Where does our export power lie?

Wednesday, 1 January 2014 00:02 -     - {{hitsCtrl.values.hits}}

In depth analysis on the export sector, its performance and way forward

  In an exclusive interview with Daily FT, Bimputh Finance Plc Director/CEO Kingsley Bernard discussed in detail the performance of the export sector, the issues pertaining to the industry, challenges and the way forward as he sees fit. Bernard is the former Director Marketing of the Sri Lanka Export Development Board (EDB) and Management Consultant of Sri Lanka Export Credit Insurance Corporation (SLECIC). He was also the President of the National Chamber of Exporters of Sri Lanka (NCE) and Chairman of Joint Business Forum of Trade Chambers of Sri Lanka (JBiz). He headed a very successful Sri Lanka-Japan export joint venture and had conducted an extensive research survey on ‘Issues and Challenges faced by Sri Lankan Exporters’ as a Country Expert of UNIDO. He counts over 30 years of executive experience both in public and private sector organisations including an MNC, holding top management positions. Following are excerpts from the interview:  By Cheranka Mendis Q: Could you give us the latest statistics of local exports (quarterly or monthly) in comparison to that of the previous year? A: The comparison of exports in the first quarter between the current year (2013) and the previous year (2012) shows a drop of 8.7% and a slight drop in the same comparison in the second quarter too, resulting in a drop of exports by 4.7% in 2013 compared to that of 2012 in the first two quarters. However the July figures show a slight recovery compared to that of the previous year 2012 and cumulative value of exports during the first seven months January to July in 2013 compared to the exports in 2012 during the same period had slightly improved by 1.2%. Although the published data of exports by the Central Bank is available up to July 2013, the Central Bank recently announced that the export performance has improved during the third quarter resulting in 2% year on year increase compared to 2012 and the apparel exports has increased by 6% year on year. The exports have registered an average growth of 8% during the ten year period from 2002 to 2012, which is far from the country’s expectations from the export sector which is one of the key contributors to its economy. Q: How is our export performance compared to that of the region? A: Export growth of 8% compared to our competitor countries in the Asian Region is relatively low. In 2010, India, Vietnam, Thailand, Philippines and Mauritius have recorded healthy export growth of 40.5%, 26.4%, 28.1%, 34% and 18.7% respectively, whereas Sri Lanka achieved a growth rate of 18.2%. The situation slightly improved in 2011 when Sri Lankan exports grew by 22.4%; India, Vietnam, Thailand, Pakistan, Bangladesh and Mauritius grew by 29.3%, 33.3%, 17.4%, 29.3%, 41.5% and 23% respectively. The story that these figures tell us is that we cannot be happy with looking at absolute figures in isolation to decide whether Sir Lanka is doing well or not in the export scenario and these growth figures should be considered in a relative sense with the performances of our competitors. Further, these growth rates also highlight that economic downturn is not the only reason for low export growth in Sri Lanka. This fact is further evident by the fact that the world exports doubled from US$ 8 trillion in 2003 to US$ 16 in 2008 in just six years while it took 16 years previously for world exports to be doubled. Q: How do you see the export sector closing the year – was there an initial target and have we achieved it? A: The initial target given for 2013 according to the Strategic Plan of the Export Development Board (2013-2017) was US$ 11,638 million and it is very unlikely to achieve this target on the basis of the current performance of exports on the basis of the figures already published up to July. Further CB also has predicted a value of total exports during the current year to be US$ 10,000 million. The main reason for this prediction appears to be the improved performance of apparel exports during the third quarter of the current year compared to that of 2012 and assumption of continuation of this performance during the 4th quarter and expecting US$ 3,000 million from value added tea, rubber, coconuts and spices and another US$ 3,000 million from the rest of the exports. I would consider this prediction as ‘optimistic’ and even if this is materialised, total exports would be only slightly higher, not even yielding an increase of 1.5% over the last year; 2012. Further, the export performance in 2012 registered a drop compared to the total exports in 2011 by 6.6%. This means that the poor performance of exports during the last few years has continued, this year as well. Sri Lanka’s export performance since 2000 has shown a declining trend, our share in global exports as well as contribution to the country’s GDP had reduced. Further, Sri Lanka experienced a drop in absolute earnings of exports in 2012. Therefore, surpassing the export growth of 2012 marginally in 2013 cannot be considered satisfactory. As things stand at present, despite the fact that exports have improved during the period from August to October, achieving the EDB target of US$ 11,638 million appears to be very remote. Q: It has been noted that the export sector performance is not on par with the economic development of the country. A: The Sri Lankan economy registered growth rates of 8%, 8.2%, 6.4% in 2010, 2011, 2012 respectively and is expected to grow by 7% during 2013. During the first two years of the post war, 2010 and 2011 the country has achieved high growth rates of 8% plus and the economy has now reached an average growth rate between 6-7%. However the current growth rate of the export sector is not on par with the economic growth, as Sri Lanka was maintaining an average growth of around 6-6.5% during the war time as well. The contribution of the export sector to the GDP has also declined considerably from around 22% during 2010 and 2011 to 16.4% in 2012. Expanding trade deficit is also partly due to the poor performance of the export sector. The declining trend of the sector is also evidenced by examining Sri Lanka’s share in global markets with respect to the major export products. Q: What do you see as the key reasons behind this? A: The reasons behind this situation are multifaceted and can be categorised as 1) Policy related issues 2) Strategy related issues 3) Implementation related issues 4) Research and