by Michel Nugawela and Pesala Karunaratna
Four decades of inaction since introduction of open economy – Sri Lanka has never missed an opportunity to miss an opportunity
Globally and regionally, country is unplanned and unprepared to drive forex earnings; exports, FDIs, and foreign-earned wage remittances record very slow growth rates below CAGR 5%
With CAGR 13.69%, tourism sector shows resilience despite no concentrated effort or national strategy; emerges as priority sector in medium-term to be No 1 forex earner
Nature and wildlife tourism has most potential to drive Sri Lanka as a hot destination for high value travellers as global mobility returns in 2021
A single elephant, alive, contributes $0.16mn a year or $11mn over its lifetime to tourism sector; 350 elephant deaths in 2019 amount to economic value of $3.9bn had they lived their lives fully
Forest cover reduced by 130,349 hectares from 2010-2019 reflecting a sharp increase of 8.6% of net forest change
The coronavirus crisis throws into sharp relief the tenuous state of Sri Lanka’s economy. The government is committed to export expansion but remains handicapped by decades of unpreparedness in strengthening the underlying enablers of competitiveness.
This opinion paper proposes a refocus on tourism as the priority sector to drive growth as Sri Lanka begins the difficult and lengthy task of reforming, restructuring, and strengthening national competitiveness. This will require shifting away from one-size-fits-all marketing under the mass tourism model to developing a product differentiation strategy that targets the best tourists – the high value traveller – with our best assets – nature and wildlife. This broad and diverse segment of travellers outspend mass tourists by 3-4 times and will be the first to travel and visit other countries once global mobility returns in 2021.
However, the high rate of deforestation dismantles the only competitive advantage Sri Lanka has to compete internationally and increase its exports of services. By stripping away nature and wildlife assets, the destination will be left with only its beaches and reputation for cheap sea-sun-sand tourism in the future.
Stagnant exports of goods and services
Exports of goods and services (% of GDP) was reported at 18.8% in 2019 of which goods accounted for 14.2% and services for 4.6%. In the years 2015-2019, total exports of goods grew from $10,547mn to $11,940mn – CAGR 3.15% – while total exports of services increased from $3,266mn to $3,888mn – just CAGR 4.45%.
Sri Lanka continues to lag other emerging economies in Asia that have successfully transitioned from an overreliance on primary goods to achieve export diversification and sophistication. In 1989, our total exports of goods and services as a percentage of GDP was 21.4% against Vietnam’s 16.5%. Thirty years later, our exports had shrunk to 18.8% as Vietnam’s increased to 119.3%. The reasons for this disparity can be found in the underlying enablers of export competitiveness where Sri Lanka’s capabilities are weak or entirely lacking.
Enabler #1 – Resource abundance
We have none. Consider the example of India’s BPO industry which is around 1% of the country’s GDP and 6% share of global BPO, directly and indirectly employing 10mn people. According to Tholons and AT Kearney Indexes of 2019, India remains the leading country to outsource because of cheap labour costs, a huge talent pool of skilled, English-speaking professionals (India’s English proficiency: #35/100 in the world and #5/25 in Asia), and tech-savvy manpower, despite competition from The Philippines, Vietnam and other Asian countries.
Enabler #2 – Price and contribution of unskilled or market-ready labour
We are stagnating at middle-income levels. The unskilled labour market demands higher wages and Sri Lanka lacks a pool of skilled market-ready workers (unlike the example of India, above).
Enabler #3 – Trade agreements that give producers access to a larger market
Domestic interest groups in Sri Lanka have opposed and successfully pressured governments to abandon free trade agreements. Meanwhile, emerging economies like Vietnam have made huge economic advances through trade liberalization and global integration. Since its Doi Moi reforms, the country has signed 12 (mostly bilateral) FTAs that have increased trade by ten-fold – from US$30bn in 2000 to almost US$300bn by 2014 – shifting it away from exports of primary goods and low-tech manufacturing products to more complex high-tech goods like electronics, machinery, vehicles and medical devices. The competitiveness of its exports will continue to increase, firstly, through more diversified input sources from larger trade networks and cheaper imports of intermediate goods from partner countries, and secondly, through partnerships with foreign firms that transfer the know-how and technology that is needed to leap into higher valued-added production.
Enabler #4 – Ability to enter, establish or move up regional or global value chains and production networks
Today, global firms optimize resources by investing or outsourcing the design, procurement, production, or distribution stages of their value chain activities across different countries. Yet since 1978, Sri Lanka has only captured share in the manufacturing and design stages of the global apparel value chain. The examples of Vietnam and Thailand demonstrate how both economies have become integral to different stages of the smartphone and automobile value chains for Samsung and Toyota.
