EU becomes top export market for Sri Lanka

he "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.