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Issues  

Economic gloom the stimulus package failed to brighten


(Inset) Mahinda Rajapakse

By Risidra Mendis, Nirmala Kannangara,
Arthur Wamanan and C.B.M. Joseph
 

Industrialists as well as the business community are wary of the so called "economic stimulus package" offered by the government last week given the global economic meltdown and its impact on various sectors of the Sri Lankan economy.

Given the present global conditions, analysts have warned that the country would be badly hit due to the global economic recession by 2009. Already, out of the original 800 garment factories set up in the country only around 275 are in operation as at end 2008.

Industry experts say 2009 would be a decisive year for the export industry.  The tea industry is in crisis and has already sought urgent government assistance. According to tea small holders, the government's intervention came a bit too late, as three months had already passed.

Like the tea industry, the rubber industry too is facing a severe crises due to the fall in prices. Rubber manufacturers say that the government's move to provide subsidised fertiliser is useless. They say that the government has to come up with a new pricing formula, as the issues faced by the industry are mainly due to the drop in sheet and crepe rubber prices.

The apparel industry unlike the tea and rubber industries has been facing problems even before the global financial crisis. These problems have been aggravated by our largest market, the US reducing its purchases. According to apparel manufacturers, the granting of GSP+ would play a key role in the survival of the industry.

Manufacturers say that the GSP+ concessions would give the local industry an edge over other countries and also provide a level playing field to compete with competitors like Bangladesh and Vietnam.

In the case of the global recession, manufacturers say that it would not make a difference, as all countries were facing the same problem. In other words, all countries face the same global environment. However it was noted GSP+ gives an added boost to the country's export industry.

The leisure industry is in the doldrums and has sought government assistance to avert a complete crash. The prevailing security situation  has adversely affected the local tourism industry. Last week, the Indian media reported that foreign tourists were avoiding Sri Lanka due to the prevailing unstable security situation.

Hospitality industry sources admitted that both the global economic recession and the ground situation in the country had resulted in a drastic decrease in tourist bookings. According to the sources, the number of bookings this season had been dismal compared to previous years. They added that this was the worst year as far as the industry was concerned.

In addition to the above, export markets of items such as spices and ceramics have also been badly hit. Analysts have called upon the banking sector to come to the rescue of these industries.

The National Chamber of Exporters (NCE) has planned to meet Central Bank and Treasury officials together with the bankers in the near future  to explore the possibility of obtaining relief for the export industry. The government however has promised it will take measures to rectify the situation.

Former Enterprise Development and Investment Promotion Minister Dr. Sarath Amunugama has assured that the government would take all possible measures to maintain GDP growth at 6%.

The banking sector however is optimistic that if the cost of living and inflation are contained, 2009 would not be as gloomy as it appears to be.

Other exports

Export markets for spices, ceramics and other items have also suffered badly due to the global credit crunch and unless the local banking sector  comes forward to rescue these industries the export companies would certainly collapse, President National Chamber of Exporters (NCE) Rohan Fernando told The Sunday Leader.

 According to Fernando the present situation has come about purely due to the global credit crunch.

 "We do not receive our dues on time and in some instances the demand for our export products has shrunk as a result of the global financial crisis. If this situation  continues  the export industry would  collapse," Fernando added. He however said that this is the time for the banking sector to come forward to help the industry, as it was the export sector that gave vigour to the banking sector.

 "If not for the export sector the banking sector too would have suffered and the time has now come for the banks to help us as a goodwill gesture by way of cutting down interest rates," claimed Fernando.

Fernando further said that the NCE representatives were planning to meet the Central Bank and Treasury officials together with the bankers in the near future to obtain relief for the export sector.


Export sector

Exporters say that the new year will be a challenging year as far as the entire export industry is concerned.

According to the National Chamber of Exporters, 2009 is expected to be a decisive year for the export industry due to the effects of the global economic recession.

President, NCE, Rohan Fernando told The Sunday Leader that unnecessary expenses should be cut down by the industry and the money invested.