Vietnam attracted Samsung at the early stages of smartphone evolution. Samsung established its first factory in Vietnam in 2008, when smartphone penetration was 10.8% globally; today it has three factories in Vietnam and world smartphone penetration is at 41%. Samsung remains the single largest foreign investor in Vietnam, with investments totaling $17bn (20% of Sri Lanka’s GDP) whilst Vietnam’s exports of smartphones and spare parts, mostly produced by Samsung Electronics, account for $51.38bn (20% of Vietnam’s GDP). On top of the current $220mn Samsung R&D center, Vietnamese Prime Minister Nguyen Xuan Phuc has requested Samsung Chairman Lee Jae-yong to next invest in a chip manufacturing plant, further strengthening the country’s competitiveness and sophistication in exports.
Toyota’s decision to enter the Thai automobile market in 1962 was largely due to the country’s industrial policy regime. Today – after 6 decades of concentrated effort between the Thai government and Toyota – Thailand is becoming a global passenger car production hub. Toyota’s investments have also helped to transfer knowledge and technology into Thailand, strengthening the R&D capabilities of Thai engineers. Toyota Thailand president Michinobu Sugata has expressed complete confidence in both Thailand and the company’s future direction in the country.
Since 1978, Sri Lanka has repeatedly missed opportunities to enter or establish itself in global value chains and production networks. We continue to be unplanned and unprepared in strengthening the underlying enablers of export competitiveness. Expect meagre export growth to continue.
Slow flowing foreign direct investment
These enablers of competitiveness are also the most important considerations to increase foreign direct investment. Inflows between 2015-2019 totalled $6.4bn, averaging $1.2bn every year and merely growing by CAGR 0.93% (this excludes the 99-year lease of Hambantota port to China in exchange for $1.1bn). Without improving supply-side constraints, international investors will remain reluctant to sink substantial resources in the country.
Strengthening the underlying enablers of competitiveness will take time. Expect stagnation in FDI inflows to continue.
Sluggish foreign worker remittances
Sri Lanka has become a major country of origin for unskilled workers with minimal economic value. Wage receipts, which amounted to $6,717mn in 2019 or 8% of GDP, negatively grew by CAGR -0.96% between the years 2015-2019. In 2019, the highest inflow ($3,459mn) came from the Middle East, a segment that participates in the lowest economic positions and lacks the skills, abilities and qualifications to mitigate any downturn in value in remittance flows.
However, the demographics are changing for neighbouring countries like India, where an increasing number of skilled white-collar workers (a growing cohort of professionals in the IT and engineering fields, according to MoneyGram) are quadrupling the average volume per each remittance.
To export quality human capital and increase our share of foreign-earned wages, Sri Lanka must introduce transformational policy reforms in education. Our university system – supported by proactive primary and secondary education systems – must be restructured to produce market-ready workers with the skills and adaptability to learn, grow and respond to change.
Reforms in the education sector will take time. Improving value in wage receipts remains a remote opportunity in the near future.
Amid no support or concentrated effort, tourism receipts grow double-digit
Tourism continued to expand and record double-digit growth of CAGR 13.69% between the years 2015-2018, despite the absence of a national strategy and a high percentage of low-income visitors. As a single sector, tourism receipts amounted to $4,381mn in 2018 or 4.96% of GDP and trended towards topping that in 2019. As Sri Lanka is weak or entirely lacking in the underlying enablers of competitiveness, and continues to be unplanned and unprepared in all other means of earning foreign exchange, tourism is the priority sector to drive economic growth in the short to medium-term.
The myth of mass tourism
For Sri Lanka, mass tourism has its advantages; it produces high revenues at high seasons by attracting tourists looking for the cheapest way to holiday (Sri Lanka’s largest inbound mass tourist markets are India, Britain, China, Germany, France, Australia, Russia, the US, the Maldives, and Canada). The mass tourism sector is also one of the largest employers in the country, providing direct and indirect employment to about 400,000 people.
But there are inherent constraints to the mass tourism model – such as its high seasonality, low average length of stay and low occupancy rates – which accelerate a downward pressure on prices. By repeatedly discounting for shrinking tourism dollars, mass tourism suppliers attract tourists who don’t spend (enough) and the tourism product stagnates: service quality decreases and consumer dissatisfaction increases over time. Finally, the destination gains popularity and is promoted for inexpensive travel.
