A positive balance of trade: Dream to reality

Wednesday, 6 August 2014 00:01 -     - {{hitsCtrl.values.hits}}

By K.C. Somaratna Introduction It was heartening to read in the papers recently about Dr. P.B. Jayasundera’s resolve to record a positive trade balance in the year 2020. Of course, the Secretary to the Treasury knows that according to the annual report for 2013 of the Central Bank of Sri Lanka – of which Dr. Jayasundera sits on the Board – this trade balance was a staggering $ 7.6 billion, resulting from an annual import bill of $ 18 billion and an export bill of $ 10.394 billion only. Looking at this gigantic task Dr. Jayasundera has set for himself, I believe he deserves to be supported in every possible manner to achieve this objective; especially so as then the Government of Sri Lanka can truly say that it has not only won the war against terrorism but it has also won the war against the increasing trade deficit as well. It is also mentioned that before citizens of our generation became full-fledged consumers, the trade balance had apparently been positive. Just as much as I believed and prayed that before we hand over the destiny of this land to the next generation, this land shall be freed from terrorism, I also pray and wish we could hand over a land free from a trading deficit to the next generation. As such I see Dr. Jayasundera as somebody attempting to fulfil that wish. Dr. Jayasundera has also identified two key strategies to achieve this objective. The strategies identified have been (a) to increase exports – especially of apparel and (b) to substitute for imports. Each strategy in itself if could be implemented while retaining the other side at constant level should result in a positive trading balance. Unfortunately, that second aspect – retaining the other side at constant level – is what is so difficult and it is what upsets our development plans and frustrates us over and over again. There were reports in the printed media that substitution for imports is a strategy which has failed in many countries and as such would not help Dr. Jayasundera. We, of course think differently. The strategy is fine and what would upset the outcome of the strategy is the decision as to what import commodities to substitute. If the critics know the Pareto Analysis – Pareto has apparently been an Economist – and makes use of it to identify the commodities to be substituted, the strategy could yield positive results. Strategy evaluation Now that we have fundamentally agreed that (i) the only two mechanisms to adopt in order to achieve a positive balance of trade is increase exports and decrease imports and (ii) it will be difficult to keep one constant while we optimise the other, our next step in moving forward is to understand how these have changed in the past. For this purpose we prepared the table given below. We have not seen a table like this in the past and we think it helps us tremendously in identifying the proper strategy. The table depicts the balance of trade expressed in US Dollars millions as the outcome of the export value and import value again given in US Dollars millions. The breakdown of these exports and imports into the key commodities are then given on the two sides and how each commodity value has changed from 1999 to 2013 is also given as layers on the two sides, of course in Sri Lanka Rupees. Looking at this table we could come to some conclusions in order to ensure that we would not be following a given strategy for a few years just to find that it could not yield the desired result. (i) Corresponding to every 50% increase in revenue from apparel exports or any other worthwhile export for that matter, there has been a more than 50% increase in import expenditure on import of fuel oil and hence balancing trade in six years using a 50% or whatever percentage increase in export revenue from apparel export is just not possible. There are a few other points to ponder in respect of this fuel versus apparel polarisation. The fuel oil import bill has increased from been only a 20% of apparel export revenue in 1999 to be nearly 100% in 2014. Apparel export revenue is determined by the buyers themselves who have representative in Sri Lanka. It is often determined by the import bill of the material and the price assigned to a standard minute of an employee in the apparel industry. Often the material cost (CIF) will be lower for another apparel exporting country and the cost of manpower too would be lower. As such our bargaining power is limited. When the fuel price goes up, the cost of a standard minute of an employee does not go up in the same ratio as he or she does not travel by a car, but by foot or public transport. While the apparel export revenue is determined based on a cost plus margin basis, fuel import cost is determined on a demand based formulae. (ii) There is no significant export commodity which has exhibited a growth rate equal to or greater than that of fuel oil and the export growth of current export commodities alone is not a sufficient mechanism to bring about a positive