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Sri Lanka Has Lots Of Untapped Export Potential

  • Needs FTAs to boost exports in future – Former CCC Chairman Chandra Jayaratne

by Amavasya Sirisena

Prime Minister Ranil Wickremesinghe (L) shakes hands with Chinese President Xi Jinping during the former’s recent visit to China

Although many do not believe, Sri Lanka will have to ink more free trade agreements (FTAs) in future with China, India, Pakistan, and Singapore creating more employments along with attracting more foreign exchange in the form of foreign direct investments (FDIs) to Sri Lanka, opine renowned economist and chamber personalities.

“We could easily get investors from those countries to come to Sri Lanka and invest here which is the only strategy available for us to increase our exports rapidly. Notwithstanding, this would enable us to achieve three main targets such as: increase rapid investments, bring employment opportunities, and create niche markets for exports, all the while opening up opportunities to become a trading and manufacturing hub serving the entire region,” said the Former Chairman of Ceylon Chamber of Commerce (CCC), Chandra Jayaratne, speaking exclusively to The Sunday Leader.

He further stressed that Sri Lanka will obviously have the possibility of doing free trade with North and South America via the Trans Pacific Partnership agreement which is slated to commence in 10 years.

“This will enable Sri Lanka to tap more opportunities when targeting West Asian and East Asian markets with these four manufacturers. For the meantime, Sri Lanka’s exports can be boosted by implementing free trade agreements with a range of opportunities with aforesaid countries although many professionals protests against this development,” he added.

Nevertheless, despite the prominence on free trade agreements, it is also a matter of importance to give prominence to value chain where we could do logistics, opined Jayaratne.

“While manufacturing, we must do some logistics, services, storage which is possibly a booster for Sri Lanka’s economic development.”

 

No big impact

Speaking of Sri Lanka’s economy in the present scenario with the Chinese slowdown, Prof. Milton Rajaratne, the Professor of Management at the University of Peradeniya, pinpointed that Sri Lanka will not be affected by the Chinese economic slowdown since Sri Lankan exports were not overly exposed to China

“Because Sri Lanka is not exporting to China in large amounts (approximately less than four per cent), Chinese economic slowdown does not have any impact on Sri Lanka’s economy on market principles. Despite these facts, he also pinpointed that Sri Lanka’s tea and rubber exports will have an issue in the future, since China has started consuming green and Chinese tea more than Sri Lankan tea.”

Meantime, since capital inflows from China into Sri Lanka has been historically low, both Sri Lanka’s exports as well as investments will largely remain unaffected, stressed Prof. Rajaratne highlighting the nature of the relationship between the two countries in terms of exports that could be stated as remote.

“Sri Lanka’s capital inflows also will not be affected in any case, since China’s huge trade surplus owing to a large number of capital stocks. This ensures ability of China in continuing to invest in infra-structure development in Sri Lanka,” he added.

“In addition, China is always interested in lending money to the developing countries which will create a market for the Chinese outputs for those who borrow their money.”

Prof. Sirimal Abeyratne, Senior Lecturer in Economics in the University of Colombo, also stated that even though Chinese slowdown has affected globally, there is no big impact to Sri Lanka.

South Asia’s vulnerability to external stress limited

The latest economic outlook report published by the World Bank – South Asia Economic Focus Spring 2016, exploring crucial highlights which occurred in South Asian economy – forecasts Sri Lanka was not likely to be directly affected by sluggish Chinese economy.

“Trade patterns do not expose South Asia to a continued Chinese slowdown. The region is more inward oriented than others, and its growth is less dependent on global markets. Unlike Latin America, South Asia is not directly affected by declining prices of food and metals stemming from more sluggish Chinese demand. Most countries in the region import massively from China, but flows in the opposite direction are considerably more modest. With the exception of Pakistan, the share of exports to China is low. For India, the most relevant external market is the US. For Bangladesh and Sri Lanka, it is the EU. If anything, performance among these two major advanced economies is improving,” the report said.