People’s Bank celebrates world MSME Day with Biz fair 2022
Coinciding with World Micro – Small and Medium Scale Business Day, the small and medium scale business unit of People’s Bank, recently organized a trade fair called ‘Biz Fair 2022’ at the third floor of their Head Office, Colombo 02.
This fair was held with the participation of several entrepreneurs who benefitted from the ‘People’s Spark’ entrepreneurship development program along with other business clients. The exhibition consisted of stalls promoting clothes, confectionery items, dairy products, spices and related products, organic fertilizer, electrical items, ornamental jewelry and much more.
This Biz fair commenced with the patronage of the Chairman of People’s Bank – Sujeewa Rajapakse and Chief Executive Officer /General Manager – Ranjith Kodituwakku. Senior Deputy General Manager (Payment, Digital, Process Management & Quality Assurance) of People’s Bank – K. B. Rajapakse, Senior Deputy General Manager (Overseas Customer Services) – Rohan Pathirage, Deputy General Manager (Enterprise Banking) – Krishani Narangoda, Asistant General Manager (Small and Medium Enterprise) – Wickrama Narayana, other members of the corporate and executive management and other staff members also participated.
CSE bounces back despite SL’s dismal Q1 growth stats
By Hiran H.Senewiratne
The CSE did not react yesterday to the survey done by the US Consumer Confidence Survey, when the US and all Asian stock markets were recorded as performing negatively, stock market analysts said.
The US survey revealed that United States’ consumer confidence edged lower in May as Americans’ view of their present and future prospects dimmed in the midst of persistent inflation.
The Conference Board said on Tuesday that its consumer confidence index dipped to 106.4 in May, still a strong reading from 108.6 in April.
Amid those developments the CSE bounced back following the previous days’ dip without a proper fundamental base. However, the economy in the first quarter had contracted by 1.6 per cent, the Department of Census and Statistics (DCS) revealed yesterday.
It was confirming that the country was in bad shape long before the current crisis emerged. The dismal performance in the first quarter is despite the 2021 fourth quarter registering a 1.8% growth, despite the COVID-19 pandemic and 3.3 per cent growth overall last year. In 2021 1Q the economy grew by 4%.
Agriculture and Industrial sectors suffered contractions of 6.8 per cent and 4.7 per cent respectively in 1Q of 2022, while the Service sector recorded a trivial expansion of 0.7per cent when compared to these values in the first quarter of year 2021. This would likely affect listed companies that engaged in the agriculture and industrial sectors, market analysts said.
Amid those developments both indices moved upwards. All Share Price Index went up by 53.2 points and S and P SL20 rose by 25.2 points. Turnover stood at Rs 778 million with three crossings. Those crossings were reported in Lanka IOC, which crossed 1.7 million shares to the tune of Rs 115.5 million and its shares traded at Rs 68, Print Care two million shares crossed to the tune of Rs 60 million; its shares traded at Rs 30 and Access Engineering 2.5 million shares crossed to the tune of Rs 25 million; its shares traded at Rs 10.
In the retail market, top seven companies that mainly contributed to the turnover were, Expolanka Holdings Rs 149.2 million (151,000 shares traded), Lanka IOC Rs 84.4 million (1.2 million shares traded), HNB Rs 61.4 million (786,000 shares traded), Browns Investments Rs 47.5 million (6.3 million shares traded), Vallibel One Rs 26.6 million (one million shares traded), LOLC Finance Rs 16.1 million (2.4 million shares traded) and Sampath Bank 14.8 million (494,000 shares traded). During the day 34.7 million share volumes changed hands in 8000 transactions.
Yesterday the Central Bank announced the US dollar rate. Its buying rate was Rs 355.81 and the selling rate Rs 367.07.
Constant ‘monetary financing’ had little backing from fiscal side, says Central Bank
by Sanath Nanayakkare
The majority of external obligations in the recent past were financed by sources like the Central Bank of Sri Lanka or through monetary financing, but fiscal consolidation through revenue enhancement as well as expenditure rationalization deemed necessary under such circumstances were hard to come by, R.A.A. Jayalath , Assistant Governor of the Central Bank of Sri Lanka said recently.
He said so while addressing a high level seminar held on the topic on “Confronting the Current Foreign Exchange Crisis in Sri Lanka: Lessons from Global Experience”.
“Thus, a significant amount of monetary financing by the Central bank has resulted in worsening inflation and exchange rate outcome”, he observed.
