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The high cost of credit has been identified by the Ceylon National Chamber of Industries (CNCI) as the most significant cause that has made industries uncompetitive. Wage increases are another factor, a survey done among a cross-section of the Chamber members has shown.

The Chamber, in a memorandum on issues pertaining to industry sent to the Prime Minister and the two Ministers in charge of industrial development, have said that direct and indirect taxes have made local products uncompetitive with imported products.

The banks have not attempted to reduce rates by cutting down one or two percentage points of the spread they recover as costs.

CNCI has commended the Ministry of Finance for advising banks to go soft on parate execution for the present in respect of certain transactions within limits. "Banks resorting to parate execution in the case of defaulters has had a most demoralising effect on industrialists. They are unable to repay because of the financial difficulties they face and not that they do not wish to settle the loans," it said.

Quoting a recent Ministry of Enterprise Development, Industrial Policy and Investment Promotion and Ministry of Constitutional Affairs survey, CNCI says that 230 industries have already closed down while many more are on the verge of closure. Such closure could be attributed to financial and marketing difficulties and large scale dumping of low quality, cheap imported products to the local market which adds on to the marketing difficulties. This dangerous trend has to be arrested to maintain industrial production and safeguard the employment potential, which is getting gradually eroded.

This situation is the result of the progressive increase in the cost of funds, restricted access to funds and lending restrictions on the part of banks, unfair trade practices adopted by exporters of competing products to Sri Lanka, the rising inflation rate, the rising unemployment rate and the increased cost of living.

Meanwhile, there has been a downward trend in economic growth as a result of a decline in active export performance and a decline in domestic production. This has been due to lack of support for import substitution industries and an insufficient response from foreign capital. The stock market has been on the decline. The annual level of investment in 2000 was 28 per cent of the GDP, which is well below the 40 per cent average in the region. The annual economic growth rate has dropped below zero. The budget deficit still remains over eight per cent, the memorandum said.

All these factors had had a dampening effect on the industrial sector. It is therefore essential, CNCI has said, that confidence building measures are taken with a sense of urgency to:

(a) Rehabilitate and revive wherever possible industries that have already collapsed;

(b) Consolidate the position of those who are presently operating, but are still facing difficulties; and

(c) Create an atmosphere of confidence for new investment including foreign investment in the industrial sector.

The CNCI members surveyed had also said that although tariff rationalisation over the past few years is welcome, that an element of protection to locally manufactured quality goods should be provided. The present 20 per cent surcharge on duty should be continued while minimum invoice values should be introduced where necessary to avoid dumping and under-invoicing.

The government should not resort to sudden and unplanned liberalisation or reduction of tariff which causes serious injuries to the industry. Textile was one such industry which collapsed due to unplanned tariff liberalisation. The decision with regard to tariff changes should be taken after consulting the respective industrial sectors.

Tariffs on investment goods (capital items) must be kept neutral or at least its burden minimised as policy makers wish to maximise growth and develop internationally competitive industries.

Many industries face marketing difficulties due to the presence of cheap imported items. This is the result of the high cost of production of local goods and insufficient protection provided by way of tariffs. The market is also full of sub-standard imported products which are hardly subjected to quality checks although most local manufacturers attempt to obtain SLSI certification.

Some manufactures also go into production without prior market surveys and arrangements for quality checks and there is no effective administrative mechanism to help and guide them.

It is important that industries are induced to identify key technology in relevant areas, where they have a competitive advantage. In the case of manufactured goods, other than where the process is simple and straight-forward, technology plays a vital role. It should provide a quality end product at a reasonable cost. Technology need not be the most advanced, so long as it is applicable to a particular product and enhances productivity. Industries must have the capability to adopt such technology.

The CNCI survey has also shown that labour laws should be looked at by the government to provide some relief to the management. Further, sudden wage increases without sufficient consultation with the management has created serious cash flow difficulties to the manufacturing sector, pressuring them to effect sudden price increases, which the market would normally resist.

