Export economy importance and supporting pillars

Sunil KARUNANAYAKE

It is generally believed that a measurement of a country’s economic health is measured by the external reserves held by the country. Reserves in terms of the import bill will indicate its ability to finance much needed imports.

During the recent global crisis most countries suffered from capital flight caused by withdrawal of funds by investors owing to unstable status of the economies. Even in a strong economy like India this phenomenon was witnessed whereas in Sri Lanka reserves declined to dangerous levels such as one month of imports.

The capital flight virtually removes most of the short and medium-term (bonds, stocks) and what remain would be the country’s hard earned export earnings.

Sri Lanka ultimately had to look upon to the IMF standby facility that provided the required strength and confidence. All these underscore the vital importance in an economy to sustain its export base.

Coming from a typical farming based background, Sri Lanka has much to offer in agriculture. It was in this environment that the colonial rulers introduced tea and rubber to our economy. Since the advent of James Taylor in the 18th century Tea dominated the economy while the famous Korean War and the rice-rubber pact with China in the mid fifties gave rise to a steep rise in rubber prices. Thus tea and rubber continued to dominate Sri Lanka’s exports until industrial exports comprising mainly textiles and garments reached phenomenal heights in the eighties.

Liberalized economy, flexible exchange rate, free trade zones and attractive tax holidays gradually transformed the economy to a vibrant emerging force in Asia.

Both tea and garment sectors has worked hard to improve quality to win the confidence of overseas markets to attract premium prices. HACCP, ISO has added strength to quality as well as hygienic conditions.

However the yield levels of tea is yet to show improvement particularly in high grown teas due to geographic limitations.

Other concern is the declining acreage due to lukewarm interest for replanting probably due to certain issues attributed to leases concluded with the plantation companies.

According to reports companies have paid Rs 2.2 billion to the government as lease rents for the past five years. Another point of interest is the tendency to invest in rubber due to the current bullish trend and lower production costs. Given the anticipated global demand (anticipated at 10 percent for the current year) supply shortages in competitors Kenya and India further improvements in auction prices seems a possibility.

It is also noteworthy to mention the increasing volumes of value added products with impressive growth in tea bags, instant tea and green tea. Japan a premier market for Ceylon tea is now experiencing a shortage of green teas owing to restrictions placed by the government due to leaking radiation from the nuclear energy plants.

Low grown teas seem to have ended its bull run with the increasing instability in certain Middle East and North African countries.

This factor has lowered the Colombo auction average drastically. One pleasing factor was the firmer prices notwithstanding the large auction quantities in recent weeks.

“The Tea Board expects the production output to be unprecedented in 2011 surpassing 329.4 mkgs achieved in 2010. The Tea Board hopes the revenue too to be substantially in excess of US $ 1.5 billion. Exotic and organic teas are wooing the tea drinkers challenging the black tea dominance as never before, tea industry experts say. A tea factory in Dubai bids to become the world’s largest. The shift in global tea-drinking trends is felt at the Jebel Ali Free Zone despite being more than 2,000 kilometers from the nearest tea bushes in the lush misty mountains of South Asia and East Africa.

Unilever’s Jebel Ali packing and blending plant is in the middle of a major consuming market the oil rich Middle East and records the changing habits of tea drinkers.

The plant producing 1.1 million bags a hour everyday round the clock begins expanding the plant to double the output within four years to become the world’s largest tea factory.

The health properties of green tea are also helping the financial health of the whole tea industry.

‘Black’ and ‘Green’ in tea are what ‘red’ and ‘white’ is to wine.The nations that export orthodox black tea such as Sri Lanka, have in recent years begun a major drive to produce green tea as well as exotic varieties”. (Bartleet Tea Surveillance)

Over the years the garment industry took the initiative to develop the ‘Garments without guilt’ concept to make aware their products are manufactured within ethical parameters. The garment industry has set the pace with good HR and manufacturing practices, rapid investment in technology etc in accordance with global developments.

Being the country’s main foreign exchange earner in exports the garment trade has done extremely well to overcome setbacks such as ending of the multi fiber agreement (MFA), GSP concession and even the depressed demand from the global financial crisis.

Today, most of the garment exporters are earning good returns thus enabling them to expand capacity both in the city as well as backward rural areas making a noteworthy contribution to the export economy.

Today the country’s economy depends on exports to stabilize strengths while foreign investments will add the required muscle. The success of export economy depends on the fiscal and monetary measures, logistical support and the political environment. The global export market is fiercely competitive and to promote a country’s products in an alien land, extraordinary effort must be taken at the market place. These elements form the supporting pillars that could market a country’s products across its shores.

The export sector must necessarily be competitive in the global market and hence the costs have to be controlled. In recent times much criticism has been leveled against the operation of the Value Added Tax (VAT) system that replaced the Goods and Services Tax (GST) and the turnover based Economic Service Charge. Even though the VAT and GST systems zero rated exports in later years the input credit system caused many issues.

The input credit system and its associated refunds to exporters became a huge issue and the resulting chaos gave rise to malpractices necessitating legal action.

Exporters bitterly complained on the delay of refunds and the consequent adverse effect on liquidity and working capital.

Recent amendments to the Inland Revenue Act has resulted in the introduction of a simplified VAT scheme that will now come under the Inland Revenue Department through a suspended VAT scheme that will facilitate both the supplier - Registered Identified Supplier (RIS) and the Registered Identified Purchaser (RIP). The indirect taxes provide the bulk of the government revenue but the process of transition from Turnover Tax and Goods and Services Tax to Value Added Tax brought in a fair share of confusion to the Business sector and one hopes the new changes will bring relief to all sectors.

The Inland Revenue Department should be commended for coming up with a simple solution that eliminates refunds from the State and most importantly opportunities for irregularities. This will depend largely on the tax credit system that will be operated between the RIS and the RIPs.

The Asian tigers who built their fortunes from exports offered many concessions to exporters by way of concessionary lending and flexible exchange rates. Though it is well understood that Sri Lanka’s foreign reserves are very strong and the rupee continues to appreciate, it is believed that a certain quantum of the reserves are considered “hot” and may not sustain.

If this theory is correct, moderate corrections to the rupee would benefit exports in great deal that also would boosts reserves.

At present both industrial and agricultural exports are doing extremely well. Despite the absence of the GSP concession, garments and textiles continue to grow and it is opportune to consolidate this trend as pricing of China and logistical and capacity issues in Bangladesh may not last for long spells.

Another issue faced by the garment and apparel exporters is the acute shortage of labour and associated high turnover.

On the other hand it was noted that live fish exports to Europe once a thriving source of revenue is now on the decline and the trade feels this is an area where the GSP concession would have been useful. In the meantime it is also reported that Indonesia is advancing its market share in Europe.

“Fifty years from now, when historians look for the defining features of the first decade of the 21st century, they will probably mark the rise of world terrorism, the deepening of the internet culture and the devastating global financial crisis. Whether the emergence of EMEs as a group will rank pair passu with those others will depend on what Emerging economies achieved in the last decade and beyond”. Looking at the shares in global GDP, the growing dynamism of EMEs becomes even more persuasive. The share of advanced economies in the global GDP dropped from 80 percent to 67 percent in 2010 with a mirror increase in the share of EMDC. Quite expectedly the share of BRICs increased more impressively from 8 percent to 17 percent.”

(Frontier issues in the global agenda - Emerging economic perspectives - Dr Duvvuri Subharao, Reserve Bank of India Governor)