Can Fairtrade spruce up export growth for SL?

* Export value in 2010 similar to 2008 performance of $ 8 billion plus

* Trade deficit expansion by 66.7% in 2010 to $ 5.2 b a worry

* December exports growth by 34% to $ 968 m very positive

Whilst Sri Lanka is registering strong economic growth at seven per cent plus with export revenue crossing 8.3 billion dollars at 17.3% growth performance as per the Central Bank, a new report coming in has revealed that there are many product categories in Sri Lanka that can command a high price based on the principle of dialogue, respect and greater equity in international trade which is a new revelation that is worth investigating to determine what benefits it can bring into Sri Lanka’s revenue mechanisms.

National importance

The logic of this strategy from a country perspective is that whilst many other initiatives are at play to increase export revenue by reshaping the basket of goods and by a deeper trade penetration by way of the Indo-Lanka FTA as well as the very attractive APTA, these must also be pursued as the overall trade deficit in 2010 has expanded by 66.7% to $5.2 billion.

Given the price spike of oil that we have experienced so far this year, this gap can widen in 2011 with the import bill expanding unless export revenue and remittances can be pegged up considerably.

Middle East woes

Whilst being upbeat on Sri Lanka’s progressive economy in the last two years, it’s important for us to understand the serious issue that is developing in the Middle East and North Africa and its ramification on international trade.

Post the financial crisis, the world has been struggling to get back on its feet even with the massive stimulus drives that large economies have been introducing. In economic terms it’s called a fragile economic recovery.

At this juncture wrong policy, adverse weather or a economic shock like a oil price hike can once again take the global economic to recessionary mode, meaning a double dip. This is exactly what the world did not want happening, but with the uprising in the Middle East and North Africa that has shot oil to cross 100 plus dollars, there can be a situation where the global economy can head to a toss, which is unfortunate as it’s man-made and could have been in fact avoided. Hence we will have to see how this situation will evolve and keep it on our radar.

Exports at $ 8 b

The ramification of this development in the Middle East and North Africa can be to our export revenue of eight billion dollars, which is skewed to the US and EU market by over 50 per cent if the world goes into a double dip.

Apart from the challenges at the demand end due to the looming global economic shock, Sri Lanka has also been challenged in the first two months of 2011 on the supply chain end with the La Nina phenomenon hitting in January and then repeating itself in February, which is estimated to have shaved of 50-75 million dollars or one per cent of GDP earlier in the year.

From a more outside perspective it’s important for Sri Lanka to register seven per cent plus growth this year even with all these challenges at the demand and supply ends because as a country recovering after a 30-year conflict, we need to attract the investment and this will not materialise unless an attractive return can be justified.

On a separate note, we need to manage the inflationary pressure hitting a consumer purse that has already gathered momentum from 6% to 7% as at end February 2011. The danger is that with the supply chain hit on fruits and vegetable being the cause for the upward movement in inflation so far, if the cost push inflation takes place due to the oil prices going up, it can take the shine off Budget 2011.

A point to note is that whilst we can be upbeat on the export performance of $ 8.3 billion, way back in 2008 we registered a similar number at $ 8.1 billion, which means we may have just about won back our lost customers last year or it could have been price point driven growth.

However, the December performance of $ 968 million at 34% growth is commendable by the export community and if this trend can continue with strong policy backing, Sri Lanka’s export perspective can be very positive for 2011.

The issue

Whilst understanding the challenge domestically, I guess the increased hydropower can somewhat offset the oil price surge but a piece of statistic to note is that a 10 dollar oil price hike shaves off half percentage of GDP value, which is a luxury that Sri Lanka cannot afford at this juncture. May be its worth seriously considering a ‘hedge’ being evaluated but avoiding the fiasco that Sri Lanka got into the last time it used this instrument.

On a global end the issue at hand is that in the event the world moves into a double dip, how Sri Lanka can protect its market share globally, which stands at less than one per cent at the best estimate. One option is to move into a niche strategy so that we have a stronger chance of consumer demand not getting hit. This strategy can also survive a demand pull inflationary situation to a great extent.

A point to note is that even today we are pursuing a niche strategy by way of the ‘Garments without Guilt’ proposition for our three billion dollar apparel industry and the ‘Ozone Friendly Ceylon Tea’ theme for the 1.5 billion dollar tea industry, which is carefully watching the Libya crisis that can throw out many issues as its borders give vent to Ceylon Teas penetrating many Middle Eastern markets.

What is Fairtrade?

One such strategy that Sri Lanka pursue on the strategy of niche marketing is Fairtrade. A recent study has revealed that there is potential for certain Sri Lanka merchandise to command a better price globally on the ethos of alleviating poverty, which is what the Fairtrade dialogue is all about.

