Export finance solutions to revitalise Sri Lankan SMEs
View(s):In a set up showing Sri Lanka’s worst downturn in exports as a share of its gross domestic product since 2000 hurting the country’s economy, the need to introduce export finance schemes and relevant policies to uplift the small and medium enterprises (SMEs) numbering 3,027 has been emphasised by Verite Research at a media conference in Colombo this week.
Verite Research, a think-tank providing strategic analysis and advice for decision-makers and opinion-formers, revealed that Sri Lanka’s share of exports to GDP was 15 per cent last year and has been on a declining trend since 2000.
Eighty one percent of the export revenue is brought in by just 235 firms, each with an export turnover exceeding Rs.1 billion. Institutions such as the Export Development Board (EDB) and Sri Lanka Export Credit Insurance Corporation (SLECIC) have existed for over 35 years but failed to invest in the development of institutional capacity and competency.
Currently the services and instruments provided by these institutions with regard to export finance, lack the necessary scope and effectiveness. In the present day Sri Lanka may also need to add a specialised export credit agency such as an EXIM bank, to match the support provided to exporters by competing countries, especially in the early stages of export development, Verite Research suggested.
A significant difference between the SMEs and large firms is their access to affordable financing to offer credit to buyers – which is critical to succeeding in exports, Verité Research Executive Director Dr. Nishan de Mel said. He added that the government should devise policies and regulations in creating instruments like value chain financing as only 2 to 3 per cent of Sri Lanka’s exports were covered by credit insurance.
“Sri Lanka cannot afford to be the fat man in the economic race that Asia is a part of. We have to be able to run as fast or even faster. ‘The country’s institutions should be productive and more professional to be at this race,” he emphasised. Mr.de Mel noted that state enterprises should be professionalised to provide a better service for the benefit of the country and contribute its share towards economic development through increasing exports.
National Chamber of Exporters President Sarada de Silva said the financial sector should revitalise its strategies to assist the export sector in a bigger way if they were looking at achieving export revenue targets of US$15 billion by 2015 and $20 billion by 2020, and it was the SMEs that required innovative thinking in export financing. “However, he said that although the target had been set to reach $15 billion by 2015, Sri Lanka was likely to reach only $12 billion by the end of this year”.
The difficulty of expanding exports stems from the fact that Sri Lanka does not have many products to export and over 50 per cent of country’s exports comprise apparel and tea. More than half of Sri Lankan exports go to traditional buyers like the European Union and the United States.
In the current context of international trade, buyers tend to have greater bargaining power. Therefore, in trying to secure orders, exporters compete not just on price, quality and reliability, but also on the terms of payment. Buyers prefer to delay payment until goods are received (or, sometimes, even sold). The exporter, therefore, incurs the full cost and must wait anywhere from one to three months (sometimes even longer) to receive payment.
The short-term cash flow crunch created by the delay between shipping the goods and receiving payment generally poses greater difficulties for SMEs than larger firms. The result can be the inability to purchase raw materials and services required to fulfil parallel export orders and loss of customers. The fact that SMEs tend to face high-risk premiums on short-term financing is what makes this problem acute.
Well recognised financing mechanisms should be devised to solve this export finance problem of SMEs. “However, at present, such mechanisms are non-existent or under-developed in Sri Lanka,” Verité Research Head of Economic Research Subhashini Abeysinghe said adding that establishing such mechanisms, will require both the government and private sector to take intentional measures towards improving the instruments, institutions and information that relate to export finance.
Commercial sections in Sri Lankan embassies in export destinations could provide buyer and country information to help mitigate the distortions created by lack of information, she said pointing out that it will help reduce search costs and lower the price of export finance instruments.
Verité Research has also suggested providing soft loan facilities for export related investment and for working capital needs and strengthening the Export Credit Insurance support. It is also essential to provide export financing on the basis of feasibility of the project rather than collateral alone and, banks could provide cash to exporters, which would help exporters to meet cash requirement before the actual payment is received.
Banks should be encouraged to move into global banking networks and set up new faster secure payment systems and provide incentives to sell via secure web-based systems and get banks to be more transparent on the fee structure, including overseas charges. If Sri Lanka is to get $50 billion in exports, the financial institutions would have a key role to play. Lankan banks would therefore have to up their capability internally to support the industries of the future, she pointed out. Furthermore, banks would need to provide export financing on the basis of feasibility of the project rather than collateral alone, if the emerging new industries are to set up and grow. The role of SLECIC and EDB would also need to be critically re-examined in consultation with the private sector, she added.