In the guise of protecting  Sri Lanka’s crashing economy,an attempt is being made to introduce a common currency between India and Sri Lanka through currency meger at a time the island nation is facing an unprecedented socio-economic crisis, informed sources revealed. 

Ajay Sahai, director general and chief executive officer, Federation of Indian Export Organisations (FIEO), said a proposal for local currency trading was deliberated by the government.

 In exactly a year since April 2021, the Sri Lanka government’s decision to peg its currency to the US dollar has come back to haunt the island nation. 

International Monetary Fund (IMF) data shows the economy’s net international reserves have been negative since December last year, and in this fiery April, Sri Lanka has less than a month’s reserve of forex to service a debt of US  $7 billion.

India stepped in to assist Sri Lanka at this critical and  crisis- surrounded juncture by extending US$ 3 billion as  its economic assistance so far this year thereby being instrumental in addressing diverse needs of the Government and the people who have now fallen from the frying pan into the fire.  

Sri Lanka is going through its worst financial crisis since its independence in 1948. Tourism is the third largest source of foreign exchange for Sri Lanka, behind remittances and apparel exports. 

While Covid badly hit tourist inflows, the government’s decision last year to switch to organic farming by stopping usage of chemical fertilisers disrupted traditional farming. This led to sky-rocketing inflation.

Sri Lanka’s usable foreign exchange reserves have slipped to US $ 50 at present which is barely sufficient for one month of imports from $ 103 at the beginning of April this year finance ministry data highlighted.

In this critical juncture some economic advisers in the government are advocating the currency merger as a solution to overcome the current financial debacle.  

However India does not find local currency trading feasible with Sri Lanka  under the current circumstances. This is because there’s no demand for Indian goods at present, except for essential items that India is supplying under humanitarian grounds.

Ajay Sahai, director general and chief executive officer, Federation of Indian Export Organisations (FIEO), said a proposal for local currency trading was deliberated by the government.

“In fact, we proposed trading in local currency. We said that since the balance of trade is in India’s favour, we will have a situation where money is lying in our account. Since a lot of companies are looking at investment opportunities in Sri Lanka also, that money can be used by them for investment there

However, we understand that this is a crisis we are dealing with and our focus should be on humanitarian issues. Business can take place later,” he added.

India is currently contemplating local currency trading with Russia as Western nations imposed economic sanctions after Russia invaded Ukraine. Most of Russia’s banks have been cut off from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging system.

However, unlike with Russia, India had a trade surplus of about $3.8 billion with Sri Lanka in 2021. India’s exports were $4.8 billion and imports stood at $979 million.

 India has responded to urgent requests from Sri Lanka with assistance worth $ 3 billion since January. A line of credit of $500 million has been provided by Exim Bank for petroleum products. Another $1 billion for food, medicine and essential items has also been signed.

The Reserve Bank of India (RBI) has also extended a currency swap of $400 million and deferred $500 million due for settlement through the Asian Clearance Union.

Sri Lanka exporters are facing difficulties in getting raw materials, suppliers are losing confidence due to delayed payments and exporters may face dwindling orders as delivery deadlines are not met, latest bi-annual Export Barometer Survey divulged.

Findings from the latest bi-annual Export Barometer Survey indicate that exporters are losing confidence in the industry’s outlook, as firms face mounting challenges posed by increasing local and global economic risks. 

This survey was conducted by the Ceylon Chamber of Commerce (CCC) and the United States Agency for International Development (USAID)’s Partnership for Accelerating Results in Trade, National Expenditure and Revenue (PARTNER) project.

.The survey, compiled in February-March 2022, received responses from 173 exporters of goods and services, including small and medium enterprises (SMEs) and women-owned and/or led enterprises. The findings drawn from the survey indicate a fall in confidence in exporter outlook for the first half of 2022 as a result of these challenges. The key insights of the survey are as follows:

A majority of exporters saw an increase in revenue during the second half of 2021, in line with the strong export performance recorded by the country during the period. However, there was an increase in underutilized capacity during the second half of 2021, compared to the first half of the year.

