2020 Export Revenue Target Revised to US$ 18B Will GSP plus save the export dream?

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2017-07-16

Umesh Moramudali

Last week, during a media briefing about export promotion of Sri Lanka, State Minister of International Trade Sujeewa Senasinghe said that the government is expecting to increase export revenue to USD 18 billion by 2020. He himself during the media briefing admitted that the government cannot be too ambitious about export targets, but with the regaining of GSP Plus, the export revenue will go up.

Given the record relating to the past few targets, target of USD 18 billion is still ambitious unless the government introduces reforms to facilitate trade and encourage exporters. The total export earnings of Sri Lanka for 2016 stands at USD 10.3 billion and this particular value has been declining as a percentage of GDP over the last decade.

Central Bank Annual Report 2016 states that earnings from exports contracted in 2016 for the second consecutive year, mainly owing to the downward movement in commodity prices in the international market and modest economic recovery in Sri Lanka's major export destinations.

Despite the positive growth recorded in the latter part of 2016, earnings from exports at US dollars 10,310 million reflected a decline of 2.2 per cent, from US dollars 10,546 million in 2015, led by the declines in agricultural and industrial exports during the first seven months of the year.

"Export earnings declined mainly due to lower agricultural exports, which account for around one fourth of total exports. Earnings from agricultural exports declined by 6.3 per cent to US dollars 2,326 million in 2016, reflecting lower exports of many categories under agricultural products.

Earnings from tea exports, which declined by 17.7 per cent in 2015, reduced further by 5.3 per cent in 2016 to US dollars 1,269 million, recording the lowest level since 2009. The total volume of tea exported declined by 5.9 per cent to 289 million kilograms, due to lower production and lower demand. Tea production declined in 2016 due to adverse weather conditions and trade union activities in the plantation sector.

The demand for tea contracted mainly due to the lower demand by major tea export destinations, especially Middle East and Russia, as a result of lower income levels experienced by these countries due to relatively low oil prices and increased geopolitical tensions," stated annual report.

Country's exports have fallen drastically as a percentage of the GDP. According to the data, in Sri Lanka, exports as a percentage of the GDP has fallen to 12.7% in 2016 from 33% recorded in 2000.

The scenario Sri Lanka faces in terms of exports can be attributed to few major reasons. One major reason for the poor export performance is the 'middle income trap' that the country has been experiencing for a while.

Why we need exports?

In contemporary globalized world, every country needs export not only for survival, but also for development. No country is self-sufficient, hence every country needs to imports certain goods and services. This results in outflow of dollars. Export is the opposite of it and it is the major way of dollar inflows

Ever since trade liberalization, Sri Lanka is having a trade deficit indicating a large import bill. In recent years, the country has faced the additional burden of large external debt servicing payments which had made increasing export revenue more vital.
Sadly, in recent past the outcomes were not very helpful and the country became vulnerable for Balance of Payment (BOP) crises. Eventually, the government ended up seeking help from IMF and obtained an Extended Fund Facility (EFF) to get out of a possible serious BOP crisis.

On that backdrop, export promotion is not an option that the country can take or leave. If Sri Lanka needs to develop, export promotion is must.

Middle income trap – exports in a crisis
More often, it is considered fortunate to move up on the income ladder. As the per capita income of Sri Lanka rises, the country was upgraded to a upper middle income country. As for now this upgrade has not brought many fortunes for Sri Lanka.
This resulted in reducing the concessionary loans received from international donors and the country has instead obtained non concessionary, commercial loans for which a large interest is paid. On the other hand, as the per capita income increases, wages have risen, resulting in SL losing the advantage of cheap labour in international markets.

The scenario of middle income trap refers to a situation in which a country benefits from neither the cost effect nor the technological effect. In simple, as Sri Lanka upgraded to a middle income country, the wages of labourers had gone up resulting in rise of cost of production. As a result of that Sri Lanka finds it difficult to compete in the international market in terms of cost, as the cost of production in countries like Bangladesh is much lower than in Sri Lanka. On the other hand, Sri Lanka cannot compete in the high end of international market where technologically advanced products are sold, since Sri Lanka has failed to produce more technologically advanced products.