Development Issues and 5) Culture Related Issues. Though Sri Lanka embarked in an era of free economic policies as far back as the late 1970s even up to the present times the public sector institutions even the ones which have a direct involvement with the export sector have not fully embraced the free economic policies in their relevant roles in the economy. We still have the skeletons of the government controlled and import substitution policies very much in the approach of these institutions. Sri Lanka still does not have a National Export Policy (NEP) despite many over the last few decades having fought for this policy; still NEP remains an unfulfilled must of the export sector. From time to time although the Export Development Board (EDB) which is the apex body for developing and promoting Sri Lankan exports publish bulky documents on the Export Strategy, these targets remain as mere targets rather than being realities for successful implementation in a meaningful manner. The two major reasons that I attribute to this is the lack of relevance of these plans and the difficulty in getting the support of other relevant public sector organisations despite EDB was established by an Act of Parliament which is fairly powerful to muster the support of any public sector organisation. It is a forgone belief that Sri Lanka is good at formulating mighty plans but not very good at implementing such plans and this is common to the export sector as well. Most of the weaknesses in implementation arise due to not having a National Export Policy (NEP) which will give a clear direction in integrating the efforts and energies of the public sector and the practicing exporters. Further a major portion of the export promotion activities will have to take place overseas; however EDB has no strong network in promoting Sri Lankan exports overseas except for arranging the exporter participation in some promotional events such as international trade fairs. No effort or even recognition is given to the need of conducting research in foreign markets to find out the market opportunities immerging in those markets in order to match Sri Lankan products with those market opportunities. In this era of information there are many methods to conduct such research in a cost effect and useful manner rather than spending colossal sums of money. The Department of Commerce too does not have the resources both financial and human to either conduct promotional activities or research overseas. Finally, we as a nation should understand and appreciate the need of exports to improve our economy and create an export culture in this country, if we are to be successful as an exporting nation. Q: In various forums, an important note has been made on how, contrary to the norm that when a country is upgrading its agri exports usually fall while industrial exports increase, in Sri Lanka a reverse trend is seen. Why is that? A: This can usually happen as the export sector is not growing in tandem with the economy. However one should properly understand the context in which this has taken place and the reason for agricultural exports to take the lead. Firstly, a significant shift in the economy is yet to take place, secondly the improvement in agricultural exports is price driven rather than product or quantity driven. In Sri Lanka apparel accounts for approximately 70% of total industrial exports. Due to heavy product concentration of apparel in industrial exports, only a few manufactured products are being exported, more than 90% such products are simple products. The value of high-tech export products have fallen significantly from US$ 102 million in 2008 to US$ 57 million in 2010. Sri Lanka’s high-tech product exports average at around 1.8% compared to more than 50% in Singapore and Malaysia, 27% in Thailand and 75% in Korea. Sri Lanka has remained far too long with the apparel sector being the lead industrial product without being elevated to the next level of industrial products. Many developing countries have gone through life cycles of development starting with garments and gradually converting their industrial products to higher degree of value added industrial products and transforming them into ‘high tech’ products. The countries like, Japan, China, Korea and Malaysia and good examples. Q: Within the industry, what are the highest performing sectors currently and what has been noted as high potential? A: The highest performing sectors currently in the industry are; Apparel, Tea, Rubber and Rubber based products, Diamonds, Gems & Jewellery, ICT/BPO/KPO industry, Food and other beverages, Spices and other allied products. The sectors with high potential are; Light engineering products, Plastic products, Printing services, Financial services, Information & Communication technology and IT enabled service exports, Toys and Wooden Furniture. The performance of services exports, are more promising than other exports, the services sector has grown by 55.4% in 2011 over 2010 compared to 5.4% for goods exports. The service sector has a competitive edge due to time zone of KPO/BPO operations, relatively higher quality of employees, English education, relatively low cost, and generally good infrastructure. It has now become the 5th largest export earner for Sri Lanka having increased it exports from US$ 213 million in 2007 to US$ 600 million (est.) by the end the year 2013. Q: What are the challenges Sri Lanka faces in terms of exports as at now? A: Our production base compared to most of our competitors is very small, hence Sri Lanka has to be necessarily a niche player in global markets. Finding these niche market opportunities is not an easy task and need fair amount of research into those markets. There is a need to increase R&D, current expenditure which is a very meagre 0.11% of the GDP, but what is more alarming is that the private sector share of this is only 18%. Allocating sufficient resources on R&D both by the public and private sectors is a major challenge. Getting the private sector to invest in R&D is not going to be an easy and practical task in the absence of a single MNC originated in Sri Lanka, whereas our competitors are fortunate to have their own MNC such as Samsung, Hyundai, KIA Acer and the likes to substantially invest in R&D. Sri Lanka’s market concentration and narrow export product range, stating differently; Sri Lanka’s product and market concentration is a cause for concern. For example our major export market USA accounts for almost 50% of our total exports and the products which earn over US$ 