If I am to pick a definition for Fairtrade, my pick is that it means better prices, decent working conditions, local sustainability and fair terms of trade for fairness. This will also mean companies having to pay higher prices for goods purchased (which are never lower than the market price), which addresses the injustice of conventional trade.

It’s an interesting concept given that the Fairtrade label sales last year has crossed the two billion dollar mark at a growth of 41%, which means that there is a group of consumers who continue their behaviour of purchasing products based on a certain value system that I strongly feel is an opportunity Sri Lanka can seriously pursue.

Fairtrade minimum price?

If I may throw light on this concept, Fairtrade minimum price is the lowest price that a buyer can pay for products under this label based on a consultative process that includes the market dynamics of supply and demand at a moment of time. I guess this is the reason for the 41% growth momentum that the world has seen in this brand category.

However, a point to note is that currently only certain products can go under this umbrella but the system is open for consultation on any new categories provided that its values can be adhered to, which is interesting.

Contd.on page 19

(The author was the Executive Director of Sri Lanka’s National Council For Economic Development under the Treasury Secretary when the country averaged 7.4% GDP growth and export revenue crossed six billion dollars. A marketer by profession, he twice won the Marketing Achiever Award, Business Achiever Award from PIM Alumni, University of Sri Jayewardenepura, whilst also winning a global leadership award from Johnson Lever. Rohantha is actively involved in the growth agenda of the Sri Lankan economy and sits on many public and private sector director boards, whilst serving the international public sector in the South Asian region.)

Can Fairtrade spruce up export growth for SL?

Contd.from page 13

The current product portfolio includes bananas, fruit and vegetables, tea, juices, nuts/oil seed, honey, cut flowers, ornamental plants and spices to name a few, but as I mentioned many others can take this proposition of the business model, which can be shaped to the procedures. May be the bee honey project in Badulla can be test-marketed on this concept before being rolled out to other product sectors in the Sri Lankan export basket.

Fairtrade premium?

This is another interesting rule on Fairtrade that can actually be attractive to Sri Lankan exporters. It’s called Fairtrade premium. What this means is that one agrees to pay money on top of the minimum price point that has to be directed to such causes of social, environmental or economic developments of the community by which the merchandise is produced.

This is a ideal fit for the ethically manufactured handloom industry of Sri Lanka where a pilot project is currently in progress in Maruthumune and being rolled out to other key towns in the north and east of Sri Lanka, coming under the ‘Peace Collection’ brand.

May be the ‘ethical eco label’ in the apparel industry can be modelled under this concept, having been launched recently at the Sri Lanka Designer Festival second edition.

Why Fairtrade?

Once a producer meets the requirements as stipulated under the Fairtrade certification, one can agree to a licence agreement. As per the Fairtrade mark any product that comes under this umbrella can use the two concepts of ‘Fairtrade minimum price’ and ‘Fairtrade premium price’.

I would argue that Sri Lanka should test this concept given the looming double dip economic scenario and our export basket being skewed to the US and EU apart from the other strategies that are being pursued by the export community of Sri Lanka such as perusing business under the Indo-Lanka FTA as well as APTA.

Demand for Fairtrade?

Apart from the 41% increase in sales under the Fairtrade label and its flexibility of branching out to specific positioning like ‘Garments without Guilt’ or ‘Ozone Friendly Tea’ that Sri Lanka is already pursuing, we also see a trend in modern trade that commands almost 60 per cent of share of wallet globally where priority space is allowed for products under this banner.

Separately we have seen many promotional opportunities that are afforded to Fairtrade label products in the traditional media of TV, radio and press and in the recent past the viral social media platforms have also joined the fray, which is encouraging given the penetration of these new methods of communication being diffused at a very strong pace.

I guess the time is right to test this opportunity that is hip in the global marketplace. It is all the more attractive given that the Fairtrade business model is people centred trade that effectively reduces poverty and also improves the standard of life in the developing world.

Fairtrade and climate change

We also see that Fairtrade is continuously addressing the key issues of the world and changing its business model, which keeps the brand consumer-oriented. The latest is the inclusion of reducing energy consumption by the use of renewable energy, which Sri Lanka as a policy has agreed to be 10% of energy in the long term. This adds to the argument to pursue this strategy.

Next steps for Sri Lanka:

Study the value chains of the export basket of Sri Lankan products and identify which items can best fit the Fairtrade business agenda.

Analyse if the Fairtrade label will add value to these identified product categories not only from an export value perspective but from an economic and social agenda. May be some products from the ‘Divi Negamu’ one million economic units drive can fall under this mandate. The logic being that Fairtrade is all about poverty alleviation.

May be some quick win products can be targeted so that we understand the practical challenges when implementing the business model of Fairtrade. Thereafter it can be rolled out.

Once the test phase is completed, it can be incorporated into the overall national game plan of achieving 20 billion dollars by 2020.