How Sri Lanka will benefit by SAFTA
Rohantha Athukorale is a marketer turned Economic Strategist. He is
currently the Director Economic Affairs, in the Secretariat For Co-Ordinating
the Peace Process(SCOPP), whilst reading for his doctoral degree.
OUTSTANDING PERFORMANCE: What ever the critiques of the economic
policy say week after week, we see reports from corporate Sri Lanka of
an outstanding performance in their companies in the year 2006. Be it
large multinational soap company or a local insurance organization, it
has been outstanding year.
Some call it resilience of the Sri Lankan economy and character of a
corporate individual. What ever reason one may call it, the outstanding
corporate performance mirrors the reality at the ground end.
The performance of the private sector, re-assures the sentiments
expressed at the recently concluded development forum.
Seven percent plus economic growth in 2006, overall unemployment
declined to a 6 per cent, Exports growing by 8 per cent, Sri Lanka
attracting over a 2 billion US dollars in foreign remittances and the
FDI's flows exceeded 500 million dollars. The challenge is how we are to
maintain this performance whist cutting down the regional disparities at
the ground level.
Sri Lanka must now focus on South Asia as it is in the period of
transition, there is a need to implement effective economic, political,
social and legal structures to support sustained growth.
The countries that lead this change will become the new tigers in
South Asia just like Taiwan and Vietnam in South Asia. Vietnam has even
got entry to the WTO. Sri Lanka being a resilient economy has bounced
backed with a seven percent plus growth in 2006.
Whilst we are targeting for strong growth in 2007, are we fire
fighting too many internal issues that is resulting in Sri Lanka loosing
out exploiting opportunities in the global market place.
The magnitude of the opportunity
South Asia is the home to around two billion out of the six billion
people in the planet. Data from the World Bank and the ADB suggest that
its regional GDP was around US$ 850 Billion at the end of '04, is
expected to grow at a rate not less than 5.5% for the next decade.
Even with the conservative growth rate of around 3.5% - 4%, by end of
2010, South Asia can aspire to become a trillion dollar economy, with
services and manufacturing accounting for a larger chunk of GDP in
comparison to agriculture.
Sri Lanka is well poised to exploit this opportunity with a 64 per
cent contribution to GDP, coming from the Service sector. But a key
question to ask is, are we getting ready with the necessary structural
changes to meet the change in the future.
SAFTA and the issue
The South Asia Free Trade Agreement (SAFTA) will be a critical
vehicle for accelerating the transition of South Asia from a "Billion
dollar" to a "Trillion dollar" economy.
By preferentially reducing tariff and non -tariff barriers to goods
originating from South Asian region (Comprising Sri Lanka, Bangladesh,
Bhutan, India, Maldives, Nepal & Pakistan) , SAFTA regime can create
investment and trade opportunities having the potential to expand the
per capita income in South Asia to an average of 4% per annum in the
next decade.
Deeper trade integration through SAFTA is expected to generate "Peace
Dividend" that might end up channelising billions of dollars into hard
and soft ware infrastructure, Manufacturing & service skill development
like BPO's facilitating a more robust level of trade in the region. In
this context Sri Lanka should have exploited the serious situation issue
that emerged last year in India on fraud, by a BPO employee running to
millions of dollars.
We should have capitalized this incident and positioned the
reliability of Sri Lankan talent. We should also have fostered an
efficient institution and drive infrastructure that would have reduced
the cost of trading, thereby enhancing the trade competitiveness of
industries located in Sri Lanka for instance.
This requires focus and strategic investment that cannot be done when
the focus is internal fire fighting from strikes in the tea plantation
companies, internal security issues and political stability issues.
GDP in South Asian countries
The World Bank predicted that the regional GDP growth in South Asia
is expected to slow down to 6.4% in 2006.
However, the latest data has revealed that GDP of South Asia has
demonstrated a growth of 8.2 per cent in 2006, with India leading the
way at 8.7 per cent with a strong non agricultural sector performance
access of ten percent, Pakistan has rebounded at 6.6 per cent,
Bangladesh expanding to 6.7 per cent mainly due to high remittances and
vibrant service sector.
Nepal is growing only at 1.9 per cent due to the intense conflicts in
country. It is estimated that the 2007 economic growth will pass the 7.5
per cent mark with the service sector fuelling the activity. Given these
developments I believe that South Asia is in the period of rapid
transition.
Hence, we need to implement effective economic, political, social and
legal structures to support sustained growth. The countries that lead
this change will become the new tigers in South Asia just like Taiwan
and Vietnam in South East Asia. Vietnam has even got entry to the WTO.
Implications to Sri Lanka
With the implementation of SAFTA from 1st of January 2006, and the
first half of tariff reduction coming to force from the 1st of July
2006, we have seen strong economic growth hitting the region resulting
in the world ranking changing drastically to the member countries.
By 2013 the tariff and custom duties will be between 0-5 per cent
where we will really see, SAFTA - Real time opportunity becoming a
reality. But the key question is Sri Lanka aligning our self to exploit
this opportunity. If not, we are loosing out for sure.
Sri Lanka should grow in 2007 at a growth rate of 7.5 per cent. Fish
production was up by 20.7 per cent and live stock production by 7.5 per
cent. Vegetable and highland crops production increased by 8.4 per cent.
Agricultural exports are up by 15.9 per cent whist the total exports
have grown by 11.7 per cent.
The heavy rains had an positive impact of a 44 per cent in 2006, by
increase total generation of power. The inflationary rate based on the
GDP Implicit Deflator indicated a 11.5 per cent for quarter three in Sri
Lanka., which means that the basic economic structure is in place in Sri
Lanka.
