EU becomes top export market for Sri Lanka
Rohantha Athukorala
The "EU has taken over the leadership as the No. 1 export earning
region with a commanding twenty percent growth in 2006. Focused changes
are now required if Sri Lanka is to reap the real benefit of the GSP
plus scheme"
EXPORTS: With overall exports exceeding $6.8 billion dollars in 2006
and the European Union (EU) emerging as the number one export region
calls for Sri Lanka to re-evaluate the overall export strategy of the
country and make policy changes to drive focused strategies. This
outstanding export performance in 2006, to the EU has dislodged NAFTA,
which has been the leading export region for the country for years.
The relative share of the EU to the total exports has gone up to 33
percent with a 2.2 billion dollars export revenue in 2006. This
performance beats the 26 percent contribution in 2005 which explains the
benefits the country is reaping from trade schemes such as GSP plus.
The total exports growth to the EU has increased by a commanding 20
percent which is an indication of the equity of Sri Lanka exports in
this market. It is also an opportunity that Sri Lanka needs drive, with
focused strategies.
NAFTA
Significantly, NAFTA's regional contribution has reduced to thirty
one percent of the total export earnings of Sri Lanka, with a marginal
growth of 1.3 percent over 2005. If we analyze the country's wise
contribution, 94 percent is accounted by the United States which is the
dependency of the Sri Lankan exports.
If we analyze the product wise contribution, 76 percent of the export
earnings are generated from the Garments industry which amplifies the
dependency of this market to the overall GDP contribution of the
country.
The EU performance was dominated by the United Kingdom with a earning
of 879 million dollars which is thirty eight percent of the total
exports of EU. Belgium with a 335 million dollar performance, Germany
generating 328 million, Italy at 257 million and France coming in with a
contribution of 154 million dollars for Sri Lanka.
The overall dependency of garments has dropped from a fifty six
percent relative share to 50 percent contribution in 2006 but remains to
be a dominant export sector. Frozen fish sector has made strong inroads
to the European Union with a seventy seven percent growth over 2005
performance, which is a wave that Sri Lanka needs to ride with a sense
of urgency.
The reason being, the competitive advantage our country's holds due
to strategic location in the Indian Ocean and that the North and East of
Sri Lanka accounting for over fifty percent of the country requirement
some time back.
Some key strategic issues that we need to focus so that we can
maximize the opportunity that Sri Lanka can enjoy from the GSP plus
benefit.
R & D Centre
Sri Lanka needs to set up an industry specific technology development
centres. This can be more, state driven so that strategic directional
research can be done for the benefit of the industry than individual
requirements. The typical areas of research could be productivity
improvement, reducing the time lag on chunning out a sample to a
potential global buyer and driving innovative products.
The best example is the Sri Lankan apparel industry that has moved
away from being a subcontractor to a service provider with extended
services like stock management. For the industry to be competitive
tomorrow, we will have to move towards launching innovative products and
supply chain management of the buyer.
This movement to a knowledge based industry will require and R&D
centre which will cost the country 7-10 million dollars but the benefits
will out way the investment cost for sure.
The United States adopted this same approach when the policy makers
opened market access to Mexico on a preferential basis. We need to pick
up the leanings from such initiatives and act with speed so that we
become a nation which is competitive globally.
Wage increase - Garment Sector
Fifty percent of the total exports earnings from the EU, is from the
garments industry. One of the key challenges of the sector needs to
address is to remain competitive, given the price war by countries like
China, Bangladesh, Cambodia and Vietnam.
Sri Lanka finds it hard to play the price war in the global market
given that the cost base being already high. The most recent development
was where the wages board of garment manufacturing trade, increasing the
wages by 50 percent on the rate fixed in October 2004.
This decision has put enormous pressure to the industry pricing
model. This decision needs to be re visited with a detail analysis
together with the different stake holders which must include the garment
industry. May be a mutually beneficial decision will have to be taken
from a total remuneration perspective than looking at it as one
component of it like, wages.
Export processing zone -Shrimp farming
The sectoral export growth has revealed that the frozen fish industry
has grown by 77 percent in the EU. Sri Lanka now needs to develop a
focused strategy to the EU so that we can ride the success wave of 2006.
One recommendation can be to incentives the sector by the removal of
VAT from shrimp feed. May be a BOI type export processing zone can be
set up for shrimp farming. The Dutch canal can be cleaned up to make it
environmentally friendly.
This in turn can be used for shrimp farming. May be we can develop
the East of the country on this sector so that we can use foreign
funding that will naturally lead to market linkages.
Cold Storage facility
To further boost the frozen fish sector we can provide cold storage
infrastructure at the airport to reduce the wastage. This can have a
spin on the all important Vegetable and Fruits industry where the post
harvest losses are as high as forty percent.