"The year 2009 is going to be a decisive year as far as the export industry is concerned. The industry needs to invest more by cutting down on unwanted expenses," he said.

The three issues that need to be considered at this juncture, according to Fernando, are movement of currency, the rate of exchange and bank interest.

With the global financial recession, there has been very little movement of currency, as countries such as the USA and the UK had stopped buying from other countries.

"These three issues are the most important. The Central Bank's intervention is also needed. The rupee has been allowed to float, which is a good thing. But, this will definitely be a testing and a challenging time," Fernando noted.

Following a special cabinet meeting last Tuesday,  December 30, the government announced a series of measures  to certain export sectors including the plantation sector.

Fernando said that the proposals put forward by the government were not adequate to address the current crisis and had been made to appease certain sections.  

Speaking further, Fernando said that the relief measures offered  were not enough and that the government was targeting only a section of the export industry, namely the estate sector.

Both these sectors were badly hit due to the global crisis.

"These are all populist measures. The government has not addressed  the problems of the export industry as a whole. It has only spoken about a few industries that have been severely affected. Instead the government should look at industry as a whole. These are done probably for political gain," he said.

Meanwhile Fernando told The Sunday Leader that the NCE met the Central Bank Governor on Friday to review the  progress  in exports during 2008 and also consider  the economic outlook for 2009 as it was noted that the year ahead would be crucial for the export sector in terms of  sustainability.

"With the global financial recession and lack of demand for consumer goods the year ahead would be a crucial year for the industry," added Fernando.

However according to Fernando although the year ahead would be crucial, the first three quarters of 2008 had recorded a good growth rate compared to the last quarter of 2008. "The prices of commodities came down and  fuel prices were also slashed and overall a 6% GDP growth was recorded in 2008. While  unemployment  has reduced to 5% by  end 2008, inflation too has come down to 14.5%. It is hoped that inflation will come down to a single digit by June 2009," added Fernando.


Banking sector

Many economists note that 2008 has been a 'bad one,' and that from the look of things, year 2009 is going to be worse. They have based their findings on the fact that the cost of living has been soaring sky high during 2008 and that the rate of inflation has been steadily rising to reach the 30% levels till the Central Bank manipulated it with a new cost of living index to bring it down to around 24%.

The trickle down effect of the global financial crisis hit Sri Lanka about three months before the end of 2008. The official stance however has been that the global economic crisis would not have an impact on Sri Lanka. 

But addressing a seminar on 'Current global financial crisis and its implications to Sri Lanka' around November last year, the Governor of the Central Bank had said that skilful partnership and planned management would definitely prove effective in gaining immunity for Sri Lanka from the prevailing global crisis.

This stance however had been countered by a government minister who had said that Sri Lanka would be affected by the global financial crisis for at least another two to three years while another government minister maintained that there had been large job cuts in the US and India running into several millions and that Sri Lanka was sure to be affected by the global crunch.  The minister had also noted that banks such as AIG and Citi Bank, which were global giants, had failed as a result of the crisis.

Many economists and analysts had pointed out with concern that the economy of the country was nose-diving, a fact that the Central Bank Governor had either consistently refuted or ignored.

Despite the Central Bank Governor's rebuttal of the facts brought out by economists, the government had issued a circular to ministries, departments and provincial councils to stop all development projects.

The JVP that was a part of the government and had parted ways around a year ago had charged that the Central Bank was about to announce a bailout package by releasing funds from its foreign reserves to counter the situation. 

With the dawn of the New Year The Sunday Leader spoke to some experts in the banking sector to obtain their views on what's in store;

Secretary General, Sri Lanka Banks Association (Guarantee) Ltd., Upali de Silva speaking to The Sunday Leader said that the year 2008 was not altogether bad for the banking sector except the third quarter. He said, "Year 2008 has not been bad for the banking sector except the third quarter. But year 2009 certainly seems gloomy. 

"The Central Bank has said that inflation is coming down and if that is the situation we should be happy about it, as inflation affects all businesses in the country. If the cost of living can be curtailed during 2009, I can say that year 2009 is not going to be bad for the banking sector."

