Tea factory owners fear total closure owing to the worsening fuel crisis and other shocks putting much needed foreign exchange earnings at risk amidst lowering of tea production after 23 years.

Sri Lanka Tea Factory Owner’s Association President Lionel Herath noted that there is a serious risk of all the tea factories in seven districts across the country coming to a standstill if sufficient fuel stocks are not received in the next few days.

“Right now, the factories are working three to four days per week as the rest of the days the employees are in fuel queues,” he added.

Tea production in June hit a 23-year low of 20.1 million kilos, Asia Siyaka Commodities PLC revealed yesterday.

It said the lowest crop for the month of June was 19.3 million kilos recorded in 1999. The June 2022 crop is also down 22% YoY from 2021 quantity of 26 million kilos.

Asia Siyaka said high grown tea production of 4.05 million kilos in June was lowest ever on record, with closest to this figure was 4.5 million kilos in 2004.

The Low Grown tea production amounted to 13.1 million kilos down 16% from a year ago. The 2022 June figure is the lowest since 2007 when 12.8 million kilos was produced.

Mid Grown crop of 2.9 million kilos was also the lowest in record and was down 44% from last year.

Asia Siyaka said tea production for the first half of the year has dropped by 18% to 132.9 million kilos from a year ago. High Grown production was 31.2 million kilos compared with 36.6 million kilos the year before.

“One has to go back to the El-Nino year of 1992 when a severe drought limited production in the first half to 29.1 million kilos to find similar production figures,” Asia Siyaka said.

Low Grown crop of 79 million kilos reflected an 18% drop from 1H of 2021.

Sri Lanka Tea Factory Owner’s Association President Lionel Herath claimed the Power and Energy Ministry’s support extended to one of the oldest and key export industries has been disappointing.

Some tea factory owners have paid money to get fuel and built necessary storage tanks, but the fuel has not been provided till now.

Three months ago, our main issue was fertilizer, now it is the shortage of fuel to operate the factories,” he added.

It was pointed out that in the seven tea-growing districts, 264 private tea factories and another 258 factories under the plantation companies and non-members operating across the country are operating with utmost difficulties.

As per him over 400,000 tea smallholders and nearly two million people or 10% of the total population are engaged in direct and indirect jobs related to the tea industry and are suffering from multiple issues.

Herath said they discussed with the Plantation Industries Minister to ensure a steady supply of fuel. SLTFOA Joint Treasurer Dr. W. Jinadasa said due to the shortage and price of fertilizer tea production and quality have dropped significantly.

“Tea production has dropped by 20% to 30% due to fertilizer, whilst the tea buds quality (two leaves and a bud) have dropped by 60% – 70%.

There is a good price for tea in the market, but the industry does not have sufficient quality quantities due to short-sighted policies the Government implemented and the cost across the board has increased by three to four folds,” he added.

He also pointed out that the use of fertilizer has dropped by 80%, given the high prices at present.

India has surpassed China to become the top lender to Sri Lanka, as the former came to the rescue when Sri Lanka started experiencing some acute shortage of foreign currency from the beginning of the year which reached a breaking point in March causing a complete collapse of the country’s economy.

Based on the data available on the disbursement of funds in the four months through April 30, India came on top, extending US$ 376.9 million worth credit compared to a paltry US$ 67.9 million extended by China.

However, this didn’t include the full package of foreign assistance from India, which approximated to US$ 3.5 billion through June this year by way of multiple credit lines, term loans and deferred loans.

India emerged as the first responder under Prime Minister Narendra Modi’s neighbourhood first policy when Sri Lanka was ditched by all other bilateral partners for funding support to ride out the dollar crunch which became more pronounced since the beginning of the year due to a confluence of external and internal factors.

As part of its US$ 3.5 billion package of assistance, in the four months through April, the two countries signed agreements for US$ 1.5 billion worth export credit facilities.

A US$ 500 million short term credit line was agreed on February 2, 2022 for two years, with a grace period of one year at the new benchmark rates for 6 months Secured Overnight Financing Rate (SOFR) plus 1.5 percent.

Another US$ 1.0 billion was agreed on March 17, 2022 for the importation of essential commodities for 3 months SOFR plus 1.6 percent payable in three years.

When the final credit line for fuel with India came to an end in mid June, Sri Lanka’s economy came to an abrupt halt causing widespread protests which culminated on July 09 which ended up chasing away the country’s embattled President Gotabaya Rajapaksa.

