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Sri Lanka needs to grow food to stabilize exchange rate: Treasury secretary
26 Jan, 2012 06:59:41
Jan 26, 2012 (LBO) - Sri Lanka has to grow more food to reduce imports which will help strengthen the exchange rate, Treasury Secretary P B Jayasundera said, as the country lost almost a quarter of its foreign reserves defending a dollar peg.
"There is no economic justification to import any longer the kind of food that we can produce," Treasury Secretary P B Jayasundera told reporters.

"The country needs to replace at least part of the imports currently taking place. And it should not take time. That is why we decided to go for an aggressive food production drive."

Up to a billion rupees of imports could be replaced this year itself.

"It’s a relief because we can't reduce oil imports," he said.

Jayasundera said oil imports were a key reason for the rising trade deficit, but there was no choice but to import oil until Sri Lanka started to produce its own, perhaps in 2015.

In Sri Lanka oil imports are frequently blamed for balance of payments troubles, which started with creation of an unstable soft-pegged central bank in 1950, abolishing a hard peg which had kept the exchange rate fixed from 1884.

Jayasundera said Sri Lanka imported about 200 billion rupees or about two billion US dollars of agriculture related goods.

He said 49 million dollars of dried chillies, 74 million dollars of dried fish, tinned fish, dhall and 400 million dollars of sugar and 330 million US dollars worth milk was imported each year.

Sri Lanka's economic nationalism, import substitution and state intervention reached its heights during the 1970s.

Cornered by trade and exchange controls, people drank tea without milk and sweetened it by licking a few rationed sugar grains off the palm. Others bit into a coarse sugar cube or jaggery branded 'ran kati' (gold nuggets), made by state enterprises.

But Sri Lankan citizens are now working in factories exporting apparel and other products earning foreign revenues. Members of the poorest people families are working abroad in the Middle Eastern desert and remitting billions of dollars by working hard.

Their children and wives are now eating better, including imported foods like dhall, dried fish which for the most part are cheaper than foods produced by the politically backed domestic farmers with subsidized fertilizer and import protection.

The state has to regularly increase taxes on imported basic foods to make them expensive to the poorer people in particular and force them to eat domestically produced goods.

Minister Basil Rajapaksa said Sri Lanka now produced its entire requirement of maize domestically and ulundu seeds were being produced in the Vanni region after the end of a 30-year war in the area.

Now there was a surplus in rice and it was gifted to Somalia. Jayasundera said the budget had offered incentives and the creation of rice export zones. Sri Lankan farmers do not produce export standard rice yet.

Sri Lanka was also planning to export chicken this year, minister Rajapaksa said.

But Sri Lanka should have a realistic exchange rate, he said.

Sri Lanka's foreign reserves which peaked at 8.1 billion US dollars in July fell to 6.2 billion US dollars by November 2011, and have fallen further since then.

An International Monetary Fund team is now in Sri Lanka. The IMF has called for a flexible exchange rate.

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READER COMMENT(S)
15. Nirawira Feb 10
"But Sri Lankan citizens are now working in factories exporting apparel and other products earning foreign revenues. Members of the poorest people families are working abroad in the Middle Eastern desert and remitting billions of dollars by working hard".
14. sltk2004 Jan 30
What about weapons, explosives, ammunition etc? We import those also. Can't we use traditional weapons - swords, hella, stones etc. We could save a lot of money?
13. R.M.B Senanayake Jan 29
The Treasury Secretary wants the Rupee depreciated but such action alone and in isolation will not help to corect the current account deficit in the balance of Payments. There must be a tighter fiscal policy to accompany it. This is basic macro-economic fundamentals.

Rupee depreciation will increase prices of imports and cause higher inflation all round and still there may not be a correction since imports are inelastic while export earnings depend on foreign market demand. The Secretary to the Treasury may not get the direct blame for it then. But the same reduction in imports can be achieved through import controls and higher tariffs. Of course the blame will then come on the government since it is visible unlike a Rupee depreciation.

Yes we need to promote consumption of domestic food but there is no free lunch for it will be at the expnse of the less affluent fixed income earners and the poor who will have to pay more for food like bread which is more or less a staple food on the estates. Rupee depreciation may also be a disincentive to foreign investment in the bond market and may even lead to an outflow from the government bond market by foreigners who may decide not to hold the bonds util maturity and instead sell them in the secondary market before interest rates rise

12. Dayan Jan 27
I find completely confused on PB's statement on controlling mechanism of foreign exchange, rather dull and haphazrad. If we happened to spend more FX for Oil, why we dont improve Public transport system and encourage local food by way of carefully planned PILOT programmes NOT the way they tried to introduce plastic crates.
11. Sandwich Jan 27
We should learn from Sinhala only and not try to control people's food and create a rice only country.

Sri Lanka is not only the land of Sinhala speakers and rice eaters. Even in the past, people ate a lot of yams and a variety of sources of carbohydrates.

You can make noodles from rice. Make hoppers from rice. Make string hoppers from rice.

