The depreciation of the Sri Lankan Rupee in the recent past has begun to have a negative bearing on the import sector which supports businesses and industries. Importers said although price increases have not been passed on to consumers they will be compelled to do so if the value of the rupee drops further.
A spokesman for the Importers’ Association said despite the continuous devaluation of the rupee for over a month, the increase in import costs was not passed on to the wholesaler or the consumer. We have have maintained the prices by averaging the cost, hoping the situation will improve.
However, importers said, “If the situation does not improve with further devaluation, we have no option but to increase prices of commodities. We hope to see some improvement in the value of the currency after the 2017 Budget,” importers said.
“We cannot sustain the trade by maintaining the same prices when the value of the currency drops. It is impossible to maintain and adhere to price control or Maximum Retail Price (MRP) introduced by the government recently. We have brought this matter to the notice of the authorities” an importer said.
The rupee depreciated Rs. 150 against the US dollar last week and continued to hover around Rs. 149 thereafter. Large quantities of sugar, milk powder and canned food are still being imported at a colossal cost each year and most of the commodities are imported by the private sector.
The rupee depreciated by around three percent last month from Rs. 146 to 149.50 which triggered an increase of three percent on every item imported. The import cost of a kilogram of sugar rose Rs. 3, dhal by Rs. 4.50, sprats by Rs.12, canned fish by Rs. 3 per 425 gram tin and green gram by Rs. 5.
The rupee has been on a steady decline since plunging from Rs. 127 in 2012 to Rs. 150 to-date.
Sri Lanka Chamber of Small and Medium Industries’ President M. Cader said it is too early to comment on the depreciation of the rupee as there could be a some stability brought to the currency after the budget.
However, the depreciation as it is at Rs. 150 to the dollar, will give a temporary boost to government revenue, ease pressure on BOP deficit, on account of increased value of export proceeds, reduced imports and increase from foreign remittances.
“Our imports will also increase in value, increasing costs and causing inflation in the local market putting pressure on consumer spending, whilst government revenue will be boosted by increased import levies, VAT, and NBT. Corporates will be affected with downward pressure on profitability and cash flow,” Cader said.
University of Colombo, Economics Professor Sirimal Abeyratne said the depreciation of the rupee is nothing surprising when the country’s foreign exchange earnings are based on borrowings and remittances instead of export growth and investment.
“We could use foreign reserves to hold it, as we have been doing in the past but there is a limit to that as well. As a result, import prices would rise for the domestic customers and the debt payment would rise, exerting pressure on the government budget,” he said.
Sri Lanka’s total outstanding external debt up to mid this year crossed US$ 23 billion according to the Ministry of Finance.
“Short-term policy measures are already on the table - borrowings and support from IMF. Debt-equity swap that the government has already initiated through sale of public investment projects and state-owned enterprises would also bring about temporary relief.
Yet the long-term stability and flexibility come with export growth and foreign direct investment; their success is yet to be seen,” Prof. Abeyratne said.
Ravi Abeysuriya of Candor Wealth Catalysts, said the exchange rate policy of the Central Bank of Sri Lanka (CBSL) has been consistent where Central Bank intervenes on both sides of the market to maintain stability whilst allowing adequate flexibility. The Sri Lanka Rupee has depreciated by only 2% year to date in 2016, compared to the year 2015 where the Rupee depreciated by 10% against the US dollar.
The US dollar is likely to depreciate against other currencies with Donald Trump winning the US election. Hence, the concerns of possible price hikes on imports including food items and raw materials due to the Rupee depreciating significantly is unfounded.