Turn East, further link West

Tuesday, 30 September 2014 00:01 -     - {{hitsCtrl.values.hits}}

Last week the world saw the launch of the ‘Make India’ campaign by Indian Premier Narendra Modi, branded ‘Turn East – Link West,’ which was an interesting idea given that a new vision was required for brand India with the fast-earning reputation of becoming the ‘Rape Capital of the World’.                               The one thought that crossed my mind was that the theme was so appropriate for Sri Lanka’s export strategy given that over 60% of the export income comes from the West – namely the US and EU – whilst if we look at East, Japan and the rest of the key countries contributed less than 10% to the total export basket of Sri Lanka in the period January-July 2014 West If we look at the Western countries, the apparel sector dominates export earnings with almost 70%, which is encouraging given that the purchasing power of the US household is increasing and unemployment levels reduced from 10% to just 6% percent last quarter. But a point to note is that the vulnerability of such a skewed portfolio is not good news for the Sri Lankan economy. Whilst there have been many attempts to diversify the export agenda, the progress has been quite slow given the policy reforms required and the aggressive private-public partnership approach not taking form. Maybe it’s time that Sri Lanka develops a fashion platform and sees how we can build our own brands and have direct access to the end consumer. We have to think to step change innovation if we are to do justice to the Sri Lankan export industry. The good news is that this idea is in the development stage and it is only a matter of time for the launch to take form but Government support must be mandatory for this objective to develop a new shape of the Sri Lankan apparel industry. East Japan accounts for just $142 million with China contributing $ 98 million followed by Hong Kong and Singapore chipping in with $ 80 and $ 60 million exports to the January-July export performance. The top Eastern economies, Vietnam and South Korea, are way below this, trailing at $ 47 and $ 41 million, which in total means that it is just 0.5 billion dollars on a 6.3 billion dollar performance from January-July 2014. This highlights the deep penetration that is required to develop the Eastern focus in Sri Lanka’s export agenda. This also calls for urgent action required for the FTA with China and maybe also pushing the agenda for the FTA with Japan so that we really drive policy for diversifying the export destination mix. However, a point to note is that the export growth of the ‘East’ is around 34% which is double the ‘West’ export country mix, whilst noting that the export base is quite different in the two regional baskets. China, India and Russia A point to note is that whilst Sri Lanka has very strong links with countries like China, India and Russia, which account for more than half the world’s population, the overall export performance from Sri Lanka is below 10% of the export basket, which is the opportunity that we have for deeper trade with the three super power countries that are protecting the Sri Lankan agenda at the United Nations Human Rights sessions. As at July 2014 the overall exports to the three countries was only 600 million dollars on an export base of 6.3 billion dollars, which is just 10% of the basket. I guess Sri Lanka will have to look at the overall product mix so that penetration into these markets can become a reality in the near future. We must correct the anomalies of the current FTA with India and see how we can avoid a repetition in the China FTA, which incidentally will be negligible to China given that China’s import bill hypothetically accounts for just 1% of the total Sri Lanka’s annual exports. Next steps Whilst one can come out with conceptual recommendations, my view is that what Sri Lanka requires is just a set of key actions at very basic level that can only be implemented with a strong private-public partnership. Below are some of them: 1. Get current FTAs to work Even though the 2014 exports are a record performance, the two FTAs are not growing at the rate that Sri Lankan exports want to grow, the key issue being the non tariff barriers that Sri Lankan exporters are up against in India. This must be addressed with the new partnerships that are coming to play with India. It requires a strong political will if we are really make this work. That is the hard truth. 2. Clear VAT refund issue – builds positivity One of the key cries of the private sector is to clear the backlog and reduce the time-lag on the VAT refunds. Many exporters state that they do not need any handouts but just to get the VAT refunds due to them, which can ease out the working capital issues. 3. EDRS scheme – to support winners Whilst this scheme was discontinued in 2009, there were payments due to exporters prior to discontinuation of the scheme, which has been invested in by the exporters. If this request can be addressed, we will be in line with the South Korea export model, which is winners were selected and supported by the Government rather than a blanket approach of financial schemes. 4. Streamline the TIEPS scheme There were many claims and counter claims on gaps in procedure that are making the TIEPS scheme a hassle rather than an enabler. Given that technology is developing rapidly, there is no option but to move to driving this online. It will bring in a positive vibe given that anyway it will have to be paid on a later date. The question is the cash flow available to make the online strategy feasible. 5. Industrial zone linkage Given that almost 73% of the exporters are SMEs, a point highlighted was that all trade fair participation as well as any technology transfer training be informed to the industrial zone coordinators in the country. Apparently there are 47 industrial estates in the country which house around 18-20 SMEs. Maybe the business chambers can play the bridging role. 6. Ceylon Tea campaign With the tea sector closing on the two billion dollar mark, a key strategy requested by the exporter is the launch of the Ceylon Tea campaign. The good news is that with all the bureaucratic issues of a Government institution, the Sri Lanka Tea Board partnering Dialog in sponsoring Sri Lanka Cricket is a big win. The Ceylon Tea Moments restaurant that has brought in a new dimension to the tea experience has potential to be franchised globally. But the launch of the Ceylon Tea campaign is a must, given that it can have a positive rub-off on ‘Brand Sri Lanka’ too. The process followed can then be replicated by the rubber, cinnamon and Ceylon sapphire business. 7. Drive ICT – growing at 30% More focus must be given to the ICT sector given that it is growing very strongly. This includes software development, network management, web application, the BPO business, designing and quality checking, data mining, embedded system designing, e-publication, ICT consultancy, KPO, customer care and call centre support, just to name a few. There is a very strong private-public partnership approach of developing this industry, which is very encouraging. I guess we must make this business amount to one billion dollars in the years to come. 8. Export bank Having a dedicated export industry-led bank that can channel development finance targeting the SME sector might be a good idea. This can also drive in strategies like the Export-Oriented Investment Support System (EOISS), which will be on the incremental export earnings. This mechanism can also ensure the export trade brings in the money earned into the country. Interesting thought, though it may not be very popular. Conclusion Whilst much can be said on Sri Lanka becoming a 20 billion dollar export business, in my view unless some aggressive partnering takes place between the private and public sector, we will find it tough to conquer this challenge. [The thoughts expressed by the author are purely his own views and are not reflective of the office he holds in the public or the private sector. Rohantha was the youngest Chairman of the Sri Lanka Export Development Board and the only person to be on the EDB Board for six years post being the Chairman. He is an alumnus of Harvard Kennedy School (Boston). He is an Independent Board Director in many organisations in Sri Lanka.]