But the key issue is has the country identified what strategic
investment is required to cater to this directional change. If we do
not, companies will move to countries in the region who are practicing
this change. The best case in point is Brandix the clothing specialists
who have set up new operations in India. Sri Lanka has lost out already!
Sri Lanka economy and sectoral trends
As in the past, the services and industry sectors provided the
impetus for growth in the last two years. Many agricultural sectors
performed reasonably well, despite the poor performance in the fishing
industry which was severely affected by the Asian Tsunami.
But in 2006, the turnaround of all sectors happen in Sri Lanka.
Sri Lanka export performance by major regions
If we examine the dynamic export sector the table below illustrates
that the performance of Sri Lanka.
It demonstrates that nearly two thirds of our total exports are
marketed in two regions; North American Free Trade Agreement (NAFTA) and
the European Union (EU). 33% of our total exports were destined to NAFTA
where the USA alone accounted for 93% of total exports to the region.
Exports to NAFTA increased by 6.4% in 2005.
Exports to EU absorbed 28% of our total exports and registered a
marginal increase of 2.7% due mainly to the decline in export of
garments (2.1%) to the EU region, which accounted for 53% of our total
exports to the region.
Exports to SAARC countries grew by 28% in 2005 to US$642 Million.
SAARC accounts for 10.1% of the total exports up from 8.6%
contribution in 2004. Trade in South Asia is characterized by porous
boarders and parallelism. Studies carried out by ICRIER and other bodies
show that a magnitude of such parallel trade in goods is depriving the
exchequers of SAFTA members. In such a context, SAFTA can be hailed to
be a successful agreement if:
* It can sufficiently incentives actors engage in parallel trade, to
trade their products using legal channels
* Create a trade facilitating architecture that can arrest such
parallel trade.
Whilst reduction in tariff rates might end up moving the trade
arbitrates associated with illegal or parallel trade, one cannot deny
that major gains from trade under SAFTA are hinged to addressing
concerns in the area of trade facilitation in an accelerating manner.
Article 3 in the SAFTA agreement states commitment by members to trade
facilitation reforms through plans to integrate transport systems and
harmonize standards. This can make movement across boarders less costly.
In the above context, care will have to be taken that rules of origin
do not become disguised barriers to trade facilitation in the region and
at the same time are not flouted at the cost of industry in South Asia.
Respecting this thin line of difference will require tremendous will
from regulatory authorities as well as industry. Raising sirens and
demanding an overall of the system immediately after its implementation
in order to address short term fears will only weaken the trade
architecture of SAFTA and raise spanners in the time table of tariff
liberalization.
In the backdrop of the macro picture where Sri Lanka has registered a
28% growth to the SAARC countries we must be cognizant that the size of
the SMEs in India is much larger in comparison to the SME counterparts
in Bangladesh, Pakistan and Sri Lanka.
Which means Sri Lanka SMEs will not have the advantage of economies
of scale when it comes to pricing of products. The challenge for a Sri
Lankan SME is to segment the consumers in the SAFTA region and identify
NICH markets that we can command leadership by customization. We will
have the opportunity of pricing the product at a premium price due to
customization.
Thereafter the challenge will be to close to market so that the SME
can drive changing the product based on the changing needs of the South
Asian consumer. The proliferation of music and cinema from India to the
region whist having cultural issues for a marketer provides the
opportunity to use a single advertisement across the region, thereby
reducing the investment of a separate piece of 'creative' in each
country of the SAFTA region.
If we are to discuss the issues, look at the major exports and
imports of the SAFTA members in the chemicals business reveals that
Bangladesh (agrochemical and fertilizers) and Pakistan (Pharmaceuticals,
organic and inorganic chemicals) have the capabilities of exporting
intermediate and higher end chemicals into the region.
Proactiveness of Chambers and Industry
The Sri Lankan representatives in the Industry Chambers such as SAARC
Chamber of Commerce and Industry (SCCI) will have to start playing an
active role as the trade in the region, under the fabric of SAFTA
architecture.
Historically, one finds that the disputes arising from such trade
agreements get locked up in long winding bureaucratic discussions and
industry continues to suffer. Chambers and industry should press for a
strong and time-bound dispute resolution mechanism which can be
developed keeping in view the framework of NAFTA or the EU.
Entrepreneurs in Sri Lanka have a real time opportunity opened up for
them in the form of SAFTA. They will have to make the most of it just
like the Europian Union.
Export Performance by Regions (US $ mn)
2001 2005 2006
Region Value Share Cumula- Value Share Cumula- Value Share Cumula- Growth
(%) tive (%) tive (%) tive over
share share share 2005
(%) (%) (%)
EU 1256.79 26.09 26.09 1,907.20 30.06 30.06 2,294.3833.34 33.34 20.30
NAFTA 2,001.7641.56 67.65 2,100.04 33.10 63.16 2,127.9330.92 64.25 1.33
SAARC 144.64 3.00 70.65 642.17 10.12 73.28 599.45 8.71 72.96 -6.65
Middle
East 289.11 6.00 76.65 337.71 5.32 78.60 348.55 5.06 78.03 3.21
ASEAN 97.21 2.02 78.67 137.55 2.17 80.77 189.51 2.75 80.78 37.78
Other 1027.49 21.33 100.00 1,219.96 19.23 100.00 1,322.8819.22 100.00 8.44
Total 4817.00 100.00 6344.63 100.00 6882.71 100.00 8.48
Source: Sri Lanka Customs, Central Bank of Sri Lanka
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