It is seen that other countries in the region had done very well in promoting exports. In Bangladesh exports as a percentage of GDP have risen to 16.6% in 2015 from 13.4% reported in 2005. In Thailand, exports amounted to 54.2% of GDP in 2015 and it was as low as 18.2% of GDP in 1985. In Vietnam, exports as a percentage of GDP have risen to 83.7% in 2015 from 56.25% recorded in 2005.

FTAs not the sole medicine
Thus far, the solutions proposed by the government focus extensively on free trade agreements (FTAs). Central Bank Annual Report 2016 notes that Sri Lanka's external trade policy focused on achieving a higher integration with global markets, by encouraging external trade and international investments to leverage trade investment nexus and this is to be achieved by enhancing market access for Sri Lanka's exports, by entering into preferential trade agreements (PTAs) and free trade agreements (FTAs) with different trading partners, strategic trade promotions and by introducing a coherent national trade policy.
National trade policy should focus on market expansion, trade and tariff rationalization, trade facilitation and attracting export oriented foreign direct investments to expand the export base and improve Sri Lanka's competitiveness in terms of exports and FDI.

At the moment, Sri Lanka is in the process of negotiating FTAs with China, Singapore and Thailand. There are discussions about expanding the existing FTA with India, allowing exchange of certain services by signing the Economic and Technology Cooperation Agreement (ETCA).

However, it remains a question whether Sri Lanka has prepared the ground for entering into a number of FTAs.
Concerns were raised about the Non Tariff Barriers (NTBs) faced by exporters in exporting goods to india utilizing the ISFTA. Moreover, concerns were raised about inability to address most of the NTBs, and inability to establish a Mutual Recognition Agreement (MRA) to resolve issues arising over standards of the goods exported.

Therefore, it is important to set out the mechanisms clearly prior to entering FTAs which the country has failed to do.
On the other hand, FTAs prioritize selected countries as such gives preferential treatment to such countries. This in fact discourages competition as well as unilateral trade. Those who advocate for free trade often opine that unilateral trade reforms should be prioritized over FTAs, not the other way around. But Sri Lanka had done the opposite.

Issues with export finance
One of the major issues in expanding exports is the lack of encouragement and incentives received by exporters.
With the objective of resolving issues relating to export finance, it was suggested to set up an Export Import Bank (EXIM Bank). The proposal first came in the Budget presented in November 2015, by former Finance Minister Ravi Karunanayake.

"Sri Lanka must now graduate from an inward-looking strategy to an outward-looking strategy. Our local industries, ranging from banking to construction to education, have the capacity to reach out to new markets beyond the boundaries of the country.
"Therefore, I propose to set up an Export Import Bank (EXIM Bank) to facilitate tapping of such opportunities, with an initial capital of Rs 25 billion, subscribed jointly by the government and the industry. As such I propose to allocate Rs 50 million as seed capital being the contribution of the government to EXIM Bank which will be operational from 1 April 2016. It is also envisaged to list this company in the CSE," he told Parliament.

However, no substantial efforts were made in 2016 and again the proposal was repeated in the Budget 2017 as well. This time, the government allocated Rs 10 billion for the cause. However, a substantial result is yet to be seen.
During the media briefing last week, State Minister Sujeewa Senasinghe said that setting up EXIM Bank requires more funding as well as time.

"We are working on it and we are well aware of the importance of it. However, it requires time to establish concrete export policy and implement proposals," he added.

Global Value Chains and way forward
According to the Central Bank Annual Report, the government has identified the need to tap into the global value chains (GVCs), improve value addition, enhance market access and innovation as the way forward, the government has been proactive in pursuing trade agreements with key potential markets, including Singapore, China, Japan, South Korea, Bangladesh and the growing markets in Africa.

However, to be a part of the GVCs it is important to facilitate business. Sadly, Sri Lanka is ranked very low in the Ease of Doing Business Index. In 2016, the country stands at 110. Yet, the country may have a chance with the massive amount of funding released by China to One Belt One Road (OBOR) initiative.

Yet, more potential lies with the Colombo Port around which economic and other institutions were already set up. Recently, Ports and Shipping Minister Mahinda Samarasinghe had revealed his plans to rebrand Colombo Port.
Impressive, I must say. But country requires action. If these plans are executed as planned, reaching the target of USD 18 billion exports by 2020 would not be too ambitious.

But do not forget that element of 'If'. The probability of succeeding could fluctuate from zero to 100%.
Umesh holds a B.A. (Hons) in Economics from the University of Colombo and can be contacted via [email protected]

 

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