This article is Part 2 and final of the series on ‘Whither exports in the next five years?’ Forum held recently. The first part was published in the Daily FT on 7 November 2013. For web access see http://www.ft.lk/2013/11/07/whither-exports-in-next-5-years/
By Shabiya Ali Ahlam
The Sri Lankan export sphere is in dire need of strategies and policies if it is to contribute to the country’s ambitious growth targets.
Identifying the worrying trends of exports, the Exporters Association of Sri Lanka (EASL) hosted a forum titled ‘Whither Exports in the Next 5 Years?’ which aimed at highlighting the issues and challenges facing the industry. The event served as a platform for exporters to put forward limitations they face when competing in the international market.
A session titled ‘Future Policy Direction’ featured 10 personalities from both the private and the public sector to present views on current policies and future policies required.
A panel discussion at which Commonwealth Secretariat Former Director Economic Affairs Division/ Tokyo Cement Company Director Dr. Indrajit Coomaraswamy was moderator allowed the speakers to point out key priorities for the country’s export strategies and the policies needed to realise the growth rates.
Commonwealth Secretariat former Director Economic Affairs Division/ Tokyo Cement Company Director Dr. Indrajit Coomaraswamy
Given how passionate we are about cricket, if the exports of Sri Lanka were a cricket player, it would have been dropped for poor performance. That is clear and that is really the message that has come out. We cannot hide behind the world economy because other countries have done lot better than our nation. Clearly we have done something wrong, and we have to understand what it is and need to put it right. One can question, why do we have to put it right and what’s there to be dealt with?
If we are serious about getting 8% growth, we need to have much better export performance. With a market of US$ 21 million driven by a capita of US$ 3000, the country cannot get 8% growth on a sustained basis by selling to the domestic market alone. One of the lessons of 2010 and 2011 was just that. If we aim at growth and have only non-tradables as the main source of growth, the economy will only heat. Unless we put this situation right, it will happen again.
One issue is clearly the macroeconomic framework. Essentially we are a high inflation and high interest rate with an overvalued exchange rate economy. Looking at the economy since it was liberalised, that is where we have been. And that is diametrically the opposite of what the East Asian countries have done. They have very low inflation, and because of that they are able to have very low interest rate. Due to the inflation differentiation they are able to have an undervalued and stable exchange rate. What is the cause of it? It is the unsustainable budget. Having worked for the Ministry of Finance for eight years, I am as accountable as anyone else. We have not been able to get the budget into order for 30-40 years, and that is the main cause of instability. We have to fix that and we are on the path of addressing the same. We are moving but we need to do more.
Today the inflation rate of Sri Lanka is 6%, and it is better than the previous rates we have had. But the inflation rate in other Asian countries is about 3%, so obviously they have better interest rates. So we are competing in terms of cost of finance which is much higher. Those fundamentals we need to get right and those come down to the budget deficit. As exporters, that is the lobbying they should be doing. That should point out that if they are to compete in the international markets, there must be a level playing field. I have always been surprised that the exporters haven’t said that their problem is the budget deficit. The second issue is factors of production. Many countries have problems in this area and what we need to do is think what is in the land, labour and the capital market that is feeding into our productivity. The third is the area of technology management. The adoption and the adaptation of technology is the critical determinant of the success of the East and the South East Asia.
Institute of Policy Studies Executive Director Dr. Saman Kelegama
Currently we are at a stage where we are gradually losing the low cost laboru base comparative advantage. When that is the case, we have to develop our comparative advantage and wrap it up with our competitive advantage by improving our productivity and bringing about innovation. These two combine for value addition. The steps for this have to be taken now.
In that context, I would like to highlight where attention is required. If we look at Sri Lanka’s entire exports to the world, 99% of our products are simple products. Looking at the R&D expenditure as a percentage of GDP, it is about 0.1% and out of that if you look at the private sector R&D expenditure, it is 18%. The middle income average spend is 65% in this area. All this shows that our investment for innovation is still very slow. That is the current state of the country’s exports. We need additional investments for R&D, both for the private sector and the Government. Working on productivity and innovation is closely related and thereby increasing competitiveness and value addition. In the context of value addition, I would like to say that in certain products we don’t do much. Looking at the mineral sector in Sri Lanka, how do we export such product? We are exporting those in raw form.
