Exports, a much better means of generating wealth


Roshan Madawela – The Research Intelligence Unit

Conflicts of development

The year 2007 is forecasted to witness a growth in world trade of six per cent from eight percent last year according to the WTO. The forecast is based on a projected global growth rate of three per cent as compared with the 3.7 per cent achieved in 2006.
In Sri Lanka, the past five years has registered an average annual growth in exports of eight per cent. Garments, tea and industrial exports have been at the frontline of this foreign market penetration.

It is worth noting that many of Sri Lanka’s trade partners are forecasted to grow at faster rates than the global average, thereby extending greater opportunities for local exporters. However, despite such rosy forecasts, the indications are that exporters are facing tougher times ahead. Signs of recession in the US have been ‘on the wall’ for some time now and it has been evidenced by the first ever fall in Sri Lankan apparel exports to the US in 2006. Exports to India also dipped for the first time last year due to trade conflict whilst imports from India didn’t relent.

Moreover, the islands overall exports are growing at significantly lower rates than the import growth that gallops along at double digit rates. In 2006, exports grew by 8.4 per cent whilst imports rose by 15.7 billion (Central Bank), widening the trade deficit further to $3.3 billion.

Figures for January 2007 indicate that exports grew by 11.2 per cent, led by industrial exports that grew by 15.6 per cent. However, the import bill climbed by 15.8 per cent to $788 million, thereby widening the trade deficit to $298 million as compared with $240 million one year back. Once again, it has been the massive flow of foreign remittances resulting from the exodus of Sri Lankan workers at all skill levels to the Middle East and elsewhere that has served to keep the overall balance on the sunny side. The hard-working migrant workers transferred an estimated $2.3 billion back to Sri Lanka in 2006.

Clearly, being one of the most open economies in the region, Sri Lanka is reliant on its exports to keep the overall economy afloat. Despite the oil price volatility of 2006 and other internal and external uncertainties, the data boasts an economic growth rate of 7.4 per cent. However, the type of growth that has been experienced over recent times cannot be reconciled with the welfare benefits and improvements in living standards of people, a phenomenon described by respected economists like the late J.K. Galbraith. Essentially, the welfare benefits of economic growth are determined by the source of that wealth generation as well as its equitable distribution.

Briefly, a rise in public spending on defense and security, concurrent with a high rate of inflation is not a recipe for welfare benefits despite the high growth rates. Only growth generated by real economic activity that is underpinned by investor confidence can deliver the true benefits. Higher rates of FDI and exports, be-it services, manufacturing and / or agriculture are much more likely to correlate with improvements in living standards. Already, FDI and tourism has taken a severe hit due to a policy that has neglected progress on the peace front.

Stifling exports

Compounding the situation, the country’s exporters have complained of new charges that have emerged of late, raising their costs and reducing their competitiveness. These new fees have been slapped on by shipping lines, freight forwarders and other agents along the supply chain for work that has been described as routine by officials at Sri Lanka Shippers’ Council. The new charges include fees for Bill of Landing on exports and pick-up fees for releasing goods against bank guarantees.

Exporters also have to field against the disadvantage of having to trade with an overvalued rupee. According to popular opinion, the currency is technically overvalued by 13.7 per cent against the US dollar in real effective exchange rate terms as a consequence of high inflation. Whilst inflation was somewhat under control three years back, due to the printing of money by the Central Bank, inflation has shot-up to over 20 per cent. According to sources (LBO), the Central Bank has printed Rs.38.5 billion to bridge the budget deficit.

If this was not enough, it has also emerged that the exporters are currently facing a shortage of space on container ships for their exports to Europe following the diversion of some routes to India by certain shipping lines. Maerck, UASC, K-line and Norasia have shifted part of their service to Mumbai thereby reducing the availability of container space from Colombo by an estimated 600 TEU’s (twenty foot equivalent Units) per week. Not surprising when the poor infrastructure in Sri Lanka such as the dilapidated road network is compared with the well heeled Indian infrastructure that supports a booming trade sector. Some commentators anticipate that India might soon start direct services to Europe, sidelining Colombo completely.

The space constraint is said to be affecting negatively on the shipments of tea, garments and coir in particular. Those who are bound by time-deadlines like much of the garment exporters are now facing having to resort to air freighting their orders. The costs are up to 75 per cent more than with sea freight. In this connection, it has now become imperative that the port expansion project is expedited in order to minimize possible losses. Whilst the ports sector is currently proving to be lucrative for its stakeholders, failure to safeguard the functionality of Colombo port and its strategic positioning will result in losses in market share in years to come.



Regulatory body

Some exporters have already called on the government to intervene in order to regulate the shipping lines and prevent them from acting as a cartel. For instance the Terminal Handling Charge (THC) for moving containers in Colombo Port has risen from $115 (20 foot box) to $150. Originally, the THC started out at $61 per TEU in 1997. Whilst other countries have a regulator in place to prevent unfair trade practices on the part of shippers, Sri Lankan exporters have to work sans any such body despite years of lobbying on behalf of the cause.

A key point as has been pointed out by the Sri Lanka Shippers Council is that these new charges are also applied on imports, thereby raising the cost of these goods and ultimately bearing further pressure on the domestic cost of living. Furthermore, these new chargers are weighing down more on the Small and Medium Size Enterprises (SME’s) who contribute a great deal to the economy in terms of employment generation. Whilst the larger players are in a position to negotiate discounts on many of the fees due to bulk shipments, the SME’s are placed at a disadvantage. The Chairman of the Shippers Council is quoted to have said that the ‘exporters of tea and garments are the worst affected as they become uncompetitive and their profit margins get affected’.

With this weeks passing of a Cabinet paper aimed at promoting tea small holder production across the island and an ongoing policy of encouraging the development of SME’s, introducing some form of regulatory body to put a lid on unfair shipping line fees would appear to be consistent with the wider macro-economic policy objectives. Moreover, the task of reducing the cost of living by means of tighter monitory control, and the cutting of tariffs on a number of food items may be offset if the shipping cartels impose heavy fees on traded goods according to the exporters.

Playing by the rules

It is important to note that the islands top export destinations are USA, UK, India, Belgium, Germany, Italy, Russia, UAE, Japan, France and the Netherlands. In this connection, it is important to maintain sound trade and diplomatic relations with these vital trade partners and take note of their sensitivities on the all important issues related to human rights and the civil conflict.

It is now widely known that many of these developed nations are guilty of exercising double standards, paying lip service to human rights whilst at the same time profiting from a lucrative arms trade that kills thousands of people in developing nations and fattening the pockets of a ‘parasitic elite’. Nevertheless, Sri Lanka should pursue a clean record not only for the sake of good trade relations but for the benefit of the people, thousands of whom are directly affected by conflict, who have a right to benefit from economic growth.

In this connection, it is worth noting that the LTTE leadership is reported to have told the AFP that ‘there may not be any attacks tonight because we are also watching the match’ prior to the match played on Tuesday at Sabina Park, Jamaica. Is it possible that the islands leaders will learn a thing or two from the sportsman?


Copyrights Reserved (RIU 2007).