ has gained against every major currency in the last few months. It has gained over the GBP, EUR, AUD, SGD and CAD. Not so long ago a currency that fell in value is the USD. USD was loosing its value significantly over all other major currencies and the rupee managed to hold still against the USD at this time. How did this falling currency in probably the last 24 months make a complete ‘U’ turn? Whats the magic? Did Donald Trump have a magic wand in which he managed to turn this around?

Donald Trump is probably not the most popular person in the world, and I am sure is with good reason. His mannerisms and etiquette is not fitting to be a president of US. But one thing seems to be for sure, he is a smart businessman. He is making the US economy bounce back. Unemployment numbers are down, the stock indices are up and the currency is gaining in value. Why is this happening?

In my opinion he did one very simple thing right. He brought the major industries back home. He started developing the local industry and gave the local entrepreneurs the strength to set up and start production on home soil. This enhanced the money circulation within the domestic market. In turn increased the buying power, and in turn the buying remained in the country, and not in China. One significant aspect of economics our Sri Lankan politicians seems to have missed.

Your currency value is based on a demand and supply. This Government decided it to be a free float and not to interfere with the natural course of the currency. This is not necessarily a bad thing. I don’t think a Government should interferer with the exchange rates by selling your reserves.

How demand and supply work;

When a country’s domestic production is high it could either mean the country is exporting its products, or the country imports less of products. When you export a product, you will receive USD into your country, alternatively when you import less you will save the USD you earn by not paying excessively for imports. This scenario will create an excess of USD in that country’s economy which means the demand for USD will drop and the local currency will stabilize or gain against the USD and other major currencies.

The other side of this coin is, when your country’s domestic production is less, they will have to import products from other countries to satisfy local demand. This will create a strain on the demand for USD since the country’s import bill is very high and their domestic production or the export does not cover the import component of that country. In a situation like this the country’s wealth is paid out to other countries where the imported goods are brought in from. This will create a sever demand on the USD and will make the USD increase and strengthen against the local currency.

The side affect of a country’s production falling is the unemployment within the country. People do not generate any value and is only consuming the imported product. This will create a shortage of liquidity in the market and people will feel the goods have increased in price and the cost of living is rising. However the real affect is that people do not have spending money in their hands to purchase the required goods.

What is Sri Lanka’s approach? If you can import it cheaper, then import. Don’t try to make it here. Is this the right approach? Don’t we have to protect our local industries???

Today we talk about the two greatest economies in the world. India and China? Did they become great over night? More importantly did they build great economies, products and world winning technologies by having an  attitude of “import if its cheaper outside”? They were closed economies for well over 20 years. They incubated their industries, brought them up like bringing up a new generation of babies. They had strict protectionist laws against foreign imports. I am sure the products were not up to standard at the start, and I am also sure US could have built an Alibaba much faster than Jack Ma did, and probably more efficiently than it originally was, but the country did not allow that to happen. They ensured that their local industries flourished. Now their products are world class, the rest of the world cant compete and now they are on war path to take over the world. One might argue the domestic market size of their economies cannot be compared to Sri Lanka, and this is true, but there are other ways in which Sri Lanka can hold their own in terms of local industry.

Let me start with a few basic steps the country can follow to reduce the foreign exposure.

Sri Lanka in the past ten years has alway imported rice. a country reputed to be the rice bowl of Asia is now importing rice. Why is this? Has there been a shortage in crop? No! The simple answer is the Government has not intervened to protect the local farmer. Buying the paddy at a minimum rate is not the full answer, the issue is with milling of rice. All rice mills and majority of warehouses are owned by private sector, they only mill the right amount of paddy to ensure market price remains high. however if the Government intervened and set up milling facilities and storage, we can completely avoid the import of rice. Every time the local price of rice goes up, CWE makes sure to import rice from Pakistan to control price and to show the people they did something great. However this is a self defeating tactic, you’d rather mill the full crop and store it within Government control to ensure price stability in the market, which will also save Forex in the longer run.

Stop importing vehicles for 3 years. Sri Lanka has way too many vehicles on the road than what should be. We pay a huge amount of money to foreign countries to import countless number of private vehicles. Most of these vehicles are owned by the finance companies. If by chance there is a liquidity shortage in the economy and the private vehicle owners start defaulting it will have a knock on effect on the finance companies, who’s main asset seems to be registered vehicles. In a striking economy having vehicles as collateral will not be of any help. My recommendation is stop import of private vehicles for a period of 3 years until we come out of this hole we are in. Vehicles for public transport and tourism should be encouraged.

Stop importing sea food and start improving facilities of sea food businesses. Sri Lanka presently imports LKR 15 billion worth of Canned fish annually. Majority of this comes from China. Thailand which has one third of the sea area Sri Lanka has is the third largest exporter of canned fish. Now, what have we go wrong here? Why cant Sri Lanka be competitive in producing canned fish and start looking at that industry to grow into exports markets and Eran forex. The Sri Lankan manufacturer cannot match the Chinese price on scale, hence they cannot even sell in Sri Lanka. The Government needs to intervene and protect the local industries by providing them some kind of protection from dumping from the Chinese. If the Government can invest in newer technology fishing crafts, the local catch will increase and the sea food industry can grow exponentially.

Invest in inland aqua culture. Sri Lanka has an ideal eco system for very lucrative inland aqua culture. The demand for products like Prawns, Crabs, Tilapia, Milk Fish, and Sea-bass is very high in the local market. The Sri Lankan mud crab has a massive demand in the east, especially in the well to do regions of China. Yet, there is not a single Hatchery developed by the Government except for Prawns. These are produce that can turn around forex very quickly. Each products life cycle is not more than 6 months. But no one seems to be interested. The next issue this industry is facing is the feed cost. Our quality of produce is far superior to any other South East Asian nation, yet they are at least 30%  cheaper in the world market, making our produce non competitive. The reason for higher cost is the feed cos for these fish. We have to import feed from China. If the Government invested in a feed factory in Sri Lanka, we can easily compete with much higher quality and at equally cheaper pricing. Why the fisheries ministry is not making efforts to develop this industry is only a mystery to the country.

Increase Tourism. The high growth potential industry is the tourism industry. Sri Lanka is no doubt one of the safest countries in the world, and easily the most safest country in this region. We need to work on better strategies to encourage tourist to travel to Sri Lanka. We need to expand our entertainment industry and think out of the traditional views. If it makes an issue to daily life of local citizens, then have tourist only zones like Singapore and the Casino’s. This is an industry in which we can improve and help the forex balance.

Dole Banan plantations. Dole is the most recognizable banana brand  in the world. Banana is the most consumed fruit in the world. We have extremely good conditions to grow Dole banana in Sri Lanka. We have plenty of land idling in fertile areas not making maximum use of space. Make all Government plantations companies to have an undergrowth a must. Give the land at nominal lease rates for these companies to expand their plantations. Encourage them to bring in their cultivation techniques to the country, learn from them and apply same to our plantations to ensure we deliver above average crops.

These are few of the very basic yet effective avenues the Government needs to use protectionism mechanisms to increase exports and reduce imports. Before we go to create the next apple or Samsung in Sri Lanka lets get the world to eat our Rice, seafood and Banana’s. If we don’t protect our local industries, we will soon go Banana’s as a country in the very near future

 

 

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