Sri Lanka tea exporters urged to cut credit to buyers
ECONOMYNEXT- Sri Lanka’s tea exporters can reduce the current high interest costs by reducing the credit periods given to buyers, Central Bank Governor Nandalal Weerasinghe said, while the industry officials said credit was a key reason for high Ceylon Tea prices.
Sri Lankas’s central bank has allowed rates to go up in April 2022 to prevent possible hyper-inflation and further collapses of the rupee which fell from 200 to 360 to the US dollar after two years of money printing to mis-target market interest rates.
Now lending rates are above 25 percent and 12-moth inflation to September was 68.2 percent by the most widely watched Colombo Consumer Price Index with prices in the non-traded sector yet to go up.
With the rupee falling and dollar tea prices also up, the trade required about 9 billion rupees in financing for an auction or around 450 billion rupees a year, which was treble the volume last year, outgoing Ceylon Tea Traders Association Chairman Jayantha Karunaratne said.
In rupee terms tea prices were up around 150 percent, he said.
“The sharp increase in lending rates is a major cost to the industry,” Karunaratne said. Exporters have to go for working capital and when you have to borrow three times more at a very expensive interest cost it is a burden on the business.
“Furthermore the sharp increase in interest costs has stopped infrastructure development of the industry.
“Factories and exporters are not that keen to invest, borrowing at these prices. This has a negative impact on the development of the tea industry. ”
Governor Weerasinghe said high interest rates were needed for some time given the need to bring down inflation which was running above 60 percent.
Exporters were given 180 days to bring down export proceeds by the central bank.
“That does not mean you have to give 180 days credit to your buyers abroad when the country is in a balance of payments crisis, when our banks are in a situation when they cannot open an LC for the other side to import without advance payment here,” Governor Weerasinghe said.
“One can bring down the cost of finance by bringing down the period that you bring your proceeds to this country and convert that to rupees.”
Sri Lanka’s nominal interest rates tend to jump suddenly as previously suppressed rates are suddenly corrected when balance of payments troubles emerge.
High interest rates usually encourage exporters to convert and invest any savings domestically to get a higher yield, helping in the correction of the balance of payments, especially if the rupee is floated for a time.
Reserve currency central banks which also mis-targeted rates blaming supply bottlenecks and transient inflation driving up global commodity prices are now hiking rates after firing commodity and inflation bubble.
Usually when reserve currency central banks hike rates, commodity prices – including tea – falls.
Sri Lanka’s tea auction prices tend to be higher than other tea producing countries partly due to credit, tea industry officials said.
Branded tea exporters for example were bound by contracts with foreign supermarkets to give credit, Ceylon Tea Board Chairman Niraj de Mel explained.
Sri Lanka’s tea auction prices were about 2 dollars above other countries, Karunarantne said.
Some of Sri Lanka’s low grown teas, which enjoy the highest prices are bought by developing or emerging countries in Central Asia, Middle East and also Turkey which are burdened by some of the worst central banks in the world with high nominal rates and sometime difficulties in remitting foreign exchange.
Sri Lanka’s tea prices are high also due to fast shipping times as well as credit, which reduced the total costs of importing and selling Ceylon Tea, industry officials have said, compared to other auctions which are not located near ports where mainlines call several times a week.
Sri Lankan tea exporters were also well versed in selling to countries in turmoil and hit by sanctions without formal pre-shipment credit, Karunaratne said. (Colombo/Oct30/2022)