trade balance in the medium term or in the long term. (iii) Even if we substitute locally for 100% of the four key import commodities milk, sugar, vehicles and pharmaceuticals, we would not save enough to strike the negative trade balance off. (iv) Without textiles and yarn there will be no apparel to export and hence it cannot be substituted indefinitely. We have succeeded in doing that in the past and that is why our textile imports in 2013 is not Rs. 375 billion but only Rs. 264 billion. But apparel customers prescribe the material that need to be used and as such import substitution opportunities are limited. (v) Without investment goods, there will be no new projects and no new manufacture and there will be only economic stagnation. Then we would be left behind with only one import commodity to target to bring about a worthwhile/significant reduction in the trade deficit. As such one and only way to make our balance of trade positive is to substitute for that behemoth of all our economic suffering – the fuel oil – and till we tackle this – or take the bull of fuel oil by the horn and tame it and make it surrender, all forecasts/pronouncements about making trade balance positive is not worth the ink and paper used to print the same. Although it seems to be an impossible task, there definitely is a way to tackle it. If it had been that simple and straight forward, probably we don’t need somebody of Dr. Jayasundera’s calibre in that seat to handle it. Both the President and Dr. Jayasundera are immensely fortunate to be in their positions right at this moment of time in history. Why do I say that? If one looks at the Global Fortune 500 list – the world’s biggest quoted companies – one would see that the cream of these companies – 25 top companies – include nine oil companies and four automobile companies contributing to a staggering $ 4 trillion turnover. And both these industries are undergoing a revolutionary change in this decade or so. In fact the International Energy Agency comprising of the 28 OECD countries put it like this in the first paragraph itself in the Executive Summary of their document Energy Outlook – 2009. “It is no exaggeration that future of human prosperity depends on how successfully we tackle the following two central energy challenges facing us today. (a) Securing the supply of reliable and affordable energy, (b) Effecting a rapid transformation to a low carbon, energy efficient and environmentally benign system of energy supply.” So this is the right time to carve out a small fraction of both these sectors and we can identify a way of doing that. One might think how we in Sri Lanka can do this. There again you only need to look at this list. Right at the top in the second slot is a company from a country of approximately the size of ours, sandwiched between Walmart from USA above them and Sinopec and China National Petroleum from China below them. That is Royal Dutch Shell from the Netherlands. Why are they there? Because their ancestors had been brave enough to explore the world and they have seized every opportunity to enhance their grip on available energy. They are doing exploration in the Southern Seas putting up the biggest floating refinery to tap natural gas close to Australia and also doing explorations above Alaska. We had been brave enough to defeat the terrorists on our own might and I am sure that we are brave enough to fight this economic war as well. Even if this $ 4 trillion is carved out according to the populations in different countries we should be getting about a $ 11.3 billion share which could erase the trade deficit. Transportation So if we want to reduce or substitute the fuel oil imports, we should first identify what we do with the oil we import. If we go by statistics available in the website of Sri Lanka Sustainable Energy Authority for 2012, Sri Lanka has utilised 552.5 pica joules of energy from different sources out of which 210 PJ had been from biomass, 219PJ from petroleum, 28PJ from hydro and 19PJ from coal while 8PJ had been from new renewables. Out of the 219PJ from petroleum, 112PJ had been used for transportation, 80PJ had been used to generate electricity leaving 11.5PJ to be used in industry and 16PJ to be used in household and commercial sectors. If we want to get a substantial benefit from import substitution, we should target the 112PJ used in transportation and 80PJ used in electricity generation. Then the problem becomes how could we reduce the petroleum used in transportation and in electricity generation? Out of all published solutions for substitution of petroleum based fuels by renewable energy sources, the one nearest to us in Sri Lanka is the ‘Wind, Water and Solar Infrastructure’ proposed by Drs. Mark Jacobbsson of Stanford and Mark Dalucchi of California at Davis University. Dr. Mark Jacobbsson is a member of the Environment & Energy Panel of National Bureau of Economic Research of USA. They have explained this WWS infrastructure in great detail in a two-part paper published in August 2011 issue of the magazine ‘Energy