BY SANATH NANAYAKKARE
Whatever Sri Lanka decides about dealing with its debt and paying its way through the world, the country needs to formulate a very good economic analysis and a publicly-backed plan that will establishc credibility of the world in its economy going forward, Dr. Nishan De Mel, Executive Director of Verité Research said recently.
He made this remark at a virtual forum conducted by Advocata Institute on ‘How to Resolve Sri Lanka’s Debt Crisis Without Seeking Assistance from the International monetary Fund (IMF)’.
Further speaking he said:
“Such an analysis needs to be thorough and well-structured with the focus on the real economic activity and the financial conditions in the economy. That would be the first step to build credibility of the world about the Sri Lankan economy. It is actually credibility that we lack rather than foreign reserves. If we can build that credibility about us in the countries that we deal with, we may not need assistance from the IMF to resolve our liquidity issue. When such a favourable environment is created and other countries repose their trust in Sri Lanka’s economy, its sovereign credit ratings would see an upgrade and Sri Lanka would be able to raise funds at the international capital market at reasonable interest rates, The skill we need for this is to present an analysis and a plan and then demonstrate our commitment to stick to it. Our concern is whether the government has such a plan and if it does have one, why it is not publicized”.
“I am not recommending that Sri Lanka should or shouldn’t go to IMF. The central question is not that. The central question is whether we can present and adopt an analytical approach to building credibility in the relevant parties about our economy. On the other hand, in the event we decide to go to the IMF at some point, we will still have to have an analysis and a plan.”
Responding to a question on whether Sri Lanka could boost its reserves by building global confidence in that manner, he replied,” When we have a very good policy document, we will need to demonstrate that we are serious about implementing it. Not only IMF, no country would support us without a well-crafted policy document and a frank commitment to actually implement it”
“We started raising funds from the international capital market via international sovereign bonds (ISBs) in 2007-2008. Those loans boosted our reserves. Then we started repayments from 2012. Before that we had not taken that type of loans from the international capital market. As those sovereign bonds increased, our reserves also increased. Before that we had taken concessional loans from foreign countries and lending institutions at low interest rates.”
“Thus we took loans from the international capital market and repaid them maintaining our foreign reserves at stable levels. Such a situation remained in the past 3-5 years. However, that equilibrium unsettled when Sri Lanka substantially reduced its taxes in the fourth quarter of 2019. Due to this substantial change, government taxes fell by about 25%. With Covid the decline was even deeper. Even without Covid, there was the 25% decline in taxes. Our global lenders were stunned by this development as it would further increase the budget deficit making our loan repayments unsustainable. I think that they had some anxiety about it”.
“This tax subsidy was given without an analysis as to whether it would help increase the country’s GDP, government’s income or how it would affect debt dynamics etc. We think that there should have been a rationale for it, but we didn’t see any such thing from the government. At that time, Sri Lanka was on an IMF programme and they probably thought that their facility’s last tranche could not be completed as the economy would not be managed sustainably. Thus the IMF got out of the picture. Then the rating agencies downgraded Sri Lanka according to their analyses. This had an impact on us. In 2019 December, the third downgrade of Sri Lanka took place. Earlier also we had been downgraded in two instances. But the latest rating made it impossible for us to raise funds in the international capital market. This situation complicated the debt- dynamics balance which had been maintained earlier. What has happened now is; we service our loans from the reserves and we can’t refill it like before. This is how this issue actually cropped up in the first place although it is said that it happened due to Covid. Actually Covid exacerbated it as there has been no Tourism receipts. But we have been able to offset that with import restrictions that have been in place. If we didn’t have to service our foreign loans from the reserves, there would not be a crisis at this point. The fact that funds can’t be added to the reserves can be shown as the cause for the current debt crisis.”
“When there is a substantial tax policy change, can we just make an oral statement and justify it? Don’t we need an analysis as to which tax should be reduced and which one shouldn’t, in order to sustainably manage our economy? Here the reality is; when there is no analysis, there is no credibility.”
“The collapse of confidence is the main reason for our economic problem and the decline in reserves. Government says that it won’t borrow from the international capital market and that there is no need to do so. This is heard as a decision made by the government. But it is not a decision. It is a Hobson’s choice. Even if we really want to borrow, we can’t borrow at reasonable interest rates. That’s the issue.”
“Confidence could collapse not only in the absence of an economic analysis. We have gone back on our pledges made to international bodies a number of times. Sad to say that this has become a tradition. So, if we had managed the economy well in the past year, we would have been able to raise loans without help from the IMF. Now we should manage our economy well, before our reserves hit near zero levels or zero.”