“Exposure to jittery international markets is also limited because capital inflows are modest. Generally, the net stock of Portfolio Investment (PI) across South Asia is limited by international standards. Only India with net PI of around 10 percent of GDP by end of FY2015 is somewhat vulnerable to international portfolio rebalancing and related volatility. Sri Lanka’s exposure to international investor sentiment is more limited with a portfolio stock of around 7 percent of GDP (although its PF debt liabilities at around 13 percent of GDP – without counting assets – are significant and could entail larger exposure), while other regional economies feature only small or negligible amounts of international and more volatile Portfolio Investment.”

 

Capital inflows not affected

Generally, the net stock of Portfolio Investment (PI) across South Asia is limited by international standards. Only India with net PI of around 10 percent of GDP by end of FY2015 is somewhat vulnerable to international portfolio rebalancing and related volatility. Sri Lanka’s exposure to international investor sentiment is more limited with a portfolio stock of around seven percent of GDP (although its PF debt liabilities at around 13 percent of GDP – without counting assets – are significant and could entail larger exposure), while other regional economies feature only small or negligible amounts of international and more volatile Portfolio Investment.

 

FDI

Sri Lanka saw its official reserves decline. Large sales of foreign currency aimed at stabilizing the exchange rate led to a decrease in reserves from solid levels to an estimated 3.8 months of imports of goods and services by end-2015. This was in spite of higherthan- budgeted foreign borrowings and swap arrangements with the Reserve Bank of India. With over USD 4 billion of FX liabilities due in 2016, managing external balances has become one of the most immediate challenges for the country.

 

GDP

Sri Lanka witnessed a marginal deceleration of growth in 2015 due to slowing construction activity, as the new government was reassessing the previous construction-based development model. But in spite of the slowdown, government consumption expanded by 10.3 percent, remaining a major driver of growth.

 

Current Account Deficit

Estimates for 2015 suggest that South Asia’s largest economies – India and Pakistan – feature current account deficits at 1.3 and 1 percent respectively. At 2.2 percent of GDP, Sri Lanka’s current account deficit was above the regional average, but it is expected to narrow mainly on account of curbing recent strong import growth.The current account deficit is also projected to narrow thanks to growing tourism inflows, while remittances are projected to grow below nominal GDP growth because of continued low oil prices affecting the Middle East.

 

Public debt

Public debt is particularly high in Sri Lanka, where large primary deficits, rising real interest rates and exchange rate depreciation have increased its volume from 70.7 percent of GDP in 2014 to an estimated 75.2 in 2015.

 

Strongest pro-growth fiscal stance in recent years

Under the previous Sri Lankan government, the development model was very much anchored on public investment. It is less clear that this infrastructure-driven model will continue under the new government, and it may not be affordable in any case.

 

Economic growth

Economic growth marginally decelerated to 4.8 percent in 2015 compared to 4.9 percent in 2014 on account of the decline in the construction sector as the new government was reassessing the construction led growth model. The services sector contributed 63 percent of the total growth underlying strong contributions from transport, trade, financial services, real estate, and other personal services related sectors. An accommodative monetary environment that led to a 25.1 percent year-on-year expansion of credit to the private sector played an important role in fuelling the growth.

Growth is expected to increase to 5.3 percent in 2016 and beyond, driven by increased public investment and postponed FDI in 2015. The reduced drag from imports thanks to continued low commodity prices and the recent policy measures to curb import growth would also contribute to the increase in growth.

Downward price revisions in key consumer items; low global commodity prices; and overall improved domestic supply conditions eased inflationary pressures. As a result, average annual inflation remained benign at 0.9 percent in December 2015. However, core inflation computed excluding fresh food, energy, and transport rose during the latter part of 2015. It reached 4.5 percent on year-on-year basis in December 2015, indicating demand pressures in the economy.

 

Fiscal deficit

The fiscal deficit rose sharply in 2015 due in part to two successive election-time budgets, with increased salaries and subsidies, reduced consumption taxes, and increased interest costs on resultant deficit financing. Although one-off revenues proposed in the 2015 budget helped mitigate the impact, the deficit increased to an estimated 6.3 percent of GDP from a budgeted 4.4 percent of GDP. A high primary deficit, rising real interest rates and the currency depreciation increased the public debt to GDP ratio from 70.7 percent in 2014 to an estimated 75.2 in 2015, while treasury guarantees are estimated at 5.8 percent of GDP. The fiscal deficit is projected at 5.6 percent of GDP for 2016 after considering a few key policy measures, including the increase in VAT rate, announced as amendments to the Budget.

