Rupee eases, tea-rubber crises averted

(November 02, Colombo, Sri Lanka Guardian) It was a rare week filled with developments even a hard-nosed corporate executive wouldn’t have expected. The banks and markets were closed on Monday for the Deepavali holiday but when normal work resumed on Tuesday, a flurry of activity triggered some hope across the business world that Sri Lankan officials were finally getting down to brass tacks to tackle the global financial crisis.

Is the crisis affecting Sri Lanka? ‘Not as bad as other markets,” was essentially what Central Bank (CB) Governor Ajith Nivard Cabraal said a few days after the financial crisis erupted and two US institutions collapsed. In fact the CB had done well to withdraw between US$75 million to US$90 million of its investment in Lehman Brothers before the US investment bank crashed.

But the cautious euphoria over a perceived notion that Sri Lanka had done well to handle the crisis – even though Cabraal kept saying ‘we are watching the situation’ – ended this week, with the government forced to take a series of decisions to bail out local industries and exporters affected by external events.

On Tuesday, the Tea Board stepped in to buy tea – in a rare move – and prop up prices which has been sliding amidst a lot of tea remaining unsold at the Colombo auction. This came after tea industry officials met the President who instructed the Central Bank to work out ways of stabilising the sector.
On the same day, the modalities of the US$150 million bailout package, for those exporting to the EU and seen being affected if GSP+ benefits don’t come in 2009, were worked out. As these developments occurred, crude prices continued to crash in overseas markets and fell below the $60 per barrel for the first time in 19 months. Yet – early in the week - the Ceylon Petroleum Corporation remained silent as public criticism mounted over demands for local fuel prices to be reduced.

On top of that rubber prices here – along with the rest of the regional markets - were crashing with industry officials also looking at the government for a handout. That is unlikely to happen because three top rubber producers – Indonesia, Thailand and Malaysia – agree to cut production levels which should see demand rising and with that prices going up.

Under pressure from tea and rubber producers demanding a devaluation of the rupee, the Central Bank on Thursday allowed a marginal float of the currency saying some depreciation of the rupee would be permitted as exporters had been affected by other currencies sliding.

Foreign earnings have also fallen. According to the latest data of the Central Bank, the trade deficit widened by 76 % to US$501 million in August 2008. The trade balance widened to US$ 4 billion during the first eight months of the year from a deficit of 2.1 billion in the same period last year.

Now how this scenario – to most analysts the situation is precarious – will play out in next week’s budget is anybody’s guess. What however is certain is that there is unlikely to be any ‘goodies’ for the consumer’s benefits with the focus being on the need for people to tighten their belts and expect harder times ahead as the global crisis starts hitting countries like Sri Lanka.

While the long-awaited depreciation of the rupee will no doubt cheer export sectors like tea and rubber, and garments, the impact on the cost of living and inflation in terms of food and fuel imports remains to be seen.

With pressure mounting on the need to bring down fuel prices, the Ceylon Petroleum Corporation – it was learnt on Friday -- is considering a fuel price reduction possibly next week before the budget. Commodities in overseas markets, and in Sri Lanka’s case wheat flour and sugar, are seen falling with the economic crisis and that to some extent could offset the impact from a rising US dollar.

Now would all eyes be on the budget? To some extent yes … but it could also be distracted by the military battle for Kilinochchi and even more, the local impact from the November 4, US Presidential election. - Sri Lanka Guardian