Asked to comment on the economic outlook for 2009, a source at the Central Bank said the high inflation rate had declined to 14.4% by end 2008 and that as expected it would further decline, possibly reaching a single digit in mid 2009.

The source further said that the growth rate of the economy in 2008 was 6% and in 2009 a growth rate of 5.6% to 6 % could be expected.  The source attributed this downward trend in growth in 2009 to the global financial crisis.

The global financial crisis had impacted on the developed countries as well as on the developing countries placing a heavy strain on their collective economies. In Sri Lanka the impact of the global financial crisis, the sources said, had pushed commodity prices down and consequently our tea, rubber and garments were experiencing low prices.

The source further said that the economic outlook for 2009 would not be that gloomy and maintained that the spending on imports would be lower with the export prices too being lower.


Tea sector

Tea small holders allege that the government's relief proposals were not adequate to restore the industry adding that the government was not serious about solving the issues.

Chairman, Joint Federation of Tea Small Holders (JFTSH), Chandrasena Wijesinghe said that the government's intervention to resolve  the crisis in the tea industry had come too late.

Speaking to The Sunday Leader, Wijesinghe said that the proposals put forward by the government following last week's special cabinet meeting were not adequate to rescue the industry.

He added that the tea industry was facing a crisis during the past three months and the government had only got involved after the industry had faced serious difficulties.

"The government has intervened three months after the industry had virtually collapsed. Most of the tea lands have become forest lands now," he said.

Wijesinghe added that the government's proposal of buying tea leaves at Rs. 45 was not enough. "It has to be bought  at least for Rs. 50," he said.

He also said that the federation had put forward many proposals to the government to take into consideration when coming up with solutions.

"The government however chose to ignore our proposals. The government did not come up with any proposals of its own for the last three months when the industry was collapsing. The proposals that the government came up with last week are not at all adequate  to save the industry," Wijesinghe said.

"The government's attitude towards this whole issue was evident when one of its spokespersons said that the crisis was only like a mild cold, and that it needed very little treatment," he said.


Investments

Former Enterprise Development and Investment Promotion Minister Dr. Sarath Amunugama has stated that the government would take all possible measures to maintain GDP growth at 6%.

Addressing the media Dr. Amunugama said that in the last four years GDP growth was over 6%. "At a time when the US growth rate was diminishing to a negative level, China and India were reversing their growth figures. During the third quarter of 2008 Sri Lanka  recorded a growth of 6.3%. There has been a rapid growth in the agriculture sector and  inflation has come down from 30% in June 2008 to 13% in December 2008. We are confident that the inflation rate will come down further," Dr Amunugama explained.

He went on to say that the government had a 6.5% budget deficit and that efforts were being made to keep it at that level. "People have a right to complain when they are facing difficult situations and it is up to the government to address these issues and introduce relief measures to ease their burden. This is why the government has taken steps such as bringing down the prices of fuel, gas, cutting down on expenditure of government officials and writing off long overdue debts.

"The government has provided debt relief and a reduction on electricity surcharge to tourist hotels, a fertiliser subsidy for the agriculture sector, offered relief to the industrial and manufacturing sectors, the tea and rubber sectors and concessions to boost cinnamon production. Tea will be purchased by the state trading institutions. A suspension of export cess on the rubber industry will also be implemented," Dr. Amunugama  said.

He added that the government would also give a 5% incentive to the apparel, ceramic, tyre and tube producing companies if they continue to maintain the same production levels as in 2008.  

"Many concessions and relief measures have been provided by the government to the public in order to address the global economic crisis. We have given the public very healthy concessions for 2009," Dr Amunugama said.


Rubber industry

Convenor, Joint Association of Rubber Manufacturers (JARM), Gamini Ratnayake said that the government needed to come up with a proper pricing formula rather than granting subsidised fertiliser.

He said that the rubber sector employees were facing problems due to the drop in prices.

"There is no point in giving subsidised fertiliser now as they have started to tap rubber. They do not need fertiliser now," Ratnayake said.