Due to the foreign exchange shortage, exporters faced difficulties in sourcing production and service input, with 72% of export firms having lost suppliers or faced delays in sourcing. The majority of firms, particularly SMEs, were concerned about their ability to export in the future, due to production/service delays or losses in suppliers resulting from forex shortages.

A significant number of exporters are considering cost-cutting measures, such as reduction in hiring and freezing contract/part-time employment, due to the ongoing economic climate. Despite this sentiment, most firms in the second half of 2021 have retained their employees, while keeping training budgets unchanged.

Most exporters continued export orders on the Business-to-Business (B2B) model, compared to Business-to-Consumers (B2C). Similar to the previous survey’s findings, firms are leveraging online channels to drive sales, although they continue to provide less than 25% of total revenue for the majority of firms. As such, there has not been a significant improvement in the utilization of the digital landscape for exports during the last six months of 2021. 

Only 60% of firms have found new export opportunities, compared to 75% in the previous survey. However, both SMEs and women-owned and/or led businesses have found new opportunities, and this number is higher compared to the previous survey.

 Exporters stated that they require market access support and improvement in the regulatory process and recommended that a market-determined exchange rate be allowed to facilitate export competitiveness.

A fall in confidence in export outlook can be observed, compared to the previous survey. However, exporters continued to be more confident about the growth of their export business in the first half of 2022 than in the economic outlook. This export growth is expected to be driven by significantly higher unit prices of export orders.

Sri lanka food prices skyrocketed due to shortage and high import costs of imported food items including wheat, sugar and essential commodities in the dollar crisis and the devastation of agriculture following the government’s organic farming strategy. 

In this backdrop an independent policy think tank based in Colombo Advocata in its latest survey revealed that  Year on Year food price increase is now close to 50 percent. 

The Sri lankan economy was in danger well before Russian tanks began rolling into Ukraine. Burdened by foreign debts and squeezed by the effects of the pandemic on its tourist receipts, the Rajapaksa government’s  inconsistent  short sighted and crazy policies including the going for organic farming overnight  has destroyed the local agriculture creating food shortage, economic analysts said.      

Now a devaluation of the currency and the impact of the war on commodity markets is sending consumer prices soaring. 

Troops have been deployed to calm the crowds queuing for fuel, and a debt default may be unavoidable. As the prices of everything from oil and gas to corn and wheat surge prompting people to take the streets.  

Advocata’s  Bath Curry Indicator (BCI) , which tracks the monthly changes in the retail price of food, recorded an increase of 14% from March 2022 to April 2022.  This is a year on year increase of 49% for this basket of food.

This is driven primarily by prices of dhal and samba rice being the highest recorded by the BCI. A kilo of Dhal in April 2021 was Rs 178, a year later it costs Rs 466. A kilo of samba in April 2021 was close to Rs 130, a year later this costs Rs 210. With food prices increasing at this rate, a family of four to spend on the BCI basket of food would have to pay approximately Rs 560 more for a week.

The Colombo consumer price index recorded a similar rate of 47% year on year increase in food inflation. Comparing supermarket food prices from March 2021 to 2022 there has been an increase of close to 40%.

This drastic increase in food prices in 2022 is a result of macroeconomic instability within the country. Although global prices have increased due to the pandemic and issues with supply chains, global prices have not  increased as fast as the prices in Sri Lanka.

In Sri Lanka in addition to the global pandemic related issues, we are currently facing shortages of foreign currency which impacts local supply chains.  This impact has also been exacerbated by consistent import restrictions, both causing shortages. These shortages compounded by the fact that the value of the currency has been falling steeply have all contributed to food prices rising faster and faster in 2022.

The BCI tracks the weekly retail prices in the Colombo market of the most commonly consumed food ingredients that might be used in a typical Buth curry meal. The prices are collected from the “Weekly Indicators” that the Central Bank publishes.