“The Central Bank had a medium term debt management strategy for 10 years, and they had published a written document about it three years ago. But now it has been changed and a new strategy is not in place as yet. In the absence of one, you can’t build confidence by making oral statements. People need to have an awareness not only on inflows but also on outflows.”
“Reserves won’t hit zero this year. In 2021, reserves may reach zero sooner or at a later stage. Even if we manage to protract it. it will spill over into the next year and the next year. It will only aggravate. It won’t be resolved. The speed of going towards zero reserves could be faster or slower, but it won’t deviate from where it’s heading. International parties analyse Sri Lanka and they have not changed their analyses. But the government has often changed its policy. For example, the foreign exchange policy was changed many times. This shows that the economy is not moving as the government expects it to. Verité Research has done an economic analysis on Sri Lanka considering its economic activities, GDP, inflows, debt obligations etc. Our predictions have remained valid but the government is not taking them into account. That’s the problem.”
“The government has presented its expectations, not a plan. The difference between a gamble and a plan is analysis. Expectations are not considered as an analysis”.
“If reserves come to zero at one point, we will have to tell our creditors that we will pay only the interest and pay the principal later. We need to sort things out before we face a disorderly default. Such a situation will affect the economy even more. Our banks, our private sector won’t be able to deal with their parties in the international arena. So we need to negotiate well before such an eventuality happens and resolve the crisis in an orderly manner.”
When asked, in such a scenario could Sri Lanka negotiate with the creditors on its own, he said,” We may need help from the IMF to talk to the creditors being these are bond sales involving hundreds of people. The IMF has a service for this sort of structural help – not reserves help – in order to negotiate with creditors and arrive at an agreement. In the event of making an orderly default, help of the IMF would be needed,” Dr. Nishan De Mel said.
Eravur Fabric Park could transform sustainable textile manufacture in Sri Lanka
Since the first announcement in June 2020, expectations have been high on the potential of the Eravur Fabric Processing Park to catalyze a new era for Sri Lankan textile and apparel manufacture.
Supported through the Ministry of Industry and Commerce and the Board of Investment (BOI) of Sri Lanka, working in close collaboration with the Joint Apparel Association Forum (JAAF), the apex body of the apparel industry in Sri Lanka, the vision for Eravur is beginning to take shape.
Of the allocated approx 300 acres of land, fifty have been allocated for the Park’s maiden investment of US$ 35 million to establish a state-of-the-art fabric mill. Negotiations are also underway with two international companies to infuse mega investments for the remainder. The Park is estimated to attract a cumulative investment of US$ 300 million. The zone is also seeking further investments towards Dyeing, Washing, Knitting, Weaving, and other associated and ancillary activities.
Cabinet approval for the Zone’s classification under the Strategic Development Projects Act was also secured, enabling the extension of tax and other relief and incentives to investors.
Rapid progress towards vertical integration
“We would like to see the first company commence commercial operations in the next 6 months to 1 year,” stated BOI Chairman Sanjaya Mohottala. “We have been very aggressive on timelines because of the clear consensus on the nationally significant value that the Park can generate. At present, all land has been demarcated, and water and electricity supply are being finalized. In excess of half the commercial land has been allocated or reserved, and we are seeing great demand. There is clear recognition locally and internationally as to the immediate potential. If necessary, we are able to expand the zone even further.”
Leveraged in support of Sri Lanka’s highly developed apparel manufacturing sector, which has steadily benchmarked itself on global standards for ethical, sustainable production and high levels of technical and technological expertise, Eravur’s promoters also see the project as an opportunity for Sri Lankan-made apparel to take global leadership on sustainability in its most holistic sense.
Mohottala explained further that the most immediate benefit from the Park’s establishment will be in the cost advantages and enhanced economies of scale gained through capacity expansion and vertical integration of domestic supply chains.
Currently, Sri Lanka has approximately 300 apparel manufacturing facilities across the country. By contrast, it has only 7 textile and raw material factories capable of producing fabric for export, and for conversion into garments for export. At its peak, Sri Lanka imported over 250,000 MT of fabric both for export-oriented apparel manufacturing and for local consumption in 2019, at a cost of US $ 2.2 billion.
In the context of unprecedented disruptions across global supply chains in particular and persistent commodity and currency volatility, increased availability of high quality raw materials will enable an immediate and drastic reduction in raw material costs, while also conserving foreign currency.