Very soon we will be going for the FTA with China. In China these minerals have a high demand. We should now gradually embark on products from these minerals. These are capital intensive industries and we have to find ways and means of finding investments owing to joint ventures and do the value addition in that sector. Value addition in the traditional sector, like tea for instance- there is an ongoing debate on the pros and cons of liberalisation, of importing foreign tea. I think this has been going on for a very long time. So what is the decision? Are we going ahead with the status quo? Now everyone knows the modern consumption patterns of tea. In that context are we happy with the current status quo? We need new thinking and need to put the necessary policy proposals to the Government and move forward.
We are still managing this open economy with some of the outdated legislation that we inherited from the closed economy. The time has come to take a second look at the laws and how friendly they are towards managing the open economy and taking the export sector forward.
National Council for Economic Development Director Malika Samaraweera
When we look at the recent policies and regulation that we have brought in the recent past, all are aware that the exchange control regime has improved a lot in that regard. We have done a lot on the Customs side as well as on the exchange control regime.
On trade agreements, the existing FTAs and the proposed ones with China and a few other countries will do well for the country. It will be an encouragement for the private sector. The Government is committed to support exporters provided that each sector has a proper strategy and a way forward. In addition to the existing regulations, the free port, there are hub activities in place and we are working towards the regulation. In a month or so it will be out. We are also careful and we don’t want Sri Lanka to be a high risk port. We want to safeguard the country’s image as well as the port while we liberalise certain areas.
We need to have checks and balances of the systems we have in the country. In addition to that, the EDB is the apex organisation for the exporters in this country and I think with the new chairman and the new team, it will work with the private sector to bring up a way forward for the export strategy.
Closer to the budget, we do have extensive consultation sessions with different sectors, associations and the chambers. One request to the private sector is that, when lobbying and when coming up with a proposal, work as a group. For us in the Government, the institution doesn’t matter, it is the sector. We would like to see more collective proposals coming through joint forums. Sometimes, depending on the leadership of certain associations, some become very aggressive, but some do work towards a common goal. We have seen this. The Government has created open forums and also has close interactive sessions with the private sector, which we have started in the recent past. These are opportunities for the exporters to present their grievances and problems. In addition to the current regulation structure, we are also working towards international accreditation. We are aware that exporters have problems in that area. We have had many sessions with the relevant stakeholders and we are hopeful that these institutions will work towards developing certain skills and structures in order to support export growth in this country.
Ministry of Finance Department of Trade and Investment Policy Director General R. Semasinghe
In the recent past, the most important thing that has been taking place is hub regulation and the Hub Act which is in operation. Speaking frankly, I have been listening to some of the exporters at deliberations and what I understand is that there are issues with the exporters. But there is room to resolve the issues.
In the past budgets, the necessary changes have been accommodated. We have to meet the demand of the private sector as well as those of the Government sector. To the extent possible we have accommodated almost all the requests at the every budget. Even for the upcoming budget, we have had over 40 pre-budget consultations merely to accommodate the views of the private and the public sector in budget preparation.
Everyone is talking about the ICT industry; when looking at the ICT infrastructure, for almost all IT equipment, the duty structure is almost zero. Likewise, for almost all the requests that have come from the exporters and also the importers and other sectors of private entrepreneurs, we have taken every effort to the extent possible to fulfil their requests.
Department of Export Agriculture Director General W.D.L. Gunaratne
We talk much about the advantages of quality and the standards of our spices. In Sri Lanka, cinnamon and pepper spices are excellent because of climatic conditions and the soil factor. But we have not utilised the resources properly. The department focuses more on foreign exchange and aims at contributing to the GDP of the spice sector in three angles: production increase, productivity improvement, and quality improvement.
Production increase is a challenge due to the fact that land is a scarce resource in this country. The main target is productivity improvement. For cinnamon, the productivity is bout 600kg/hectare per year, but there is a potential to go up to 1,200 kg/hectare per year. This can be done through proper agricultural practices. In the case of pepper, Vietnam is producing more than 3,000 kg/hectare and we are producing hardly even 50kg/hectare per year. We can easily achieve productivity by making effective use of the natural resources available. So in that regard, our target is to produce at least US$ 500 million by 2020. When we look at value addition, there is only 3% value addition for the sector. The Government policy is to go for at least 15% value addition. We have proposed to the Government to give some incentive for the local investors but that has not worked out.