200 million annually are less than ten products while apparel, tea and rubber earns more than 70% of our annual export earnings annually. Slow growth of industrial products and its composition is a major drawback. Our selection and prioritisation on winning export products have not yielded expected results. We have not focused our efforts on developing and adaptation of such industrial products to cater to the export market opportunities. Further, in global markets ‘brand image’ of products is a key for success. Export brand development is a slow process requiring a lot of resources; except tea and apparel sectors other export sectors have not been successful in export brand development. Export brand development is almost a luxury for Sri Lankan exporters manly because of the resources they possess being small and they are micro operators in a global sense. Some of the successful Sri Lankan tea brands would not have got off the ground if not for the financial assistance and facilitation offered by public sector facilitating institutions such as Tea Board and EDB in the past which is not in practise any more. Cost of brand development is a major challenge for individual Sri Lankan exporters, which requires state sector involvement and assistance. Sri Lanka has not been able to materialise the full benefits of trade agreements entered into so far and being the weaker partner to many of those agreements hence the benefits that we derive are much lesser than that of our partners in most cases. This appears to be due to poor negotiating skills on the part of Sri Lanka and also not deeply engaged in studying these draft agreements fully to clearly understand the outcome of those, before entering into. Q: What would you recommend as likely solutions? A: Concerted and integrated effort both by the Government and the Private sector is a must to overcome the challenges faced by the export sector. The Government has to formulate a National Export Policy ensuring a consistent and conducive policy environment to the exporters creating an export savvy macro policy environment to the exporters featuring flexible and predictable exchange rates, lower interest rates, effective trade facilitation etc., identification of promising export product sectors and new export markets reducing the degree of dependency on US and EU markets. Sri Lanka will have to pay more attention in finding market opportunities in the Asian Region which is growing economically compared to the rest of the world. The huge Indian and Chinese markets have not been fully exploded in finding proper product-market matches and this has now become a dire need in effecting a quantum leap in Sri Lanka’s export performance. This is not an easy proposition and needs a good research effort in these markets to decide on innovative and competitive products in these markets. The involvement of the Government through its export promotion and development organisations is very much required in this process. Emphasis on industrial products deviating from the existing ‘simple product orientation’ is a must, if we are to come out of the current sluggish export performance. Sri Lanka is ranked among the first top 25 countries in A.T. Kearney’s Global Services Location Index in 2011 in recognition of its global services. Service sector became the 5th largest export revenue earner for the country in 2010 with 100% value addition. Furthermore, Financial & Accounting Outsourcing (FAO) Sri Lanka has been ranked among top 20 centres of excellence for FAO. There is evidence that Sri Lanka’s service exports have a global reputation and have registered a significant growth during the recent years as seen in table 1. Q: Could you comment on the involvement/efficiency of trade promotion and facilitative bodies in the country? A: Sad to say that these trade promotion and facilitating bodies are ineffective in recent times, this is mainly due to their inability to change with the times; these institutions have lost their relevance in relation to the needs and wants of the export sector. They still offer the services and programs offered by them fifteen years ago, despite the export sector had undergone many a changes and developments locally and globally and their requirements have changed drastically. Further, these institutions are professional in nature and need professionally and academically qualified individuals in respective fields, who have a clear vision to lead these institutions, especially at the top level. Such personalities to lead these organisations are a rare species in Sri Lanka now due to high political influence in such appointments. Q: What is the way forward for the industry? A: What Sri Lanka needs today is a major effort to align the whole country in driving exports in all fronts. We need to precisely understand the major thrust areas for export development and allocate necessary resources to develop these thrust areas. The exporters should be provided with information with regard to global trends in business and demands and projections with a mechanism to study those trends and predict the future trends and facilitate exporters to exploit such opportunities. The involvement of the state and its export development and promotional bodies are very much a prerequisite in this respect. We need a cohesive strategy with an effectively implemented action plan to go forward to achieve our export dream of achieving US$ 20 billion by 2020. All three sectors, industry, agricultural and service are important to Sri Lanka in achieving our export goals and therefore integrated development in all three fronts is a must. However, innovation and value addition are key factors for success in all our exports. Q: Expectations for 2014? A: Sri Lanka has a number of strategic advantages in becoming a successful exporting nation; its strategic location facilitating trade; its highly trainable, talented and literate work force; its agricultural and mineral products with a comparative advantage such as tea, cinnamon, gems etc. I don’t see any difficulty in transforming these advantages into competitive advantages of our products in the global markets if we have the will. If Sri Lanka can really implement the much talked about ‘five hub concept’ and make use of it, graduating Sri Lanka to the next stage of development as discussed will not be a ‘pipe dream’. Therefore, let us work towards an outstanding year of exports in 2014 and lay the foundation for achieving the magical figure of US$ 20 billion in2020 and let’s not leave it only to be a slogan.