ECONOMYNEXT – Some Sri Lankan firms could be hit while firms in essential goods may be less affected and import substitution firms could benefit if import controls are tightened on weak external finances, Fitch, a rating agency said.
“Sri Lanka sovereign’s weak external finances will affect corporates importing non-essential finished goods such as consumer durables more than corporates importing essential finished goods such as pharmaceuticals, food or clothing,” Fitch said.
“At the same time, we believe restrictions are less likely in the near term on the importation of raw materials for the domestic manufacture of essential products such as personal care, or for those industries serving as import-substitutes such as tyre and footwear manufacturers.”
Inflated Reserve Money
Sri Lanka’s central bank has been injecting liquidity (inflating reserve money supply in excess of the external monetary anchor or peg) keeping interest rates and credit out of line with the balance of payments and triggering forex shortages.
The central bank has lost foreign reserves as the liquidity was used in state salaries and later in cascading bank credit, and the news money redeemed against foreign reserves for imports or debt payments at a non-credible peg (convertibility undertaking).
The convertibility undertaking has far shifted from around 185 to 203 to the US dollar since early 2020. After convertibility was restricted for trade transactions, as well as some capital transfers banks started to ration dollars.
Parallel exchange rates have also risen as a result.
Due to Mercantilist beliefs – which are also taught in Keynesian universities – monetary instability has been blamed on imports, and authorities tried to control imports.
In Sri Lanka oil often is blamed for currency falls, though liquidity injections in 2015 created a currency crisis as global oil prices collapsed.
However as credit driven by the new liquidity shifted to permitted areas, the trade deficit had exceeded the 2019 levels by May 2021.
In June some import restrictions were relaxed.
Among Fitch Rated firms, consumer durables sellers were likely to be most affected.
“Singer (Sri Lanka) PLC (AA(lka)/Stable) and Abans PLC (AA(lka)/Stable) are the most exposed among Fitch-rated corporates to tighter import controls, due to the discretionary nature of their products,” the rating agency said.
“A tightening in import controls may exert pressure on both entities’ ratings, owing to low headroom. However, the availability of buffer inventories, a degree of local manufacturing, and potential group synergies in the case of Singer, could help mitigate the impact in the near term.”
Meanwhile firms that critics call crony import substitution firms which have actively lobbied politicians for protection in the past to create a domestic ‘black market’ at high prices could benefit.
“We expect sales volumes for domestic manufacturers to rise in the near term as they attempt to fill shortages created by import restrictions,” Fitch said.
“Therefore, corporates such as the domestic tyre manufacturer Ceat Kelani Holdings (Private) Limited (CKH, AA+(lka)/Stable), footwear manufacture and retailer DSI Samson Group (Private) Limited (DSG, AA(lka)/Stable), as well as electric cable producer Sierra Cables PLC (AA-(lka)/Negative), may be long-term beneficiaries as their products serve as import substitutes.”
The impact on alcohol, beverage and phamarceuticals may be neutral.
“We believe pharmaceutical manufacturers and distributors such as Hemas Holdings PLC (AAA(lka)/Stable) and Sunshine Holdings PLC (AA+(lka)/Stable) are less likely to see tighter import restrictions despite significant import exposure,” Fitch said.
“This is because of the essential nature of their goods, and limited availability of their products in the local market.
“Hemas and Sunshine have limited domestic manufacturing capabilities for certain generic drugs, while around 90% of the pharmaceutical products they sell are imported.
“This is because domestic pharmaceutical manufacturing is at a nascent stage, with producers lacking the technological know-how and infrastructure near term as they attempt to fill shortages created by import restrictions.”
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”
Central Bank urged to save collapsing local industries
Eravur Fabric Park could transform sustainable textile manufacture in Sri Lanka
7-billion-rupee diamond heist; Madush splls the beans before being shot
The Burghers of Ceylon/Sri Lanka- Reminiscences and Anecdotes
Unfit, unprofessional, fat Sri Lankans
Features2 days ago
100% Organic Agriculture: A costly experiment leading to National disaster
Features4 days ago
Reflections on return of Sri Lanka’s multifaceted Manike, Yohani
Sports5 days ago
Basketball Federation signs ‘safe sport’policy
Sports6 days ago
Sri Lanka record come from behind win over Bangladesh
Opinion6 days ago
Reconciliation requires single PC for North and East
Sports6 days ago
Naveed Nawaz compares Junior cricket structure of Bangladesh with Sri Lanka
Features5 days ago
Proposed Sri Lanka Tourism policy should promote inclusiveness
Features4 days ago
A legend who rewrote Sri Lankan history: Eulogy for Dr. Deraniyagala