"What we want the government to do is to come up with a proper pricing formula that will help the people who depend on rubber manufacturing to survive."

He said the price of rubber had dropped drastically in recent times,  affecting the manufacturers and employees alike.

According to Ratnayake, the price of a kilo of sheet rubber dropped from Rs. 400 to Rs.100 while a kilo of crepe rubber, which was sold at Rs. 350 is now sold at Rs. 90 a kilo.

"This is a drastic fall in prices. Therefore, the government has to come up with viable solution by presenting a  proper pricing formula - a formula that will help the industry workers to survive," he said.

Ratnayake said that the government needed to concentrate on rubber manufacturing as well, as some factories had closed down.

"The government has to look into the rubber factories. Some of the factories have closed down. It is the government's duty to get them going again," said Ratnayake.


Garment sector

Secretary General, Joint Apparel Association Forum (JAAF), Rohan Masakorale said that the apparel industry will be facing a challenging year due to the global economic crisis and also the GSP+ issue.

The apparel industry, unlike the tea industry has been facing problems even before the global recession set in, according to Masakorale.

The US is the largest market for Sri Lanka's apparel industry. According to Masakorale in recent times however the US has reduced buying from the country largely due to the global financial crisis.

"The crisis in the tea industry was an immediate after-effect of the global economic crisis. However, the apparel industry was facing problems even before the economic crisis started."

He said that the buyers, mainly from the US and the seller (Sri Lanka) were likely to go for consolidation. "The retailers have been heavily challenged. Therefore, there is a likelihood that the buyer and the seller will go for a consolidation," Masakorale said.

He said that while 10 to 15 garment factories had closed down recently, many of them were trying to consolidate.

"There were around 350 to 380 factories operating as of 2007. There are around 260 to 295 factories operational at the moment. Some are trying to join. Some have closed down."

According to Masakorale, there are orders for January and February. However, he said that the situation was uncertain as some of the countries had delayed their orders.

"There is a lot of uncertainty," said Masakorale.


BoI

Speaking to The Sunday Leader Deputy Director General - Investment Promotion, BOI, A.M.C. Kulasekera said it was hard to say what the impact of the global economic crisis  on Sri Lanka would be as it was still in the early stages.

"The economic crisis has just started and it is too soon to say how Sri Lanka would be affected by this situation. We have to wait for at least three to six months before we can assess how badly the country is affected by this global economic crisis. At present Sri Lanka is not that badly affected by the global crisis as our foreign exports are relatively limited, Kulasekera said.

Just started

He added that companies have only just started reducing staff and cutting down on overheads to address the present economic crisis. When questioned on the number of garment factories closing down in the country Kulasekera said that small garment factories that survive hand to mouth were the ones closing down.

"There are around 800 to 900 garment factories in the country. Out of this number 50% come under the BOI. Most garment factories will try not to close down for as long as they can, which is why they are cutting down on overheads and employees.

"The big garment factories can survive for more than a year by cutting down on expenses. However the small garment factories that depend on small scale orders cannot survive that long. These small garment factories are the ones that have closed down," Kulasekera explained.

All affected

He went on to say that Sri Lanka is not the only country that is facing this global economic crisis. "China had recently made a large export order of apparels for USA. But due to the global economic crisis the USA cancelled this order. China had no option but to sell their export order in the local market.

"Sri Lanka's apparel export orders are mainly to Europe and USA. However the danger of these exports getting affected has not yet been felt in Sri Lanka," Kulasekera added. 

He went on to say that due to the global economic crisis people around the world are cutting down their expenditure. "Foreign buyers who used to wear a garment once and then discard it and buy another, are today washing that garment and wearing it again. Similarly the tea industry is affected in Sri Lanka.

Chain reaction

"The global economic crisis is a chain reaction. When tea exports come down tea packaging companies are also affected. Similarly when the Golden Key Credit Card scam was exposed Seylan Bank got affected. This is what is happening all over the world. We cannot escape from this chain reaction in the global arena. However we can take preventive measures to address the crisis," Kulasekera explained.   