Eat rice. Be happy if Sri Lankans eat more fruit or wheat whether grown in Pakistan or not. Why do you want to control us? What sadistic pleasure do you get from these actions? Why why?

Have some mercy. Treat us wheat eaters better than Nazi's treated jews. I beg you. Please dont do this to us. We do not have the vote in the parliament to stop this. We can only beg.

10. Swarna Salgado Jan 27
10%-13% our imports from 1997 to 2009(according to figures of Central Bank) constitutes Wheat flour, Sugar and rice. We can grow rice and Sugar in Sri Lanka. I saw some news about bakery grade rice flour being produced in Sri Lanka that can substitute imported wheat flour for bakery use (bread, biscuits, cakes etc...).

Such industries should be supported to stop importing wheat flour and feed our people with our own rice flour. We know wheat flour is the main reason for diabetes, obesity and many more diseases. Instead of limiting food imports the government is now importing wheat flour from Pakistan. I can’t understand what Dr. PBJ is talking about.

9. Liberty Jan 27
Well done. This mindless nationalism puts Nazi autarkists to shame. I am sure Wilhelm Keppler could not have put it better dk.

It is amazing to what lengths we go to control our fellow citizens (who are also human beings) and their food preferences. Long live Sri Lanka where people eat food according to what rice nationalists decree by import duty administered by police power.

So this is why we got freedom from the British. Good to reflect on this as we celebrate independence day shortly.

'Liberty liberty give us, in order to oppress!'

8. D.K.,RAJAPAKSA Jan 27
All what Dr Jayasundera has mentioned is correct but most important drain of foreign exchange has been ommitted or forgotten.There is a seriuos drain of foreign excahnge by importing flour when rice can be easily substituted

Already bread is being made with 50% rice flour but recent import of PAKISTAN cheap flour has driven those industries to the wall.Before thinking of rice exports why not we consume more and reduce flour imports as it foolish to import flour and export rice.

The other exchange drain is milk powder imports which can be reduced byu promoting locally made milk powder and promoting fresh milk.

Also restrict import of apples and other preserved foods.

7. Old Timer Jan 27
This brings me back to the 1970's when we had import restrictions, food shortages and queue's for everything.

The budget speech opened with a remark that we went on the wrong path in 1977, now it seems more and more like they want to take us back into 1970; with expropriation, trade restrictions and all.

6. fuss Jan 27
EconStudent
You are right. However he is not alone in this thinking. It is not limited to Sri Lanka either.

Some of the most famous 'Anglo-Saxon' economists especially those connected with the establishment subscribed to this view and later said Germany ended up in hyper-inflation because of war reparations.

As Ludwig von Mises explained:

"The Allies were from the very beginning of the negotiations handicapped by their adherence to the spurious monetary doctrines of present-day etatist economics.

"They were convinced that the payments represented a danger to the maintenance of monetary stability in Germany, and that Germany could not pay unless its balance of trade were “favorable.”

"The truth is that the maintenance of monetary stability and of a sound currency system has nothing whatever to do with the balance of payments or of trade. There is only one thing that endangers monetary stability—inflation. If a country neither issues additional quantities of paper money nor expands credit, it will not have any monetary troubles."

5. EconStudent Jan 26
I think that the top economist PB has lost his head or he is just uttering nonsense to please his masters. Sri Lanka's food imports are just less than 5% of import bill amounting to some $ 1000 mn of a total import bill of $ 20,000 mn and a trade deficit of $ 10,000 mn in 2011. Even the food imports of $ 1000 mn, a half is for the tourism industry to feed the tourists.

Hence, more food production means more fuel chemical imports for tractors and lorries and more tourists means more food imports. So, SL will be caught in a vicious circle of having to import more to produce foods and feed the tourists.

So, his prescription is sweet music to some, but would make the ailment worse.

4. fb Jan 26
@Mfznr
Rupee will fall. Upward pressure on the peg was there when credit growth was weak, and the central bank was withdrawing liquidity.

Now the shoe is in the other foot.

3. Sumedha Jan 26
I hope the government depreciates the currency. We need to maintain competitiveness and we are already the least competitive of the movers of global economy earmarked for this decade.
2. Mfzansr Jan 26
Could some explain what will happen to the exchange rate as well as the general interest rate if the government decide to relax the peg for some extent.

I remember reading somewhere about few months back that the pressure on exchange rate where the rupee to appreciate and the realistic exchange rate at that time would be somewhere around 107-108,and it said that government is delibarately defanding the peg and holding the exchange rate around 110 to maintain the export competitiveness. Following the budget announced surprise move of 3% depreciation seem to be creating economic impacts on the other direction. will rupee appreciate or depreciate if the peg relaxed.

1. Chris Jan 26
Ok Let me describe another scenario. SL allows import of cashew from India. Result the people of Puttalam and Batti who depend on this crop which is only once a year do not get a fair price, in return their quality of life drops. Their purchasing power diminishes in turn the people who produce other goods cannot sell their produce to these people making their quality of life poorer. It is a vicious cycle I've seen with my own eyes. I am with PB on this.