Increased domestic production of textiles also translates to a higher percentage of domestic value. If that threshold increases from its current 52% to 65%, it qualifies for a larger proportion of Sri Lankan exports for zero-duty benefits under GSP Plus1.
The culmination of a pioneering national journey in sustainability
The economic argument in favour of investing in Eravur is bolstered by its potential to also be the most sustainable venture of its kind in the entire Asian region, with local stakeholders having already committed to establishing extensive renewable energy facilities, water recycling facilities, science-based targets, and circular business models.
At a macro-level, increased local production capacity will contribute significantly to all these targets by reducing the end-to-end length of Sri Lanka’s apparel supply chains. This in turn enables tighter backward integration and lower carbon emissions.
Taking a cue from the Sri Lankan textile and apparel’s industry’s outstanding achievements on environmental sustainability to date, the Zone is being designed from the ground-up to facilitate and incentivize sustainability in every facet of its operations. In terms of fabric processing, the main focus is on wastewater treatment.
Mohottala continues: “Sri Lanka’s environmental standards for industries are quite stringent, especially compared with regional competitors. A key feature of the Zone will be its central wastewater treatment facility with a sea outfall, which will require a high standard of treatment. Fortunately, we already have strong expertise available locally, with many of Sri Lanka’s textile producers having established facilities on par with global best practices on wastewater treatment. We have used this to our advantage by calling in the local industry’s technical experts and drawing on their pioneering experiences to optimize wastewater treatment protocols at Eravur.”
Adding that this will be one of many positive attributes all stakeholders downstream of the textiles produced at the Zone can lay claim to, Mohottala says, “With the greater localization of production, we also gain improved oversight and control over environmental standards within the Zone. This also enables greater transparency, traceability, and accountability across the supply chain, which in turn will confer preferable competitive advantages to Sri Lankan apparel exporters. In addition, this will empower brands and retailers to make clear and credible claims to genuine sustainable sourcing.”
An end-to-end opportunity
Another significant advantage for Eravur is that it is purpose-built with the most advanced environmentally friendly technology available. This will also promote efficiency in energy and water consumption, as well as additional infrastructure for recycling and recovery of water used in production, for which the BOI aims to provide investors with additional incentives.
Notably, Eravur also enjoys a high level of solar irradiance and consistent high-wind conditions, making any manufacturing facility established in the area, ideally suited for solar and potentially, wind turbine power generation.
“Augmentation of the Zone’s energy requirements with plentiful renewable energy will enable cost savings on the energy-intensive aspects of wastewater recycling. Given the consistent annual reduction in the cost of solar and wind energy, the conditions at Eravur are another unique attraction for investment into the Zone, and potentially enables the entire supply chain to utilize global incentivizes around responsible and sustainable production,” Mohottala said.
In addition to the wastewater treatment protocols, the Zone will also include a sludge treatment facility, with further trials already underway for responsible disposal. These include tests using micro-algae to breakdown sludge, as well as utilizing sludge to fuel furnaces and as bricks with a bio-mat mask.
The final and potentially most vital contribution which the Eravur Fabric Processing Zone is the empowering impact it will have on the lives of Sri Lankans in Batticaloa. At present, the district has an estimated population of 621,887, of which, an estimated 60,912 individuals are below the poverty line. As at 2019 – prior to the pandemic – unemployment in the region stood at 6.4%
“With the development of the Zone, we will be able to create thousands of stable, well-paying direct and in-direct jobs. This could prove to be one of the most transformative developments to take place in the Eastern Province in recent history,” Mohottala concluded.
‘The insurance industry continues to drive the message of safety and optimism’
The Insurance Association of Sri Lanka has been working overtime to ensure the smooth operation of the insurance industry with the objective of spreading awareness and inculcating knowledge on the importance of insurance. Similar to multiple other industries, in global and local contexts, the insurance industry has experienced its share of fluctuations with the onset of the pandemic and displayed its resilience to the resultant challenges.
Dinesh Yogaratnam, the Chairman of the Marketing and Sales Forum (MSF) of the Insurance Association of Sri Lanka (IASL), shared his perspectives on the marketing of insurance during these tumultuous times. He expounded on the ways in which the MSF of the IASL adapted to overcome the hurdles of the circumstances that arose during 2021, while promoting insurance penetration.