He stressed that the BOI is not a donor agency but an investment facilitation company. "What we can do as an investment facilitation company is to not charge concessions from companies that register with us. We can also advice the government on what measures it can take to address this situation. As the BOI we can advice the government to give affected companies and factories concessions on taxes and funding from banks among other facilities," Kulasekera said.


Tourism sector

The country's leisure industry, which was once the fourth largest foreign exchange earner for the country is to face the worst ever crisis during 2009 due to the global financial crisis and also as a result of the country's security situation, the Tourist Hotels Association of Sri Lanka (THASL) told The Sunday Leader.

With the global financial crisis, the leisure industry has hit rock bottom with advanced bookings seeing a steep decline in the past few months. The situation is expected to worsen after January 15 as hardly any new bookings have been made beyond January 15 according to the THASL.

 This would have serious consequences on the industry and if  precautionary measures are not taken to protect the industry and its dependents many resort hotels would have to close down partially or even completely to avert further losses according to the THASL.

Worst crisis

"This is the worst ever crisis the country's tourism industry has had to face. The industry that suffered a setback following the tsunami and the airport bombing  was able to bounce back with determination quicker than expected.

"But the current global financial crisis and the country's security situation have forced the leisure industry to suffer its biggest setback yet.

"The situation has affected the industry, especially the hotels so much so that owners have sought government assistance just to keep afloat and avert a possible mass scale closure," President, THASL, and Chief Executive Officer/ Director, Serendib Leisure Hotel Management, Srilal Miththapala told The Sunday Leader.

 According to Miththapala the surveys carried out during the past few months had clearly shown that the industry would be in great trouble after January and the extra staff engaged during the season would have had to be retrenched although this is the winter season - the peak season for Sri Lanka.

"In December there were only a few arrivals which was  a huge decline compared to the previous years. But the  situation after January would be completely different  as hardly any bookings have been made," Miththapala added.

 Miththapala further said that although the THASL wanted to ask for financial assistance from the government in order to keep the industry afloat, they had to put off the idea since the government has assured   some relief to the industry.

Wait and see

 "With the recent announcement by the government  providing relief to the leisure industry in its 'economic stimulus package' the THASL has decided to wait and see  what relief the industry would receive from the government. Although the government has claimed that some relief was being provided to the  tourism industry we have not been informed as to what we would get.

"Anyhow we are happy that some relief has been promised and we are hoping to hear about the specifics at least by tomorrow (Monday). When we met Tourism Minister Milinda Moragoda on Thursday January 1, he wanted the THASL to wait and see as to what we could get from the relief package," Miththapala stated.

 Speaking further Miththapala said that not only were those  directly involved in the industry suffering, but their dependents were also suffering. He also said that more than 40, 000 persons indirectly involved with the industry and their dependents had already lost their livelihood.

 "Although the industry suffered enormously in 2007 this year's loss could be rated as the worst ever as it is a 15% drop compared to 2007. Even the World Tourism Organisation (WTO) in mid 2008 had projected a growth of 6.8% in the tourism sector, but within a few months they had to downgrade the growth figure to a 3% decline, which clearly shows how the crisis has impacted on the tourism sector," Miththapala said.

Charters cancelled

According to Miththapala, Russian charter flights that were to bring leisure seekers to the country had been cancelled and many more cancellations of this nature were expected. 

 In addition the industry has started to crumble following the security situation in the  country. If this situation prevails further  around 20  to 30 THASL member hotels would be pushed to closure. Forward bookings have dwindled over the past few weeks with the patronage of the Russian, German, UK and French markets whittling down.

"There is very little  to talk about the German market as well as the other tourism generating markets as tourists from these countries are not travelling to Sri Lanka probably due to the global crisis. Although the present situation is mainly due to the global crisis we  still could attract tourists  in small numbers if the government  could agree to some sort of a ceasefire which would bring  peace and stability even temporarily.  The 2002 ceasefire agreement (CFA) helped the industry to bounce back after many setbacks and helped the industry to pick up within a short period," added Miththapala. 


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