In an otherwise gloomy economic situation, the news of the extension of GSP Plus status by the European Union is indeed good news. Whatever the reason for this extension till 2011, its benefits cannot be underestimated. Without this extension many of the country’s industrial exports, especially garment exports, would have suffered enormously. It is indeed a matter of good fortune that this extension was given. However this does not mean that the travails of the industrial export sector are over. In fact the problems facing industry in the country are the current economic policies. If the extension leads to inaction in economic policy reform, industrial exports can be in jeopardy in 2009.
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The GSP plus extension is a conditional extension as the probe into the country’s compliance with a number of UN covenants remains to be complied with. This it appears would take a minimum of six months and the government would be given a further period to take corrective action to ensure compliance. At the end of this period, if there is a lack of compliance, GSP plus status would be withdrawn. This is a generous concession. The bottom line is that the country has been given a respite and the disaster that would have befallen industrial exports had the concession been withdrawn has been averted for the time being.
Had the GSP plus status been withdrawn at this juncture it could have spelt disaster for our industrial exports, especially at a time when the European market as well as the American market is showing signs of recession and the demand for many industrial commodities is declining. In this depressed market, competition on price is an important factor in maintaining exports. Our competitors are cutting their prices to meet this situation. They have been assisted by several factors. There has been a depreciation of their currencies by various amounts with some countries depreciating their currencies by as much as 25 percent. This has not happened in as far as Sri Lanka is concerned. In addition, several costs of production have risen owing to higher prices for fuel, electricity and labour. Consequently Sri Lankan export prices are not competitive. The impact of this is over 100 garment factories have shut down. Most of these are small, but some large factories too are badly affected. There is an impending possibility that a larger number would close down shortly. The impact of these on employment and incomes would be harmful to society.
These shutdowns owing to garment exports not being competitive happened while GSP plus status continued to benefit exports. This is an important actuality to remember. Had we lost GSP plus status the ability of our industrialists to compete in the European market would have further deteriorated. It must also be recognised that the cut down in orders for garments were not only to the European markets but other markets as well, especially the American market. Therefore the causes for the declining competitiveness must be looked into and addressed. The fact that GSP status is being continued is no reason for not taking action to ensure that our industrialists produce in an environment that enables them to compete in international markets.
Sri Lanka’s costs of production have increased much more than that of competitors owing to the higher rate of inflation. No other competitor had as high rates of inflation as Sri Lanka’s 20 to 28 percent in the recent past. This led to an increase in the costs of production, especially labour. The increased wage costs were an important factor in raising the costs of production. The other important components have been fuel, electricity and transport costs. These three items were also of higher cost here than in countries such as Bangladesh, India, Vietnam and China. In fact some countries adopted policies of subsidising these inputs. When fuel prices plummeted, Sri Lanka was unable to bring down fuel and electricity prices owing to its hedging agreement on oil. It is impossible for the country to retain its competitiveness in the international market, where demand is slackening without measures to correct these problems. What are the economic measures that should be taken?
It has been argued that the depreciation of the currency by about 25 percent is essential to restore the country’s competitiveness. This no doubt is a solution, though a drastic one with many repercussions. While it would enable exporters to reduce dollar and euro prices for their exports, it would once again bring about a new wave of domestic inflation. Some of the costs of production of industrial exports would also rise. Wage costs may increase. Therefore a 25 percent depreciation will not necessarily improve competitiveness by the same amount.
Another less drastic and more specific option would be to reduce the costs of fuel and electricity for the industrial sector to the same level as those of our competitors. This may seem a subsidy, when in fact industrialists are being released of high taxes and given the benefit of international prices that have been distorted by domestic policies. It is estimated that fuel is taxed by over `50 percent. Such a reduction would have an effect on government’s revenue that is woefully inadequate to meet its expenses, yet such a policy would benefit exports while not leading to excessive consumption of oil. Such a pricing formula for export industries would mean the costs of production of industrial exports would rise and fall in line with those of other countries and remove the disadvantages that Sri Lanka’s industrialists have suffered.
Policy inaction at this stage would be disastrous to the country’s industrial exports, increase unemployment and poverty in the country. In an international market that is unfavourable to exporters, the government must take necessary steps to enable exporters to be competitive. The extension of GSP plus concession should not be interpreted as if all’s well now for industry. If economic policies that are conducive to industrial competitiveness are not put in place it would lead to a serious setback to the economy. The social and economic repercussions are already evident. |
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