He went on to say: “In this environment, the tax cuts introduced in 2019-2020 with a reduction of VAT threshold was a grievous policy, in my view. Total impact of such a tax cut was over Rs. 600 billion and some put it at Rs. 800 billion. The resultant revenue drop was about 7.7% of GDP. The mainstream economic theory suggested such tax cuts would enhance money in circulation in the economy supporting growth in the medium to long term. The combination of pandemic-induced additional expenses and limited resource mobilization had widened the fiscal deficit. Tax cuts, low interest rates and high liquidity environment created higher demand for imports. In addition to that, the pandemic hit the brakes on tourism-related revenue which was the fifth largest inflow which had been normalizing after Easter Sunday attack in 2019. The pandemic related mobility restrictions around the world strengthened remittances via banking channels. However, this was short-lived as mobility increased after successful immunization programmes as a result of which the pattern of the flow of remittances changed. This was exacerbated by the fixation of exchange rate at Rs.200 levels”.
“Tourism brought USD 4.4 billion – 5.6% of GDP in 2019 – and it was reduced to 0.8% in 2020. Then the government decided to ban the import of agro-chemicals in April 2021 for health reasons and to promote eco-friendly sustainable agriculture. Although the transition towards organic farming seemed like an environmentally friendly sustainable step, the sudden shift was like a time bomb waiting to explode. Whatever the rational, the sudden transmission was extremely problematic due to lack of organic farming infrastructure, dependence on imported agro chemicals and lack of access to modern agricultural techniques. …….This disrupted the economy’s self-sufficiency in rice production requiring rice imports using scarce foreign exchange reserves. The nation’s external economic performance deteriorated and the current account deficit increased from 1.14 billion in January 2022 from 0.13 in January 2021.”
“When you look at Sri Lanka’s current crisis, we can’t forget the legacy the country has been carrying. Since post-independence, Sri Lanka has been a twin-deficit country except for a few years. The number of times the country has sought assistance from the IMF in its post-independence history shows the frequency of BOP challenges it faced. Today we are seeking the global lending agency’s support for the 17th time.”
“The country’s trade account was continuously in deficit. Import expenditure was almost double the exports. In the current account, it showed some relief mainly because of migrant worker remittances. But that was insufficient to cover the twin deficit. The majority of the country’s foreign exchange inflows didn’t come via non-debt creating flows like FDIs, but through further borrowings. On top of this fiscal balance or the government budget was continuously in deficit. And it was increasing due to ever-increasing commitments of the government sector. Thus the country’s primary account balance – the government budget before deduction of debt servicing expenses – was in deficit except for a few years.”
“Government revenue as a percentage of GDP was constantly on the decline since 1980s except in 2015, and 2016. Tax revenue was declining until 2015, and showed some increase in 2017/2018. But the budget deficit was significant. In 2019, it was around 9.6% and increased to 11.1% in 2020 and 2021, so both fiscal and Balance of Payments ( BOP) issues were at the heart of Sri Lanka’s macroeconomic performance constantly. In addition, heavy and continuous borrowings by the government to bridge the fiscal deficit over the years, has led to monetary policy and exchange rate management having limited effectiveness in managing the fallout of funding the fiscal gap. Subsequent to the global financial crisis and the presence of low interest rates in the developed market, Sri Lanka shifted its strategy significantly towards foreign market borrowings, exposing the country towards global credit cycles. So although we witnessed rapid economic growth, majority of them were coming from borrowed funds and at the same time they were invested mostly in non-tradable sectors or slow-revenue generating sectors.”
“This was reflected in the trade balance which was not sound and was deteriorating. The other factor that led to the rapid shift in our debt composition was when we moved to commercial borrowings, particularly after we lost access to concessional borrowings. Since we graduated to middle-income country status in early 2000, most of our borrowings were commercial borrowings. We didn’t have access to low-cost borrowings from multilateral agencies. And as concessional loans declined, the economy increasingly moved towards commercial loans mostly by way of international sovereign bonds (ISBs) and other bank and overseas borrowings. While the domestic /public debt level remained mostly stable, foreign debt became primarily the force driving the Sri Lankan economy.”
“Foreign debt to GDP ratio increased from 30% in 2014 to above 50% in 2020. Although Sri Lanka’s foreign debt to GDP ratio has witnessed a significant reduction over the past two decades, the change in the composition of high level of external debt has made the economy more vulnerable to a currency crisis in the past few years. Consequently, in 2021, the economy had net repayments to foreign creditors; therefore, the entire budget deficit was financed by domestic financing. It was kind of domestication of external obligations,” the Assistant Governor said.
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