Sri Lanka Export Development Board Director General Sujatha Weerakoon
In terms of consistent and healthy macroeconomic policies, I think the Government has taken adequate steps by considering the present scenario. In a recent forum, the IMF also fully endorsed the Government’s activities.
The Government needs to take the necessary steps to build the image of the country and build the proper infrastructure, which is necessary to move forward. The Government is spending a lot on that. The Government is also keen on going for domestic value addition. In order to become partners of the international supply chain, it is a very important factor for countries to be able to partner with Sri Lanka. That is happening in a progressive manner and in the years to come it will be more.
To increase productivity, the Government has taken steps to facilitate R&D and the necessary tax incentives have been given. Also to gain access to appropriate technology, the tax incentives have been given to the export industry as well.
In terms of quality, assistance schemes are in operation. From a marketing point of view, we are keen on sustaining the existing markets and are looking at emerging markets as well. Maybe it is not adequate, but we are trying our level best to help the industry with the available resources.
Former Director General of Commerce P.D. Fernando
One of our biggest problems in exports is the volumes. We don’t have good volumes and we have to find areas where we can get sufficient volumes to go to the export markets. Volumes itself is not enough. We have to get value addition as well. These are the two core areas that we have to concentrate on. Once we have this, we will have to look at the impediments, the challenges, and sort them out. A problem with the FTAs is that there isn’t a list of products that are to be negotiated. The FTAs are not just free. What we give they will take and what we should gain we won’t get, simply because we have gone for the FTA without preparation. For the two agreements that we started, we had market entry problems. This is the reality and we have to address this collectively. My view is that we first must get good volumes. We must let the pioneers capture the market. If that protection is not there for exporters who are starting up, they will not explore. This has to be addressed.
Sri Lanka was one the biggest exporters of nursery products, and due to some political decision of the EU we lost some duty advantages. Unlike the garment industry, the nursery industry gave up. But still today, it is an industry that we can revive. We must look at areas where we can compete, and look at value addition in that area. We must look at policy to protect and promote industries rather than distributing the budget to many industries where the volumes are less.
Ceylon Chamber of Commerce Past Chairman Dr. Anura Ekanayake
I am hesitant to put the blame on the private sector. Why? What is the private sector? Who are business people? Business people are those who spot an opportunity and if it is there, put money and time and make it work for them. When exports are not performing well, I would think that the exports are not presenting the reality for business houses to invest. Then comes the question, how do we make the much-needed exports an attractive proposition? While as an economist I have an enormous attraction to the idea that macroeconomic corrections are fundamental, in reality while that may be the case, that is not going to be an easy fix. The reason primarily is that given the things the Government wants, there aren’t enough resources. This is why there are deficits in the budgets. When you have deficit budgets, you have inflation, there is a trade deficit and interest rates go up. Just because a group of people representing 15-20% of the economy tell the authority to cut spending immediately and bring the interest rates down, it is not going to happen.
We need to look more at the factors of production and the constraints in there, which are land, labour and capital. Although Sri Lanka is a small country, we have an enormous extent of underutilised land because the market forces are not allowed to operate in them. Therefore the small holdings are a function of outdated land regulation. You take that way and there will be enough room for agriculture. In terms of labour, there are outdated rules. They have to be sorted out. Capital, we have two State giants determining the price of capital in Sri Lanka. The highest spread is in this part of the world and probably the entire world.
My suggestion is that while macroeconomic suggestions are absolutely essential and fundamental, let us focus on market constraints because the cost of addressing them is less in my view in terms of addressing the macro correction and allowing the private sector and the entrepreneurs to make money.
MTI Consulting CEO Hilmy Cader
I fully agree with the point of factors of production. We need to work on that and figure out how we can influence that behaviour. To do that, what kind of environment do we need to create? We are competing with people who have access to capital in less than one third of the cost that we have. I agree that some of these problems cannot be solved with the minds that created it. You have to look at it very differently. We have this consensus that we need to get everyone’s view and that is not going to help. Even in the industry, with due respect, they will not have the full view of it and many do not know what is happening.
Pix by Lasantha Kumara and Sameera Wijesinghe