Policy’. According to this paper, almost the entire amount of energy consumed world over could be replaced using this WWS infrastructure. Not only they have calculated the total energy usage for transportation, industry etc., they have gone to the extent of (i) specifying the number of roof tops which should have PV solar panels, (ii) number of Mega-Watt range PV Solar Plants, (iii) number of Concentrated Solar Thermal Plants and their capacities, (iv) number of Mega-Watt range wind turbines that should be in place, (v) probable foot print of these different power plants as a percentage of the earth’s surface area, etc. They have studied all types of objections raised by opponents of solar energy like minute-to minute variability, unavailability in the night, etc., and elaborated on possible work-arounds which has gone unchallenged. They have studied the transportation industry and concluded that 96% of liquid fuel usage in transportation can be replaced using renewable energy and battery electric vehicles. Prof. Henry Lee of Harvard Kennedy School has studied options offered for fossil fuel based transportation using mathematical models and published a report which says that BEV will be the ultimate winner. As such the world will be moving towards BEVs powered by electricity generated using solar energy. All serious automobile manufacturers are already developing their own BEVs of various degrees of sophistication. Of course if we decide to use electricity from solar energy, you need large land space to install solar plants of whatever type and dedicating so much of land for energy generation will be difficult and the process of implementation might involve a lengthy process which includes obtaining environmental clearance, etc. So we in Sri Lanka have developed a solution which is free from these limitations and it is to lay these PV solar panels above and along the roadways themselves – of course the suitable ones only. Then this energy generated could be taken to battery charging stations where batteries of BEVs could be charged. This would eliminate all the four disadvantages of PV solar energy quoted in Technical Assessment Report IV of IPCC; namely that PV solar energy (i) is distributed in nature, (ii) need to be stored, (iii) need a large land area and (iv) is expensive. This usage for battery charging needs a distributed source, for storage and the roadway is readily available. From the costing perspective out of all energy users in Sri Lanka it is the automobile driver who pays the highest price – about Rs. 117 per kWhr for a unit of energy actually used and as such electrical energy of PV solar origin could be sold at a much higher price than for grid electricity. What stems from this analysis is that Sri Lanka can plan to substitute for petroleum imported for transportation and leaving the liquid fuel used for aviation and maritime uses we should be able to substitute for about 75PJ of energy. Of course the questions will arise as to where these BEVs are and how long it would take to come. They are becoming more and more popular and they are definitely coming and the other important thing is that there are even conversion kits which could be used to convert your petrol fuelled vehicle to be a BEV. A good hockey player will not run to where the ball is; but to where the ball is going to be. Similarly we should not wait for all these things to happen and then adjust ourselves as then it would be too late to carve out a sizeable portion from the $ 4 trillion we were talking about. Power sector On the other hand we can also plan to replace a sizeable portion from the other major usage of petroleum – the 80PJ used for generating electricity. When somebody talks about using solar-based electrical energy in the main grid, what the antagonists would say is that the peak is really in the night and solar is not available in the night. How we see it is different. If one looks at the variation of demand for electricity during 24 hours of the day, one could see that there is a steady demand of about 1000 MW throughout the day above which there is a peak of about 200 MW from 05.00 to 08.00 hours followed by another of about 700 MW from about 10.00 – 18.30 hours and yet another peak of 1250MW from 20.00 to 23.00 hours above the 1000MW continuous demand. Then we can service the early morning peak and night peak with hydro power and the day time peak with solar energy. That is about 700MW for eight hours a day or 5600 MW hrs per day. If we want to use solar energy and reduce the usage of oil what we could do is use thermal energy throughout the day at a particular fractional level to be determined by the forecasted rainfall figures. In fact when a country is much dependent on hydro electricity, it is nothing but prudent to have solar energy capacity as well and the significance of this can be gauged from the quantities of hydro power and thermal power that has been generated during the last five years. While the hydro power generated has fluctuated between 6,918 GWhrs and 3,292 GWhrs, the thermal energy has varied