“The Insurance Association of Sri Lanka (IASL) is the industry body comprised of all the Life and General Insurance companies that operate in the market. The Marketing and Sales Forum (MSF) is a subcommittee thereof and as the name implies, addresses matters pertaining to the sales and marketing of insurance products and services. Further, the MSF also carries out various initiatives to increase insurance penetration in the country via education and knowledge-sharing. One of the major efforts of the MSF this year is to help the public better appreciate what insurance is. In addition, helping them understand how, when, and why they should purchase a policy, so that they may provide themselves, their loved ones, their assets, as well as their enterprises with the financial protection required, are key objectives.
“The MSF has resorted to using mainly digital and print media for its insurance promotion activities. Employing a two-pronged approach, whereby, the MSF under the IASL banner is carrying various pieces of communications on social media channels and is working with the country’s print houses and their digital arms to disseminate information and educate the public, the individual companies too have been encouraged to promote their products and services, as well as to carry knowledge building pieces of communication on their own platforms. Through this, we are witnessing a heightened level of activity and dialogue across social media channels.”
Giving further insight into the current insurance marketing landscape prevalent in the country, Dinesh Yogaratnam stated, “The insurance industry has grown in 2021 by approximately 14% in terms of Gross Written Premium as of the end of the 1st quarter; while long term insurance has seen significant growth, general insurance has contacted very marginally. As an industry, we are confident that the growth trajectory we have witnessed in the first half will continue to the end of the year.
“With the pandemic impeding movement, insurers had to very quickly realign themselves to front the customer both for new business acquisition as well as for premium collection, equipping themselves with various digital assets and recalibrating their sales teams to embrace a new hybrid model of interacting with and engaging the customer. From a servicing perspective; industry players have infused many digital interventions as part of their customer touchpoint strategy so that customers are able to seamlessly interact with them and obtain whatever services they require, regarding their policies. On the customer’s side, the pandemic has made people appreciate the need for a meaningful health insurance plan and they have also begun to appreciate the need for long-term insurance. The Sri Lankan insurance industry has always stood by society not only during times of normalcy but more so during times of widespread calamity and dire need. In this respect, the industry has come forward to pay COVID-related claims, irrespective of the fact that pandemics are excluded as part of insurance contracts.”
SL’s Kithul-based treacle and jaggery for Gulf markets
By Hiran H.Senewiratne
A local company is now in the process of venturing into the lucrative export Gulf market through its flagship product, Kithul based treacle and jaggery. Initially, the company will target the UAE market and afterwards other Arab countries.
“Both our products were introduced to the local market as niche products one year ago and are already exporting to Australia and several other countries, chairman, C-lon Kitchen & Healthy Foods, Rohan Wijeweera told The Island Financial Review.
‘The Gulf region is a lucrative market and there is a big demand for pure Kithul treacle among Arabs, which could be harnessed if we supply quality products, he said.
Wijeweera adds: “Now we have secured an order from a Gulf online sales company to market these products under the tag, ‘Made in Sri Lanka’ under the “Deegayush” brand and initially two containers will be exported to Dubai most probably next month. After that we will be targeting Canada and the UK markets.
“Kithul treacle and jaggery are made from the sap harvested directly by tappers living in border areas of the Sinharaja forest in the Rathnapura district. We have come to a forward buying agreement with around 250 tappers in this region, whom we also support by paying a premium price and also by some other CSR initiatives.
“The sap is then brought to our processing plant in Piliyandala where we process it. Kithul treacle is known to contain polyphenols, which are antioxidants, organic acids which are bioactive, amino acids that have many functions, beta carotenes that produce vitamin A and ascorbic acid or vitamin C that improves immunity.
“Thus, it is known to yield as many health benefits as Kithul jaggery. It prevents arthritis, improves complexion, alleviates constipation, aids weight loss and combats blood sugar. For nearly the same reasons as Kithul jaggery, Kithul treacle or syrup is witnessing massive demand locally as well as internationally.
“Today the demand for pure and natural Kithul products far outstrips the supply and due to lack of sap many local manufactures add sugar and other artificial sweeteners to the products thereby diluting the health benefits of it. However, we ensure not to add artificial ingredients and due to this our products are sold at a premium price from leading super markets under the brand name, “Deegayush”.
“Behind the scarcity of Kithul products there are several reasons, such as the shortage of tappable jaggery palms, fewer people being engaged in this industry due to the inherent risks and the profession not being accepted among the youth.
“Also less numbers are involved in jaggery palm planting since the tree takes around 7 years to mature before being fit for tapping.
“I am also looking at making Kithul treacle and jaggery from sugarcane, once again, targeting the export market as well.
“We are also manufacturing several immune boosters from locally sourced material. We next plan to introduce a curd to the market. More details could be obtained from, email@example.com”
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