Sri Lanka's export sector performs better:

Misperceptions on Central Bank's position on GSP+

The results of the Central Bank of Sri Lanka evaluation on the impact of the GSP+ scheme on Sri Lanka from a risk management perspective was presented to the public recently.

From the feedback, we have observed that many analysts have concurred with the Central Bank's position, while none has been able to dispute the factual data that was presented by the Central Bank. However, of late, a few persons have unfairly criticized the Central Bank's analysis and hence the Central Bank's reiterates its position and highlights the weaknesses in some of those misperceptions.

As already set out, the thrust of the Central Bank position is that if exporters were able to compete in the international market when the Sri Lanka rupee appreciated significantly against the euro and pound sterling in late 2008 and early 2009, they should now be able to perform even better, when the rupee has depreciated against the same currencies.

It is now well-known that the large scale foreign exchange inflows into the market with the improvement of investor confidence, has been creating intense pressure on the Sri Lanka rupee to appreciate.

However, the Central Bank's frequent intervention by way of absorbing foreign exchange in the forex market at a high cost of sterilization to the Bank, has enabled Sri Lanka to maintain the current level of exchange rate and prevent a sharp appreciation, which could have negatively impacted exporters.

Despite the vast majority of exporters being appreciative of the Central Bank's strategy, a single exporter has been arguing that his company finds it difficult to continue its business and is hoping that the Sri Lanka rupee depreciates against the pound sterling to the level that prevailed in 2004.

Another exporter is arguing that the depreciation of the Sri Lankan rupee against the euro or pound sterling does not provide his company sufficient support as its export items are priced in US dollars.

These individualistic and contradictory arguments naturally create confusion among the public and it is in that context that the Central Bank wishes to reiterate, that in setting exchange rate policy, the Central Bank takes into consideration the overall macroeconomic factors, rather than the narrow preferences of individual firms.

The following important factors impact the competitiveness of Sri Lankan products in the international markets: (a) domestic inflation and input costs (b) security and political stability (c) initiatives that should mainly be developed by individual firms, e.g., technological improvements, institutional arrangements and environmental initiatives etc.

In this context, it is clear that the current regime of low inflation, lower inflation expectations and the falling interest rates provide a satisfactory support for the entire business environment, including exports.

Excessive reliance on temporary benefits, which are controlled by outside authorities or countries, results in a number of fundamental and structural problems for the recipient economy.

The high "politicization" of such concessions by interested parties together with periodic threats of withdrawal of concessions often leads to negative vibrations in the economy.

Such uncertainty saps economic momentum and also leads to delays by firms to introduce productivity improvements. These are, inter alia, some of the unhealthy outcomes of relying on "concession" regimes, which in the long-term, even inhibit sustained export promotion.

Recently some critics have also suggested that Sri Lanka's exports during the first nine months of 2009, declined by 16.8 percent, compared to the corresponding period of 2008, because of insufficient depreciation of the Sri Lankan rupee and the lack of fiscal subsidies to the export sector.

In that regard, it is important to point out that the decline in exports in 2009 is not specific or peculiar to Sri Lanka. It is a well known fact that the general lowering of worldwide exports is directly due to the most serious global economic crisis since the Second World War.

From the above, it is clear that Sri Lanka's export sector has performed better than most of the other emerging markets and developed countries, in the face of the global economic crisis, despite the exchange rates of many of the above countries depreciating sharply against the US dollar during late 2008 and early 2009.

This outcome confirms that a majority of Sri Lankan exporters have been able to compete successfully during the difficult external environment by improving their productivity levels, although a few individual exporters have perhaps not been versatile enough to compete effectively and are therefore lobbying for tax payer support and/or a currency depreciation.

The Central Bank of Sri Lanka wishes to state that in setting its exchange rate policy, the Bank considers the currency's impact on overall economic conditions in terms of, inter alia, exports, imports, inflation, cost of living, debt, investment and consumption, internal and external balances, and market movements of major currencies in international markets.

Accordingly, it is a carefully considered, professional decision which is taken in the interest of the entire country, unlike the partisan positions taken by some persons who are obviously driven by their own personal interests and individual preferences.