Sri Lankan forex crisis worries exporters

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September 08, 2021 4:20 AM

Of course, Lankan importers haven’t yet defaulted on payments but such issues will surface soon if the forex crisis there isn’t stemmed swiftly, Indian exporters fear.

Although Sri Lanka and Afghanistan are still small markets for India, expeditious resolution of any trade issues with these countries will help those, especially small businesses, that are supplying to these nations.Although Sri Lanka and Afghanistan are still small markets for India, expeditious resolution of any trade issues with these countries will help those, especially small businesses, that are supplying to these nations.

Even as the turmoil in Afghanistan continues to worry Indian exporters, a worsening foreign exchange crisis in Sri Lanka — a larger market with imports of $3.5 billion from this country in FY21 — has multiplied their challenges.

Exporters that FE spoke to said they could soon represent to the government to explore various options to address any payment issue that may emerge from the Sri Lankan crisis. These options include a temporary mechanism under which Lankan importers may be allowed to pay up in their local currency.

This can then be used by Indian importers to buy merchandise from the island nation, some of the exporters said. However, the problem with such a plan is that India has a decent trade surplus ($2.9 billion in FY21) with Sri Lanka, an official source said.

Of course, Lankan importers haven’t yet defaulted on payments but such issues will surface soon if the forex crisis there isn’t stemmed swiftly, Indian exporters fear.

“Sri Lankan importers have the ability to pay in their domestic currency but not in dollar,” said Raja M Shanmugham, managing director of garment firm Warshaw International and president of the Tirupur Exporters’ Association.
Another option could be to provide some sort of a line of credit (in Indian rupee) to Sri Lanka to enable it to pay for the goods.

Ajay Sahai, director general and chief executive at apex exporters’ body FIEO, said the exporters and the government will have to hammer out a solution to this emerging challenge fast.

The Sri Lankan economy — which depends heavily on tourism and exports of commercial crops like tea — was battered by the pandemic, as travel restrictions hit tourism. Its GDP contracted by a record 3.6% in 2020 and its foreign exchange reserves plunged by over a half in one year through July to just $2.8 billion. This has led to a 9% depreciation of the Sri Lankan rupee against the dollar over the past one year, making imports more expensive.

The island nation is heavily dependent on New Delhi for the supply of a broad range of goods. These include mineral fuel, pharmaceuticals, steel, textiles (mainly fabric and yarn), food products and automobiles. In the first quarter of this fiscal, India shipped out goods worth $1.1 billion to Sri Lanka, up 106% from a year before, albeit on a sharply-contracted base. But its imports from the tiny neighbour stood at $266 million in the June quarter, up 208%, again on a favourable base.

Meanwhile, the exporters said supplies to Afghanistan have stopped and prospects of trade with Kabul now hinges on whether New Delhi is going to recognise any government formed by the Taliban. Payments of `700-1,000 crore are stuck since the Taliban takeover of Kabul, they added.

India’s exports to Afghanistan dropped 17% last fiscal to $826 million, mainly due to the pandemic. In the first quarter of FY22, the exports jumped 79% to $216 million, aided by a favourable base. The Islamic nation mainly sources food and pharmaceutical products, textiles and garments from this country.

India has set an ambitious $400-billion export target for FY22, buoyed by impressive growth so far this fiscal. Outbound shipments in the first five months of this fiscal rose to $164 billion, recording a jump of 67% year on year and 23% from the pre-pandemic (same period in FY20) level.

Although Sri Lanka and Afghanistan are still small markets for India, expeditious resolution of any trade issues with these countries will help those, especially small businesses, that are supplying to these nations.

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