- Good indication that SL’s dollar reserves are growing: Treasury
- Nothing can be done about losses due to fluctuations: Food importers
- Difficult for exporters to plan; need guidance from authorities: NCE
Amidst towering stacks of invoices and meticulously organised shipping documents, K. Perera embarks on his daily duties in his office as an importer of consumer goods. With each passing day, the weight of the increased cost of importing goods presses down on his shoulders, steadily chipping away at his profit margins.
With steely determination, Perera carefully pores over financial reports and market analyses, searching for the elusive glimmers of opportunity amidst a sea of challenges. Every spreadsheet becomes a battlefield, every decision a strategic plan in the complicated dance of import commerce.
Addressing the strain on cash flow amidst dropping exchange rates, Perera told The Sunday Morning: “While a depreciation of the rupee might suggest savings, it actually translates to increased expenditure in settling our dollar-denominated invoices. This puts pressure on our cash reserves, often compelling us to resort to expensive short-term financing to bridge the financial gap.”
Perera likened the fluctuating exchange rates to a precarious balancing act, stating: “Navigating through these fluctuations feels like walking a tightrope, unsure of when the next breeze will hit. Even with our efforts to hedge currency exposure, planning ahead becomes a daunting task when the landscape is constantly shifting.”
He also highlighted the impact of exchange rate shifts on market dynamics, noting: “As the rupee weakens, imported goods become relatively cheaper compared to locally-produced alternatives. However, this doesn’t necessarily guarantee an advantage, as consumers may still opt for domestic products due to perceived quality or loyalty.”
Further elaborating on the challenges, Perera highlighted the need to adapt swiftly to Government policies aimed at stabilising exchange rates. “Tariff adjustments, import regulations, or interventions by central banks can disrupt our supply chains and inflate procurement costs,” he explained. “Remaining nimble is crucial to navigate through these policy changes and mitigate their impact.”
Despite the hurdles, Perera maintained an optimistic outlook on the opportunities presented by dropping dollar rates. “A weaker rupee can potentially bolster our exports’ competitiveness in foreign markets. We’re constantly exploring avenues to leverage these fluctuations to our advantage, whether through expanding our product range or exploring untapped export markets,” he observed.
Importers challenged
Like Perera, many importers in Sri Lanka are facing similar challenges at present.
Essential Food Commodities Importers’ and Traders’ Association (EFCITA) President G. Elamanadan voiced concerns over the significant losses incurred by importers due to sudden fluctuations in dollar rates.
He lamented: “There’s nothing that can be done to mitigate these fluctuations. While we would prefer to be informed in advance, it’s challenging for the Government to predict and communicate such changes. As importers, we feel helpless in this situation. Unfortunately, this is what we have come to expect during an economic crisis.”
National Chamber of Exporters (NCE) Secretary General Shiham Marikar, speaking on challenges exporters face amidst fluctuating exchange rates, stated: “When there are fluctuations happening at this rate, it is very difficult for exporters to plan, especially in terms of costs. Exporters believe that the dollar rate should not be controlled by anybody and should be determined by the market.”
He also emphasised on the need for guidance from authorities during such fluctuations: “There should be some sort of advice or guidelines given by the authorities if they foresee something like this happening. Sudden spikes in the exchange rate can catch businessmen off guard, causing significant disruptions to operations. For example, if the Government is going to open up vehicle imports, that will obviously have an impact. But if they can give an indication to the business community, they can plan accordingly.”
Marikar, highlighting the consequences of abrupt changes in exchange rates on business operations, explained: “What we see right now is sudden spikes and businessmen will be in huge trouble if they are not prepared for these fluctuations.”
Rise and fall
Central Bank statistics showcase fluctuations in the dollar rate over the course of March. Beginning at Rs. 310.1532 on 1 March and declining to Rs. 301.1837 by 28 March, the trend suggests a gradual depreciation of the dollar against the Sri Lankan Rupee over this period. However, within this downward path, there are noticeable daily rate fluctuations, indicating short-term volatility in the currency market.
Sri Lanka’s gross official reserves saw a slight increase to $ 4,517 million in February, up from $ 4,496 million in January. These reserves comprise fiscal balances, typically acquired through borrowing, and monetary reserves, which are assets held by the Central Bank. The Central Bank, tasked with maintaining reserves, often acquires them through purchases or swaps, such as those with the Reserve Bank of India and the People’s Bank of China.
As per statistics, recent trends indicate an uptick in swaps with domestic market participants, although the Central Bank also holds significant domestic assets. However, borrowing dollars through swaps can pose challenges, potentially leading to misaligned rates and increased money supply if private credit expands. Despite these challenges, there has been improvement in the Central Bank’s nett foreign assets, indicating a reduction in external liabilities and rupee appreciation.
The Central Bank had previously depleted its reserves to maintain artificially-low rates, highlighting the complexities of managing reserves under flexible inflation targeting.
Sri Lanka has faced similar situations in the past, with notable occurrences in 2011/2012 and 2015. In 2011, the Central Bank supplied a total of $ 3,184 million to the market, followed by $ 977 million in the first two months of 2012, until greater flexibility was introduced in exchange rate determination in February 2012. Despite the substantial depletion of reserves, the Sri Lankan Rupee depreciated from Rs. 113.90 at the end of 2011 to Rs. 132.55 against the US Dollar by 26 April 2012, marking a depreciation of 14.07%.
Similarly, in 2015, the Central Bank provided $ 1.9 billion in nett terms throughout the year before opting for increased flexibility in exchange rate determination on 3 September 2015. This decision was followed by a depreciation of 4.8% against the dollar by the end of September that year.
Increased flow of dollars
When contacted by The Sunday Morning, Treasury Deputy Secretary R.M.P. Rathnayake noted that the Government was not controlling the dollar rate and that the fluctuations currently experienced were due to the increased flow of dollars into the country.
“This is a very good indication that our dollar reserves are going up. Mainly from foreign remittances as well as from the boost in the tourism sector, we are getting more dollars into the country. We have seen the fluctuations, but there is no intention to control them; instead, we let the market react accordingly,” he explained.
When asked whether the fluctuations could pose a threat in the future, with local traders potentially saving their dollars in other countries in expectation of better rates and to avoid the impacts of sudden fluctuations, Rathnayake stressed that there was no necessity to do so. “What we are experiencing currently is a positive trend, which is bringing more dollars into the country.”
When asked why the Government could not predict the fluctuations and warn importers/exporters or other interested parties, the Deputy Secretary noted that it was difficult to predict. “There are assumptions made by the International Monetary Fund (IMF) and other institutions, but those assumptions do not necessarily take place accordingly. It is hard to predict,” he added.