The Chamber has made the following recommendations to the ministers regarding these issues:

(a) Rehabilitate and revive, wherever possible, industries that have already collapsed;

(i) Increasing the parate execution limit, taking into consideration the industry's needs and the plight they are in. Giving a moratorium in respect of recovery, provided the industrial sector makes an attempt to rehabilitate themselves. The banking system should also assist industrial sector management in their rehabilitation and restructuring process to strengthen their capacity to repay such loans before attempts are made to resort to parate execution. Loans should be based on cash flow forecasts and not on collateral;

(ii) While banks normally reschedule loans, it is recommended that a moratorium be provided without closing the industrialist's account;

(iii) An interest subsidy might be considered subject to such subsidy being tied to additional employment and increased turnover;

(iv) Assistance and training in the field of marketing should be provided to medium and small-scale industries by the government;

(v) Where exports are concerned, the Export Development Board must play a vital role in promoting products and finding new markets, specially for the garment sector; and

(vi) Railways should be developed as an alternative to container transport. Proper container yards to be built adjacent to the Colombo main railway yard and de-stuffing facility to be provided. This will enable to develop railway as an economical viable. Bulk transport handling could be carried out during the night. Infrastructure should be geared to assist industrialists by making every effort to see that their products are being brought into the cities by rail and the container yards as well should be located close to railway tracks and railway stations. The objective again should be to cut costs.

Providing a level playing field; deregulation of legislation; taking concrete action to prevent dumping and under-invoicing; restricting the import of second-hand goods; providing special treatment to small and medium industries; directing government departments to make prompt payments for the goods and services they receive from industrial units; neutralising and minimising the tariff on capital goods; and avoiding sudden wage increases and tax exemption on incremental increases in exports have been recommended by the Chamber to expand the industrial sector.

Continuing the concept and incentives given for export thrust industries; providing inducements to investors in rural areas; extending the tax holidays for companies which would reinvest in remote, unfavourable areas or considering levying a cess on items exported by which a fund could be set up to assist industries located in rural areas; adopting consistent policies and retaining them over a considerable period of time without sudden changes and reversals and changing the role of the Ministry of Enterprise Development, Industrial Policy, Investment Promotion and Constitutional Affairs from service orientation to facilitator and monitor of the private sector have also been mooted by the CNCI. "The Ministry should also contribute to the formulation of the country's macro-economic policy framework and the designing and implementation of policies and programmes in areas that have a direct impact on economic growth. The Ministry should be made to get involved in the formulation of economic policies and strategies which are bound to have an impact on that sector," the memo said.

Focusing on the garment industry, it said that the industry which brings in the highest amount of foreign exchange to the country and provides employment to 300,000 persons has to be sustained. "The biggest challenge will come when the Multi Fibre Agreement is phased out by 2005. The absence of quotas and the return to free trade will force us to compete with fabric and accessories producing countries. As at present, in spite of quotas, buyers provide designs, fabric and accessories. Therefore, we have become virtual subcontractors of labour. There is a lack of marketing knowledge and buying houses have filled the gap. There is hardly any direct dealing with wholesalers and retailers," it said.

The Chamber has suggested the following matters to be considered seriously in this regard: promoting collaboration with foreign parties who will focus on marketing; looking for new markets and niche workshops; promoting a Sri Lankan label; cutting down time consuming procedures on the part of government institutions which are involved in handling the goods for export; promoting amalgamation among small and medium garment manufacturing units to achieve economies of scale; promoting the supply of branded products; negotiating for preferential treatment wherever competing countries have received such treatment; and if importing countries resort to social compliance standards, which could function as non-quota barriers, taking up those issues through the World Trade Organisation.

The CNCI has recommended a realistic exchange rate, a tariff policy which will neither undermine industrial growth nor over-protect industry, a fiscal policy which will promote steady investment growth while avoiding inflation and a wage policy linked to productivity as measures which will contribute towards the evolution of a sound economic policy.

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