We need to also develop the infrastructure of the North and East on
cold storage facilities so that we stimulate the livelihood
opportunities in the resettled areas.
Terminal handling charges
At the shipping conference of India, Pakistan, Bangladesh and Sri
Lanka a decision was taken to increase the Terminal Handling Charges
(THC) from the 1st of January 2007. This is not only adding to the
pressure to the cost structure of the Sri Lankan industry but also has
impacts on the loss of foreign exchange to the country.
Currently in a 20 foot container, the THC is 155 dollars whilst for a
40 foot container it is 245 dollars. It must be noted that some quarters
of the industry say that as at now the THC imposed, exceeds the actual
cost incurred by a shipping line. This decision needs to be revisited
and reviewed with the regional partners, given the importance on the
export sector to the overall GDP contribution to the country.
Extended working hours
Given that most export oriented companies work 24 hours a day to meet
tight deadlines. Another strategic decision that can be made is for the
Sri Lanka Customs Department to work on weekends and poya days at a
higher wage structure. This can have many benefits from many fronts.
Professional Services
An emerging sector globally. Sri Lanka has attracted over a 2 billion
US dollars in foreign remittances placing the country fourth in the
select band of developing countries on this criteria.
We can build this sector focused to the EU market by providing
government assistance and registration in the EU countries for services
like accountancy, Surveying, Ayurvedic, health services and the
different components of the IT industry like soft ware development.
Recent reports have revealed that the IT sector has grown by 19.1
percent in 2006. Given this development the BPO sector has the potential
to be significant in Sri Lanka's export earnings and providing
employment to the youth of the country.
May be Sri Lanka can specialize in providing specialize back end
office support for accounting, given that Sri Lanka produces some of the
best graduates from the Chartered Institute of Management Accountants
examinations. Once again, an opportunity, which can be exploited by a
private-public sector joint initiative focused to the EU market.
Organic Products
Another growth market globally. May be Sri Lanka needs to once again
develop a focused strategy to the EU. The 1st should be the setting up
of a National certification body.
This market if properly developed with practices like segmentation,
targeting and positioning, Sri Lanka can command premium pricing for
agricultural produce from the country. One of the key issues in this
high profitable sector is the high market access cost due to the issue
of certification. This is where policy holders need to step in and drive
strategic change into the export industry of the country.
VAT Relief and refunds
This is more, for the development of the SME sector. May be for SMEs
whose turnover is less than 10 million rupees per annum can be granted
VAT relief. Some SMEs can be directed to the EU in the processing of
seasonal foods. Incentives can be given to providing investment relief
for investments in post harvest projects in such industries. COO
branding
Sri Lanka needs to take the high ground on the "Ethically produced
platform'. Little Sri Lanka can confidentially shout to the world on
elements like empowering women, no sweat shops, non use of child labour,
equality at the work place.
This can be extended to a Country Of Origin (COO) label. The garment
industry has already developed a 'Garment without guilt' label. We can
extend this to the total export industry targeting the EU market as a
matter of priority. May be the State, can fund the marketing of this
campaign to the world as a strategic initiative.
Budget proposals -2007
The private public- sector driven budget proposals of 2007, needs to
be monitored closely on the successful implementation and what results
these policy changes have achieved.
The key initiatives are; Reduction of the ESC for textiles and
Apparel manufacturers and trading houses to 0.1 percent, Exception of
heavy furnace oil and electricity from VAT, Reducing the industrial
tariff to 0.07 dollars equivalent and claims of import credit to be
under VAT to name a few. The key is to evaluate the results and net
benefits to the country with such incentives.
Future direction
Sri Lanka's long term economic growth and economic stability depends
heavily on the future of the country's exports. Currently almost 30
percent of the GDP is contributed from this industry.
Significantly over ninety five percent of this industry is owned by
the private sector hence in terms of a strategic direction policymakers
can only provide a macro directional environment to facilitate this
industry.
May be the need of the hour is a coherent strategy to be developed.
May be the time is right for us to start this from the number one market
for Sri Lanka, the EU and make it a 3 billion dollar business for Sri
Lanka in the future.
Region 2001 2005 2006
Value Share Cumulative Value Share Cumulative Value Share Cumulative Growth Over
(%) Share (%) (%) Share (%) (%) Share (%) 2005 (%)
EU 1256.79 26.09 26.09 1,907.2030.06 30.06 2,294.3833.34 33.34 20.30
NAFTA 2,001.7641.56 67.65 2,100.0433.10 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 1,219.9619.23 100.00 1,322.8819.22 100.00 8.44
TOTAL 4817.00 100.00 6344.63 100.00 6882.71 100.00 8.48
(Source; Central Bank)
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