Crises in Sri Lanka and Nepal: Labour-intensive exports will suffer
A simmering currency crisis in Nepal, in addition to Sri Lanka’s worst economic crisis since 1948, has added to concerns among Indian exporters, who fear a 20% drop in supplies to neighbors in FY23 by compared to the previous year, unless the situation improves soon.
Exporters FE spoke to said the drop in shipments to Sri Lanka could be more pronounced unless New Delhi provides a new line of credit, on top of the $2.4 billion aid dollars already provided since January, to bail out the island nation.
New Delhi’s major exports to Colombo include petroleum products, pharmaceuticals, steel, textiles (mainly fabric and yarn), foodstuffs, and automobiles. Exports of many of these products to Sri Lanka will decline in FY23.
Similarly, given Nepal’s restrictions on imports of luxury goods and cars, automotive supplies and automotive components, which accounted for about 9% of New Delhi’s total exports to Kathmandu in FY22 , should lower this exercise. However, supplies of petroleum products, which accounted for a quarter of India’s total exports to the Himalayan nation in FY22, are not yet constrained.
Sri Lanka and Nepal both saw their fortunes slide after the pandemic hit their tourism sector, which has been their main source of income.
While any potential drop in India’s exports to these countries can be easily offset, given the limited trade value, it still adds to an array of external headwinds for Indian exporters, including the massive disruption of the supply chain following the Ukraine crisis. Moreover, the crises came at a time when India is looking to build on its strong export performance in FY22.
An industrial resurgence in Western countries, which drove up demand for Indian goods in FY22, has been hit by geopolitical tensions. As a result, the World Trade Organization has now cut its world trade growth outlook for 2022 to 3%, from 4.7% previously announced.
The economic crisis forced Sri Lankans to reduce discretionary purchases, while Nepal reportedly reduced “non-essential imports”. Together, these two countries imported goods worth $15 billion from India in FY22, up about 50% from the pandemic year of FY21. India was the largest exporter of goods to Nepal and Sri Lanka in FY22.
The exporters said Nepal has imposed restrictions on opening letters of credit (LC) for imports of automobiles and jewellery. For a large number of products, if Nepalese importers want to open LCs, they must maintain a 100% cash margin on their LC accounts; for the rest, they must have a margin of 50%. However, some of the essential food products are included in the list of products for which a 100% cash margin is required.
“It is not a hopeless situation for Nepal, but they are cautious probably because of what is happening in the neighborhood (Sri Lanka) and act before it is too late,” said Ajay Sahai, director general and managing director of the umbrella organization of exporters FIEO.
It is undeniable that there could be temporary setbacks for India in the short term, but there is a silver lining on the horizon, Sahai said.
“Two positive factors for Sri Lanka and Nepal are that both are good destinations for tourism (which is on a recovery mode) and that many of their citizens are working abroad which will increase remittances. “, said Sahai.
A major agricultural exporter said: “Sri Lanka is in a bad position right now, so it will take months, if not years, to be able to control the crisis. Our exports will certainly be affected. Another exporter said: “A lot depends on India’s continued aid and Sri Lanka’s talks with the IMF for a bailout.
Sri Lanka has requested an additional $2 billion line of credit to overcome the crisis. India has already provided him with a line of credit worth $1.5 billion since January. These include $1 billion for imports of food, medicine and essential items and another $500 million for petroleum products. In addition to this, India’s aid also includes a $400 million RBI currency swap and a $500 million loan repayment deferral.
Nepal’s foreign exchange reserves have declined almost steadily in recent months (from $11.75 billion in July 2021 to $9.75 billion in February), prompting authorities to crack down on “non-essential imports”.
As for Sri Lanka, its GDP contracted by a record 3.6% in 2020 and its foreign exchange reserves have collapsed by 70% over the past two years to around $2.31 billion in February. , leading to a sharp depreciation of its currency. Meanwhile, its debt has ballooned to $51 billion.