Analysing trends in Sri Lanka’s exports

Monday, 16 June 2014 00:00 -     - {{hitsCtrl.values.hits}}

  • Substantial market or product diversification not visible
By Saminda Uswatta Sri Lanka has often shied away from recalling the tough times during the good times and has on occasions paid dearly for this mistake later on when ‘the going gets tough’. The significant increase in imports after the war, which thereafter required painful reforms to rein in the burgeoning trade deficit which resulted, can be considered to be a good example in this regard. Exports have performed quite well since June 2013, particularly towards the very end of last year. Sri Lanka nearly managed to achieve a ‘hat-trick’ of three consecutive months of exports exceeding $ 1 billion due to strong export performances in the months of October, November and December 2013. This encouraging performance in exports appears to have been extended to 2014, with the country witnessing an unprecedented $ 1,070 million in export earnings during March 2014. While these are undoubtedly positive signs, it should not be forgotten that the pickup in exports was largely a result of positive developments in Sri Lanka’s major export markets rather than due to its own efforts. The Central Bank partly acknowledges this fact in its 2013 Annual Report though it also places considerable weightage (to a greater extent than other commentators on the particular issue have done) on conducive domestic policies. ‘Wake-up call’ for Sri Lanka The Central Bank’s 2013 Annual Report says, “Exports recorded an impressive growth from the second half of 2013 with the recovery in Sri Lanka’s traditional markets, such as USA and the EU. The expansion in domestic economic activities, a favourable investment climate and conducive external trade policies also supported the growth in exports in 2013.” While undeniably any country would be adversely affected by negative growth in its major export destinations, the turmoil in the Western markets following 2008’s global financial crisis and the slowdown which occurred thereafter served as a ‘wake-up call’ for Sri Lanka, emphasising the danger of over-reliance on a few markets and few goods to drive export earnings. Therefore, this juncture is as suitable as any to analyse Sri Lanka’s export performance over the last few years and to ascertain whether the trends one can identify with regard to exports are positive or negative and what action, if any, the country could take to ensure continuous expansion of exports. For this task, this article will take into account export figures between 2005 and 2012 released by the Department of Commerce and the Central Bank, as an official in-depth country and product-wise breakdown of exports for 2013 is not yet available (though some relevant data is available in the Central Bank’s Annual Report). Data pertaining to export markets and export items will be considered separately for greater clarity. Considering Sri Lanka’s export markets (with the unit of focus being nations and not economically-integrated regions), a few important trends are visible. "While one cannot witness significant export or product diversification with regard to Sri Lankan exports, this does not appear to be an undue cause for alarm in the immediate term. However, Sri Lanka should not forget the hard lessons learned during the aftermath of the global financial crisis and the ‘dog days’ for exports which was its ultimate result" USA and UK Considering the period between 2005 and 2012, it appears that Sri Lanka’s reliance on the USA (Sri Lanka’s top export market) has declined considerably – which could indicate greater market diversification. While in 2005 earnings from exports to USA constituted 32.2% of Sri Lanka’s total export earnings, this figure had reduced by around 10% by 2012, which is encouraging. However, considering the corresponding figures for UK do not paint as heartening a picture in terms of market diversification as export earnings from UK as a percentage of total export earnings has only declined by one per cent between 2005 and 2012.  According to 2012 figures, these two countries (USA and UK) accounted for approximately 35% of Sri Lanka’s total export earnings. It is however somewhat disturbing to note that Sri Lanka’s relationship with both these countries appears to have been strained in recent times, which could in extreme circumstances lead to political barriers to trade. India and Pakistan Sri Lanka’s earnings from exports to India – the country’s third largest export market – as a percentage of total export earnings have actually fallen by around 3% between 2005 and 2012.  This is a worrisome trend – especially considering the Free Trade Agreement (FTA) between the two countries – as it could imply that Sri Lanka’s efforts to diversify its export markets by focusing on its Asian counterparts have not yielded any substantial success. Moreover, though India is Sri Lanka’s third largest export market, in relative terms it is significantly behind USA and UK. In 2012 earnings from exports to India were only about a quarter of the value of earnings from exports to USA. Despite there being a FTA between the two countries, in 2012 Pakistan occupied the 24th position in terms of Sri Lanka’s largest export markets. A key point to note in this context is that cumulative export earnings from India and Pakistan – two countries with which Sri Lanka has signed FTAs – accounted for only slightly more than seven per cent of the country’s total export earnings in 2012.  This could indicate that the FTAs have failed to yield substantial positive results to Sri Lanka in terms of increasing the country’s export earnings and could also imply the need for the country to make in-depth analyses of costs and benefits before entering into FTAs. China Interestingly, China – with which Sri Lanka is mulling a FTA – remained a relatively unimportant export market in 2012 with earnings from exports to China accounting for a meagre 1.2% of total export earnings. The country was ranked Sri Lanka’s 16th largest export market in 2012. With many economists considering a FTA with China as a development which can substantially improve Sri Lanka’s economic prospects or a ‘game-changer’, this particular figure could increase dramatically if the two countries indeed succeed in entering into a FTA. Africa and Latin America In considering any set of figures, one should realise that often what the figures ‘do not’ represent is as important or more important than what the figures ‘do’ represent. Africa and Latin America are particularly noteworthy in their complete omission considering Sri Lanka’s 10 major export markets in 2012. Even if one were to expand focus to Sri Lanka’s top 20 major export markets, according to 2012 figures, only one Latin American country was part of the top 20, while Africa had no representation whatsoever in the top 20 rankings. Top export markets in 2012 Focusing attention back on Sri Lanka’s top 10 export markets in 2012, Japan is the country representing the Far East while India is the sole representative from South Asia. North American, Middle Eastern and European nations take up the remaining positions in Sri Lanka’s top 10 export destinations (based on value).  