Dr. Ganeshan Wignaraja, a Senior Fellow at National University of Singapore speaking at a recent forum suggested that India could go bigger in bailing out Sri Lanka by giving leadership to the proposed donor summit with the rest of the bilateral and multilateral partners to provide up to US$ 25 billion in fresh funding in the next three years.

After India, Asian Development Bank (ADB) came in as the second largest lender with US$ 359.6 million being disbursed in the first four months, followed by the World Bank with US$ 67.3 million.

Despite wide expectations, China’s unwillingness or the reluctance to come to the rescue of Sri Lanka when it needed the most raised many eyebrows.

However, on Friday, Palitha Kohona, Sri Lanka’s Ambassador to China told Bloomberg News that the request for up to US$ 4.0 billion worth aid from the world’s second biggest economy and Sri Lanka’s largest bilateral funding partner until recently could come at some point.

Despite the severe hardships faced by people with lack of fuel, gas and many other commodities, China hasn’t also unlocked its US$ 1.5 billion equivalent Yuan denominated swap line with the Sri Lanka’s Central Bank for use.

Having exhausted all its options when Sri Lanka turned to the International Monetary Fund for a bail out in April, as China initially balked at the idea.

In the first four months, Sri Lanka took the receipt of foreign loans to the total value of US$ 968.1 million and US$ 0.7 million in grants.

The Reserve Bank of India on 11 July, asked banks to put in place additional arrangements for export and import transactions in Indian rupees in view of increasing interest of the global trading community in the domestic currency, reported PTI.

The central bank said in a circular instructed that before putting in place this mechanism, banks will require prior approval from the foreign exchange department of RBI. “In order to promote growth of global trade with emphasis on exports from India and to support the increasing interest of global trading community in INR, it has been decided to put in place an additional arrangement for invoicing, payment, and settlement of exports / imports in INR,” it said.

For settlement of trade transactions, the concerned banks will require Special Rupee Vostro accounts of correspondent bank/s of the partner trading country.

According a report by The Hindu, the RBI’s move would facilitate trade with countries under sanction like Iran and Russia. But this decision has also gained in significance in the backdrop of the recent economic upheaval in neighbouring Sri Lanka — currently, one Sri Lankan rupee equals 0.22 Indian rupee.

Speculations are rife that the Sri Lankan Rupee (LKR) will be substituted with the INR in certain segments of the economy, according to Sri Lankan news agency The Sunday Morning.

The comes when Nandalal Weerasinghe, the Governor of Sri Lanka’s Central Bank on Sunday, said that the country’s economy is likely to contract by over six per cent this year — worse than in the pandemic-affected 2020, when the economy shrank 3.5 per cent.

The currency swap has the potential to draw foreign investors who will be attracted by the stability of a substitute currency and show greater willingness to be paid in INR rather than the domestic currency LKR, which might be subject to losses on foreign exchange markets. Further, with a foreign currency, the economy is unlikely to face a balance of payments crisis when speculators take flight and sell domestic currency.

However, former director of the Central Bank of Sri Lanka and Advocata Institute Senior Visiting Fellow Roshan Perera stated that she did not think that it was possible to use the INR in parallel to the LKR in Sri Lanka if the substitution was to take place in a few selected sectors, it reported.

Perera said, Bhutan and Nepal are using INR mainly because most of the goods in their respective countries come from India and therefore it makes sense to pay for these products in INR because they had already been priced in INR terms. However, she said that is not case with Sri Lanka.

Economist and Frontier Research (Pvt) Ltd Product Head – Macroeconomic and Thematic Research — Chayu Damsinghe told The Sunday Morning that the partial substitution may not change ‘anything much’. While University of Colombo Faculty of Arts Department of Economics Senior Lecturer and Attorney-at-Law Shanuka Senarath said that if Sri Lanka were to substitute the LKR with the INR or any other foreign currency, it would probably mean that part of Sri Lanka’s national sovereignty would no longer be in its control.

It is interesting to note here that following the Russian invasion of Ukraine, in southern Kherson region the ruble is being used alongside the Ukrainian hryvnia. Similarly, Haiti uses the US dollar alongside its domestic currency the gourde, and Cambodia used it alongside the Cambodian Riel for many official transactions.

The Diplomat, however, reports that at this point of time an IMF bailout is a must, as currency swaps with India and China alike have been insufficient in ameliorating the foreign-exchange crisis. Yet the IMF will set strict conditions, including a necessary consensus from the creditors regarding debt restructuring. That looks unlikely at the moment, with one of the major bond-holders of the government filing a lawsuit against the Sri Lankan state for a bond payment due in July 2022. Sri Lanka can neither get more foreign exchange, nor more debt relief, without substantial and shocking readjustments to its domestic economy.

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