Sri Lanka’s export economy has been facing challenges in recent years from intense international competition and lack of investment, especially foreign direct investment. As a result, the government is stepping up its commitment to support exports, especially from industrial small and medium-sized enterprises.
A number of programmes have been initiated, while the country is more broadly rethinking its role within global supply chains. Sri Lanka wants to change the way it engages with the world to promote higher volumes and values of trade. Ultimately, it hopes to become a manufacturing and innovation hub in South Asia.
Slow Going
Since 2011 the value of Sri Lankan exports has stagnated. In that year total annual export values reached $10.6bn and since then have remained at similar levels, registering a total of $10.3bn in 2016, rising slightly to $11.4bn the following year, according to data from the Central Bank of Sri Lanka.
The government believes that historic trade patterns need to shift if Sri Lanka is to increase exports. Half of all exports currently go to the traditional markets of the US, the UK and India. However, new opportunities are emerging in Asia, especially in ASEAN and China. A thorough review of target economies is becoming more urgent given the international political environment. Multilateralism appears to be falling out of favour, while regionalism is on the rise. Sri Lanka is adjusting accordingly, looking towards the signing of an ASEAN-plus type of agreement, aiming to join the Regional Comprehensive Economic Partnership or similar, and seeking more extensive cooperation in the Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation.
Fundamental Adjustment
More generally, Sri Lanka is starting to rethink its trade priorities and goals. Rather than approaching trade as a simple process of increasing exports and improving the overall trade balance, the dominant paradigm for decades, it is beginning to appreciate more the need for integration into global supply chains. The country is transforming its vision from a zero-sum view of international commerce to an outlook emphasising mutual benefit, comparative advantage and value added.
As it moves towards more sophisticated trade flows, Sri Lanka has a few specific sub-strategies it is focusing on. The country hopes to market itself as a vital component in value chains designed specifically to manage risk. For companies looking to develop resilient global networks that hedge production and defend against disruptions, such as the Bangkok floods of 2011, Sri Lanka would like to play a role, establishing and marketing itself an alternative production site. Nevertheless, taking into account China’s manufacturing dominance and unrivalled internal market, Sri Lanka must continue to focus on value-added, niche, customised, specialised and opportunistic production in order to achieve this.
A Strategy in the Making
Beyond the theory and general analysis of the evolution of local trade, specific policies are being formulated. A National Export Strategy (NES), which is currently under development, is intended to expand existing exports and target new priority sectors in order to increase employment and help rural areas. The NES is part of the country’s overall drive to increase exports to $20bn by 2020, approximately double the current level. The vision statement of the strategy is “Sri Lanka – An Export Hub Driven by Innovation and Investment”, with target areas including IT, spices, food and beverages, electronics and electrical products, wellness tourism, and boat making. To improve these sectors, the government will focus on infrastructure, research and logistics.
The programme is being promoted by the Ministry of Development Strategies and International Trade and the Sri Lanka Export Development Board (EDB), with support from the International Trade Centre (ITC), a Swiss-based development agency under a joint UN-World Trade Organisation (WTO) mandate. The strategy will run for five years with the participation of a range of both public and private sector stakeholders.
SME Importance
Small companies are central to Sri Lanka’s export efforts. According to Rishad Bathiudeen, minister of industry and commerce, small and medium-sized enterprises (SMEs) employ 75% of workers in the country, but at present these companies are almost exclusively involved in local trade. A full 99.8% of sales by small companies are made to domestic customers, compared to 99.6% in South Asia overall and 93.8% worldwide, according to the latest “World Bank Enterprise Survey” from 2011. In 2016 SMEs accounted for about 4% of Sri Lanka’s total exports, according to the latest available figures from the EDB.
These firms are disproportionately affected by trade barriers and costs. Non-tariff measures are especially burdensome for smaller companies, especially fixed expenses that must be paid by all enterprises regardless of size, such as those related to sanitary and phytosanitary measures and technical barriers to trade. SMEs also have relatively poor access to information, especially when it comes to tariffs and Customs procedures.
Sri Lanka is assisting smaller companies in a number of ways. The Incubator and Technology Transfer Centre (ITTC) is one important initiative. Located at Makandura, approximately 50 km north of Colombo, the ITTC is a cooperative venture between the National Enterprises Development Authority (NEDA) and Wayamba University, with additional assistance from the Malaysian Technology Development Corporation.
One aspect of the country’s third-generation economic reforms, following approval in 2016 it was fast-tracked for development and launched in September 2017. The objective is to support technology-focused SMEs, central enterprises with regard to raising the country’s international profile.
Trade Adjustment
The National Trade Policy, which was adopted in late 2017, is also relevant to the development of smaller businesses. It will help in the provision of information about markets, policies, regulations, tariffs and non-tariff barriers and help SMEs become better acquainted with the benefits of trade agreements. It also calls for credit facilities to be developed for SMEs involved in exports and support for those most affected by market liberalisation measures. This would include training and direct financial assistance.
The government is planning to initiate trade adjustment packages specifically designed to help local industry deal with disruptions that could come as a result of free trade agreements (FTAs).
In July 2017 Malik Samarawickrama, minister for development strategies and international trade, told local media sources that an FTA is currently being negotiated with China, while a similar agreement with India is being upgraded with an Economic and Technology Cooperation Agreement, focused on the reduction of non-tariff barriers with an emphasis on services and technology. In providing assistance, the government hopes to help industries modernise so they do not face any major disruptions moving forward.
Money Matters
As in most countries, financing is a problem for smaller companies in Sri Lanka, as banks are hesitant to lend to them and they are not often good candidates for initial public offerings. Owing to limited financing options, SMEs do not usually have the technology required for competitive exports and this puts them at a disadvantage when compared with larger competitors. SMEs also encounter particular difficulty in accessing trade finance.
Efforts are being made to address this. Hatton National Bank (HNB) and the EDB are cooperating to develop an export credit facility for smaller firms, known as HNB SME Export Credit. The initiative will allow up to LKR40m ($261,200) in funding to each client, is designed especially for SMEs and offers concessionary rates and easy payment arrangements.
The focus will be on pre- and post-shipment financing, with tea, rubber, spices, cinnamon, coconut, textiles and garments, fisheries, and related industries in particular targeted for the utilisation of the facility.
Read More from OBG
