First things first

By Dr. Shan Fernando

Is our economy doing alright? Will the Government be able to increase its revenue? Will it be able to rationalise its subsidies and other welfare oriented expenditure? How should the country’s debt be managed? How much more can the country borrow? How can we boost our exports and foreign exchange earnings? How far will we succeed in attracting FDI? These are some of the frequently asked questions (FAQs) these days. These questions highlight some core issues that we face today, and these are certainly tough issues to handle. 

In view of these challenges, the Government, while trying to enhance its revenue, will also have to rationalise its expenditure. In other words, the Government will have to get its fiscal house in order with a view to getting its debt situation under control. The country’s debt service payments per annum amount to around 90% of annual government revenue. Annual interest payments on debt alone amounts to one-third of annual government revenue. Therefore, while eliminating unnecessary expenditure, the government will have to come up with strategies to boost the country’s foreign exchange earnings and foreign exchange buffers.

In view of the dire economic challenges faced by the country, it will be very important to identify the key areas that we as a country should focus on immediately with a view to boosting the country’s foreign exchange earnings and foreign exchange buffers. This article focuses on two key areas that the country needs to fast track if we are serious about achieving these objectives. These areas are discussed below.

Boosting ICT and service exports

Sri Lanka has great capacity to boost her service exports. Indeed the country has been consistently ranked as a top global destination for business process outsourcing (BPO) and IT. ‘In early 2016 AT Kearney ranked Sri Lanka 14th on its Global Services Location Index, which gauges the commercial attractiveness for offshoring of some 55 countries’ (source: http://www.oxfordbusinessgroup.com). Adequate supply of required IT graduates to maintain the growth momentum of the ICT industry will be a challenge. However, fundamental infrastructure is largely in place and this will help the country to gain from an expanding global market (source: http://www.oxfordbusinessgroup.com).

In recent years Sri Lanka’s ICT revenues have grown significantly, from $ 128 m in revenue in 2007, to $ 325 m in 2009, $ 440 m in 2011 and $ 719 m in 2013, representing 6.47% of total export earnings. Estimated revenues for 2014 were around $ 820 m with projections for 2015 exceeding $ 1b. The ICT industry is targeting revenue of $ 5 b by 2022 along with 200,000 direct jobs and 1,000 new start-ups (source: http://www.oxfordbusinessgroup.com).

Sri Lanka’s key strengths in relation to ICT are concentrated on building intellectual property and software engineering, at a higher value-added segment of the market. This focus is different from India’s focus which is mainly concerned with offering a wide range of services at a low price point. (source: http://www.oxfordbusinessgroup.com). These opportunities have given rise to a number of successful local firms that are strong and internationally focused. By way of examples local firms such as WS02, Codegen and 99x, have experienced accelerated growth serving an international clientele(source: http://www.oxfordbusinessgroup.com).

Leveraging the country’s unique location

Another area that offers great economic potential is the unique location of Sri Lanka. Indeed, Sri Lanka’s international Unique Selling Proposition (USP) is none other than its hub positioning. Sri Lanka is ideally located along the major East-West trade route. Sri Lanka’s strategic location places it on 6 of the 10 largest trade routes of the world and within reach of over 26% of all of the world’s container traffic. With a view to leveraging Sri Lanka’s strategic location to boost the economy, in terms of Part (iv) of Finance Act No. 12 of 2012 as amended, and the Commercial Hub Regulation No. 1 of 2013, the previous regime declared Colombo and Hambantota ports as free ports. 

The Katunayake Export Processing Zone and Koggala Export Processing Zone were declared as Bonded Areas. Mattala MRIA Airport and Mirijjawila Export Processing Zone were declared as Specified Bonded Areas.

The above tax exemptions granted for the said ports, airport and EPZs under the above pieces of legislation are in addition to exemptions given to them under the Customs Ordinance, Import and Export Control Act and the Exchange Control Act. These record tax benefits can be used to boost entrepôt trade, off-shore business, front-end-services, headquarter operations, and logistics services.

Today, five companies are successfully running operations benefiting from the Commercial Hub Regulation. These companies are reportedly looking forward to expand their operations. The government should make every effort to help these companies to expand their operations while encouraging other companies to make maximum use of the opportunities afforded by the Commercial Hub Regulation. 

The wide applications of the Commercial Hub Regulation can be demonstrated by taking a look at how Dubai has made use of similar arrangements to boost its trading activities. The Dubai Multi Commodities Centre (DMCC) provides a useful model to draw lessons from. 

The role of the banks

The areas mentioned above should be fast tracked with a view to enabling the country to gain maximum advantage from its competitive strengths. If the country does not leverage its competitive advantages to the maximum possible level, then its position as a laggard among peers will further deteriorate and the catch-up with the rest will widen. 

In view of the above, the government will have to get its act together and align its policies to back the areas identified above. All of this will have to be done with a sense of urgency. If there are delays in implementation, then some other country/s will gain advantage at Sri Lanka’s expense and even the little competitive advantage that we as a country has will be lost. 

Banks essentially provide the lubricant (or liquidity) that keeps the wheels of the economic machinery going. Therefore, banks also have an important role to play in providing support for the areas identified above. Banks will have to be agile in identifying business opportunities in relation to these sectors and be flexible enough to adopt different approaches, if necessary, in catering to their particular requirements.

Conclusion

Sri Lanka has been consistently ranked as a top global destination for business process outsourcing (BPO) and IT. The ICT industry is targeting revenue of $ 5 b by 2022.

Additionally, Sri Lanka is ideally located along the major East-West trade route. Leveraging this strategic location, the country has an ideal opportunity to boost entrepôt trade, off-shore business, front-end-services, headquarter operations, and logistics services making full use of the legislation which is already in place in terms of Part (iv) of Finance Act No. 12 of 2012 as amended, and the Commercial Hub Regulation No. 1 of 2013.

It is important for Sri Lanka to make full use of the above opportunities in the process of leveraging its competitive advantages. However, these things will have to be done with a sense of urgency. If otherwise, other countries will make inroads into those areas and deprive Sri Lanka from gaining even from her remaining few competitive advantages. 

(The writer counts over two decades of experience in the field of economic research in the private sector. He has earned a BA (Hons) in Economics, an MA in Economics and a PhD in Economics at the Department of Economics of the University of Colombo. He can be reached at [email protected]).

The views expressed by the writers in the articles published in the APB page are personal to them and are not necessarily those of the Association of Professional Bankers – Sri Lanka (APB).