 

Expansionary fiscal and monetary policy

Expansionary fiscal and monetary policy led to a surge of non-oil imports, almost offsetting the low commodity price windfall. Meanwhile, capital outflows from the government securities market fuelled by tight global financial conditions and scheduled external debt obligations contributed to heightened exchange rate pressures. Due to uncertainty in a complex political environment, FDI inflows remained lower than expected. Despite higher than budgeted foreign borrowings and swap arrangements with the Reserve Bank of India, the official reserves declined from the equivalent of 4.3 months of imports of goods and services in end-2014, to 3.8 months of imports of goods and services by end-2015, due mainly to continued sales of foreign currency. Nevertheless, the LKR depreciated 10 percent against the USD during the year.

Belatedly, steps were taken in late 2015 towards tightening monetary policy, providing greater flexibility to the currency and curbing growth in private credit and imports. Policy rates were increased in February 2016, for the first time in almost four years. Some measures were proposed to parliament to increase fiscal revenues in March 2016 that included increasing VAT rate from 11 percent to 15 percent.

During the past year, labour market trends have been mixed. Employment in agriculture continued to fall, boosting productivity and contributing to declines in poverty. Between Q3, 2014 and 2015, the share of employment in agriculture fell from 29.0 to 27.4 percent. But unemployment, while remaining manageable, ticked upwards from 4.2 to 5 percent. Female labour force participation remains low and lags male rates by nearly 40 percentage points.

The impact of past currency depreciation and the increase of VAT rate are expected to lead inflation to rise in 2016. However, relatively low international commodity prices are expected to maintain downward pressure.

The trade balance is projected to improve with reduced imports on policy tightening and continued low oil prices.

 

Risks and challenges

Immediate challenges include managing external balances with significantly large forex drains due in 2016; and implementing the proposed revenue measures to reduce the 2016 fiscal deficit. Structural challenges include increasing fiscal revenue in the medium term to meet the requirements of a middle income country; and narrowing a persistent current account deficit linked to structural competitiveness issues in the export sector. With the country approaching upper middle income status, borrowing terms are becoming more commercial, which could affect affordability. Finally, with limited national savings compared to national investment, Sri Lanka needs to attract more FDI to sustain a high growth path with emphasis on manufacturing and export sectors.

 

1 Comment for “Sri Lanka Has Lots Of Untapped Export Potential”

  1. Trevor Jayetileke

    The only untapped potential of SL is Crude Oil., which has not even been mentioned by all the economic intellectuals of SL.
    We have been at it since 1967 and so far will no real luck.
    Everything else stated in this Story is just able to keep SL rolling along without a self-reliant economic base which is the fundamental problem.
    The irony of all this is that the Minister for Petroleum states to Bloomberg Wire very recently that “everyone seems to know we are Blessed with Oil and Gas” but unfortunately no one is willing or able to bring it to the surface.
    What SL needs is someone with a “Creative Mind” and not a Crooked Mind and that is what SL has to remedy without wasting time and money.
    Alternatively SL has to help China with its dilemma ? the “New Maritime Silk Route” to kick start the Asian Century ( 21st)., stuck for the past 15 years.
    However what we are doing now is just “Lip Service” for which we have been given 500 Million Yuan from Xi Jingpin the President of China on our PM’s recent visit to China. I could suggest things we could do but no one seems to recognize my advise. During the Coal vs Gas Debate over the years I advised the Authorities to fire the Norochcholai Power Plant with Gas which no one listened at that time ( not even Coal Expert Dr.Thilak Siyabalapitiya ) and today we have a Big Problem. Norochcholai was not the Place for Coal Firing but we had no choice as only China at that time was willing to bear the cost and Build it. An Australian Company arrived on the scene to build a Gas fired Power Plant but as usual we lost a great opportunity. SL has lost all its opportunities and even given away all our Silver Ware to Singapore. Lee Kwan Yew must be laughing in his grave and wishing SWRD and Sirimavo also to RIP with him., while SL goes Cap in Hand to the IMF for Bailouts. No Wonder the Minorities are disenchanted.

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