Thursday, December 17, 2015
We cannot devalue and grow unlike most emerging market economies!
The US$1.5B BONDS that were recently sold at 6.75% are now trading at 7.8%, resulting in its borrowers taking a LOSS of 15% at least, within a few months! Due to the lower rating for SL in the world, and increasing interest rates world wide. This means that we have to reschedule debt to the tune of US$5B due to the profligacy of the Rajapakse Administration that DID NOT understand the detrimental effects of their waste! This will be at 9% resulting in the need for considerable belt tightening, and no hope of paying off debt and inability to grow due to the growth trap that cannot be solved by devaluation!
It is a myth to believe the answer to the inevitable problem we will face in 2016 is to devalue the rupee, and hope there is an export lead boom. For one thing Sri Lanka’s current export mix is NOT determined by lower price, and hence is price inelastic.
The world market prices of tea and rubber have fallen and so we are affected as demand has NOT picked up as a result! So how can a devaluation affect that industry, favorably? It will NOT increase employment or the volume of exports. The same logic will be for Rubber. As for the apparel sector which is now of high quality, a devaluation will not make a big change, as the products are priced in dollars, and the exporters are unlikely to reduce the dollar value.
Take tourism, that too is not determined by exchange rate alone, and whilst there is some price comparison by budget tourists, as the internet hotels are all priced in dollars, that too will not change, and so there will be NO increase in that business from a devaluation. Of course the dollar value of remittances will remain the same or will not change upon a depreciation, so all that a devaluation will do to the economy, is to increase the input costs of all, and we are a heavily import dependant economy, all our costs will go up, resulting in higher inflation, and lower purchasing power all round, effectively being a recession!
The above link for rural investment is the ONLY hope for a more competitive export structure of new markets of new products where we are directly competing with others. This is outside the tradition markets, and MUST either be value added exports of processed food stuff, be it virgin coconut oil, coconut water, or packed and bottle original kithul treacle.