If attention is extended to the country’s top 20 export destinations in 2012, while the number of countries representing the Far East would increase, the number of South Asian nations would remain unchanged – making India the only South Asian country among Sri Lanka’s top 20 export markets. Considering these rankings it appears that while Sri Lanka relies significantly on Europe, North America and to a lesser extent on the Middle East for its export earnings, it has substantial scope particularly to increase exports to Latin America, the Far East and Africa. While clearly export opportunities to severely poverty-stricken African nations would be quite limited, some African nations including Nigeria have achieved substantial economic growth in the recent past and this should be factored into any analysis involving potential for future market diversification for Sri Lanka’s exports. Major export items Shifting attention from export markets to major export items, a few trends are quite noteworthy. One important fact to note would be that Sri Lanka’s heavy dependence on apparels in driving export earnings appears to have increased further, albeit marginally, in recent years. In 2008 apparel constituted approximately 40% of total export earnings while by 2012 the corresponding figures had increased slightly to 41%. While this indicates that the country’s export earnings are heavily dependent on earnings from apparel exports, on a positive note the value per item of apparel exported appears to have increased during the same period – possibly indicating higher value addition. Similarly, in the same period, the share of export earnings from tea as a percentage of total export earnings has remained virtually constant at approximately 15.3%. This indicates that apparel and tea combined accounted for a lion’s share – more than half – of the country’s total export earnings in 2012 and a simultaneous contraction in these two sectors could have severe repercussions for the country in terms of export earnings. This is an important point for both policymakers and the private sector to take into account. Notably export earnings from the category ‘Other vessels for the transport of goods & both persons and goods’ rose sharply (multiplied by nearly 12 times) – albeit from a low base – between 2008 and 2012. While the country’s gem and jewellery exports can also be taken into account, it has to be noted that the steep decline in gold prices globally seriously affected the gem and jewellery trade and thus it may not be quite suitable to consider this category, as contraction was inevitable given this situation. While cinnamon, coir, activated carbon and pepper appear to have made considerable headway between 2008 and 2012 (in particular with export earnings from pepper and activated carbon more than doubling in the review period), some categories appear to have experienced a decline. Local economists have particularly lamented the lack of exports of products involving a high degree of technology and export figures between 2008 and 2012 appear to confirm this view, as export earnings from electrical transformers have declined by approximately a third in the review period. Similarly, export earnings from coconuts despite a sharp increase in 2011 have experienced a decline in 2012 in comparison with 2008 figures. In contrast, in the same period, improvements were witnessed in some other categories including gloves, mitten and mitts and toys, games and sports requisites etc. No substantial product diversification While these figures indicate decline in export earnings from some products, increase in earnings from others and lack of change in earnings from some others, overall – with the exception of the vessels category, etc., which expanded from a very low base in 2008 to a substantial value by 2012 – clearly one cannot witness a clear change in the actual ‘content’ of exports with virtually export earnings from the same items appearing to fluctuate over time in the period under review. Thus one cannot witness any substantial product diversification in Sri Lanka’s exports within the review period. Combining the conclusions drawn from the analysis of both export markets and items, it would appear that Sri Lanka remains vulnerable to fluctuations in key markets as its exports are concentrated both in terms of export markets and items. Any slowdown, particularly in Western markets, could again have a highly destabilising effect on the Sri Lankan economy. Actions taken with regard to product and market diversification, at least up to 2012, do not appear to have yielded noteworthy positive results. Positive factors While this picture does not appear to be a particularly bright one, it should be noted that one should take into account other factors which largely indicate a more positive outlook. Firstly, in the immediate future, the high concentration of exports in Western markets does not appear to be a cause for undue concern. The Central Bank in its monetary policy review for May 2014 said: “The outlook for export earnings remains positive on account of the firming up of the recovery in advanced economies.” This augurs well particularly for Sri Lankan garment exports. However, in contrast, any political hindrance of trade in these economies due to alleged human rights issues in Sri Lanka, etc. could alter this positive outlook. Secondly, a FTA with China could enable Sri Lanka to achieve more effective market diversification. Recent talks could lead to improvements in trade with Japan. The FTA with China and improvement in trade with Japan combined can raise Sri Lanka’s exports to the Far East by a considerable amount. Recent developments with regard to India – including expansion of the quota for Sri Lankan garment exports to India – could also boost exports to India over the long term as well, increasing export earnings from South Asia. Thirdly, the changes which can drastically alter the importance of Sri Lanka’s traditional exports should be taken into account and the growth of the local IT industry in particular is a key point in this regard. While it should be acknowledged that issues with regard to sustainability plague industries such as tea in particular (with re-planting emerging as a highly contentious issue), the Sri Lankan IT industry has expressed confidence in becoming a $ 2 billion industry by 2020 – which could reduce the country’s reliance on exchange of goods to earn foreign exchange. Therefore, while some traditionally-dominant industries could experience a decline, other fast-growing industries may have the potential to fill this vacuum. No cause for alarm in immediate term In conclusion, while one cannot witness significant export or product diversification with regard to Sri Lankan exports, this does not appear to be an undue cause for alarm in the immediate term. However, Sri Lanka should not forget the hard lessons learned during the aftermath of the global financial crisis and the ‘dog days’ for exports which was its ultimate result. The country is targeting an ambitious $ 20 billion in export earnings by 2020.Pursuing product and market diversification together with export development could put the country’s exports on a stronger footing.