between 8,339 GWhrs and 4,776 GWhrs. So when a drought sets in, solar energy will help us and when rains do come, we benefit from the hydro power. It may be that with proper forecasting, we will be able to generate about 3,600 GWhrs of PV solar energy in a year when rainfall becomes low in the catchment areas or a drought sets in. The additional energy – of whatever origin – could be used to reduce the thermal energy used. Consolidation towards zero trade deficit As such the total amount of energy to be substituted by PV solar energy is about 107.5PJ which would result in a saving of about Rs. 269 billions in import expenditure at 2013 prices. For us to achieve that balance $ 5.6 billion portion from the $ 4 trillion turnover of oil and automobile companies, we need to proceed along other avenues associated with newer modes of transportation and energy generation. We should commence (i) manufacture of PV solar panels, (ii) assembly of battery electric vehicles, (iii) research and development of lithium batteries and (iv) manufacture of lithium batteries. These are quite in line with five hub principle very much promoted by the Government. We need to remember that our relationship with Bolivia is good and Bolivia is known as the ‘Middle East’ of lithium. We cannot help reiterating again that this is the right moment to commence all these things. At Hambantota, we have a new harbour, a new airport and the biggest export processing zone and close to it is that huge continent Africa waiting to be awakened. According to the UNEP document Green Economy, in order to avoid climate change, mankind needs to spend nearly $ 1.5 trillion a year out of which nearly $ 700 billion need to be spent on energy and another $ 350 billion on transportation. It further says that if a country spends about 0.34% of its GDP on promoting alternative modes (in place of fossil fuel based transportation) of transportation for 40 years it should achieve about 80% penetration with 10% more employment. So what we can do today is to establish an incubator for green economy enterprises (as indicated in the UNEP document) at Hambantota and promote (i) manufacture of PV solar panels and other accessories like inverters, etc., (ii) manufacture/assembly of battery electric vehicles, (iii) manufacture of lithium batteries and (iv) promote highway solarisation which is laying PV solar panels above and along the highways and use that energy generated for BEVs or for fulfilling the daytime electricity demand. This will be the first such incubator in the world and very much along the lines of Silicon Valley. We can attract those companies and start ups who are working on green technologies even from the developed countries because of our proximity to a whole heap of countries where there is a lot of solar energy. Highway solarisation might become popular in these countries and we might be able to export the technology if we can act fast and master the technology. Highway solarisation can be implemented very fast since no environmental clearances will be required and the approvals can be granted/obtained expeditiously. In fact when USA installed 17 GW of PV solar energy in one year, Bill Gates of Microsoft said it is a cute form of energy for mankind, especially so as it would take about 17 years to install nuclear plants of 17 GW capacity. Such an initiative to establish an incubator for green economy enterprises at Hambantota should provide us with availability of assembling and exporting at least 50,000 BEVs, two GW of PV solar panels and 25,000 lithium batteries a year in five years time. Companies engaged in these technologies from all countries around the world would be tempted to come because of the close proximity to an entire region where the products of these technologies would have a thriving demand. These product figures should be able to bring in an additional revenue of Rs. 250 billion and this revenue plus the saving from substitution for petroleum based energy products of Rs. 269 billion should yield a surplus of Rs. 519 billion from these newer product range. This along with planned increased revenue from the current exports should be able to bring in adequate funds to bridge the trade deficits by the year 2020. Please note that during the five years from 2008-2013 the export revenue has increased by Rs. 453 billion and a similar increase in the next five years along with Rs. 519 billion from energy and transportation sectors should bring in Rs. 972 billion extra which will write off about Rs. 980 billion trade deficit which was there in 2013.We shall neither worry about whether climate change is real or not, nor about whether our mitigation actions would make a significant impact on the global greenhouse effect or not. If we want Sri Lankans to be enterprising we should grab the opportunity provided and take the country towards prosperity and a positive balance of trade. With all these possibilities what is needed is only focus, urgency, determination and perseverance. (The writer is Chairman/Managing Director of Somaratna Consultants.)