Economic Review:

'Export or perish' - a reality for Sri Lanka

by: Sunil KARUNANAYAKE

Sri Lanka continues to be heavily dependent on imports for energy (petroleum, gas, and other fuel), food, capital equipment and the import bill has been growing at a steady rate.

However, export growth has been below expectations excepting for occasional commodity booms that provided temporary surpluses. Since the economic reforms of 1977 and liberalisation, concerted export-led growth produced a success story in the apparel and garment industry, which is now the mainstay in exports.

Export of computer software and processed gem stones are yet to emerge with significant numbers. Notwithstanding this background, today, the export industry is facing a severe challenge owing to weakened economies in the East and Europe and the politically unsettled Middle East tea markets that provided the bulk of the tea revenue.

Sri Lanka's trade balance that stood at $ 5.2b as at end 2010 rose to $8.8b by November 2011.

This is somewhat an alarming situation in the midst of the IMF SBA facility coming to its end. The adverse trade balance and the Balance of Payment limitations could affect the economy adversely. The key factor of the country's external financing, worker remittances now account for nearly $4b but is under threat due to instability in the Middle East and North Africa .

This is a vulnerable factor in the economy. The theory of "Export or Perish" is more than a reality for Sri Lanka to improve its external financing. No magic formula or short cuts are available to enhance export volumes.

Impediments

We need to critically examine the impediments for export growth and gradually eliminate them. The challenges are enormous, in 2010 exports amounted to $8b of which tea accounts for $1.4b and textile and garments accounting for $3.5b thus accounting for over 50 percent of the exports thus playing a significant role in generating much-needed foreign exchange .

These export industries have fared remarkably well overcoming many obstacles including the contracted demand arising from the global crisis. These two sectors have ventured successfully into quality enhancement and brandings and the results have been rewarding.

The tea sector, however, has been confined to a handful of Brands but now efforts are being taken provide funding through the government perhaps through the Tea Board to encourage brand building.

The Garment industry faced a daunting challenge consequent to the temporary suspension of the GSP plus facility by the European Commission in February 2010.

Sri Lanka was granted this facility in 2005, thus becoming the sole beneficiary from South Asia among 15 other countries.

Notwithstanding the government's stand, for exporters, it was an enormous challenge.

It was not only garments that were affected, but also other exports mostly from the SME sector such as fruit, vegetables and live fish.

Well-managed garment exporters with vertical integration, branding, technology did succeed in weathering the storm. Nevertheless good economic diplomacy even at this stage could mend fences.

Garments with their motto "Garments without guilt" has well established their ethical practices thus giving confidence to buyers. Apart from the GSP plus issue, the whole export sector does not seem to be getting adequate attention from government authorities. For many years the VAT refund issue has caused enormous headaches to exporters.

In recent times, some assurances' have been made and the problem seems to be addressed by the IRD through the SVAT scheme that's less cumbersome .

EDRS scheme

The EDRS scheme was designed to assist exporters who were affected by the global economic crisis of 2008.

It was a good proposal but the implementation seems to have not been smooth, with only one quarter being fully settled.

One wonders whether the Department of Commerce, with their varied duties could handle such a cumbersome process and if not can the Export Development Board which is more familiar with the intricacies of the export goods/services process could handle it better.

The tea industry has played a pivotal role in the country's economy. Though the transfer of industry stakes from the Europeans to locals through land reform was inevitable the industry and the country faced a major crisis due to obvious limitations arising from state ownership, after this setback, the tea industry faced another enormous challenge due to two insurrections where a number of tea factories were burnt and some of the employees paid with their lives.

This was the biggest crisis the industry faced since the first tea bush was planted in the Loolekondera estate by Scottish planter James Taylor.

However, in 1992 sanity prevailed and the government took a bold step to privatise tea plantations through regional plantation companies giving life to an overstressed industry.

"One-hundred-and-fifty years ago, the British planter arriving in India or Ceylon could hardly expect a bungalow, a deep freezer, a television set, let alone an orderly estate of tea bushes.

The scene would rather be desert, tropical jungle, disease carrying insects and prowling beasts.

He would work and live alone for months under tropical rain with the scantiest of provisions" (John Weatherstone - The Pioneers) Having gone through such turmoil in the post Independence era, the industry and exporters emerged stronger with auction price levels reaching nearly $ 4/kg in 2011.

Unfortunately, these levels crashed in 2012 with current Colombo auction prices coming down to $ 3.05/kg in January 2012.

How do we advance from this stage to enhance export earnings.

It is clearly understood that a major expansion of the tea crop is not feasible due to obvious limitations such as land and yields.

Tea hub

It was with this foresight that during the 1980's in the aftermath of economic liberalisation, the "tea hub" concept was given thought and import of tea of selected varieties were permitted to boost value addition.

This paid dividends and Sri Lanka's value added tea exports increased in quantity and value.

It was in this background that the Global Tea giant Unilever was in the process of moving their packing of tea bags and packets from the UK to a location in the East.

Colombo was a preferred location and in fact some production was transferred to the Lipton factory in Mabole, this was short-lived due to the rigidity of import regulations and Jebel Ali in Dubai was preferred. Thus Sri Lanka lost the opportunity.

If tea exports are to realise its true potential as a forex earner, its time regulators, exporters and producers seek a consensus.

Apart from Dubai, Russia too has commenced importing multi-origin teas and moving to on-shore packing, this has already affected the tea bag export volumes. Sri Lanka must not let opportunities slip away during its quest for resurgence.

The Sri Lankan tea industry expects with cautious optimism that a resurgence of tea prices is likely in 2012 on the basis of improved prices due to traditional first-quarter low production, recovery of the middle eastern and north African markets that have been inactive, 3 percent devaluation effected in the Budget of 2012, improved market activity from importing countries due to the price advantage in Colombo.

Sri Lanka will be hosting a "Tea Convention" in early February that will be represented by key officials from the leading tea producing and consuming nations.

This will be a major boost to the tea sector particularly amidst depressed market conditions.