Govt. must change policies

There is no doubt that 2008 is going to be a bad year for business and the consumer. Company profits are expected to be affected badly while consumer prices are soaring fuelling inflation which is at an all-time high.

The Sunday Times FT on Thursday organised its own panel discussion to discuss the state of economy, the fuel increases which have been coming regularly over the past few weeks and rising food costs. On the panel were Rohan Fernando, Chairman of the Chamber of Exporters and Chairman of HVA Lanka, Raja Hewabowela, Managing Director of Nippolac Paints and an award-winning entrepreneur and Dr Sirimal Abeyratne, Economist from the University of Colombo, representing the viewpoints of an economist, chamber personality and small industrialist.

Excerpts of the discussion:

Dr. Sirimal Abeyratne said petroleum prices in the world market will continue to increase due to both supply and demand unless the world finds a successful alternative substitute energy programme at a global level. The increased food prices as well as the fear about the world economic recession sees more people moving away from the dollar while trade is taking place in other currencies around the world. "The strength of the dollar will remain as long as people have confidence in the dollar as an international currency," he said. Given the global picture, it is in this context that people should look at what is happening in Sri Lanka.

"We are not doing enough and we haven't done enough," he said adding that Sri Lanka has never had a long term perspective on upcoming issues and no long term development policy or reforms on a smaller scale or at the macro level. Even after the electricity problems the country faced in the mid-1990's, Dr Abeyratne said ‘we’ still do not have any solutions. Likewise, in many areas related to economic development, the government is just ‘plastering’, he said. The government resorts to short term strategies when a crisis comes up with no long term strategies. However, he said that despite whatever the crisis may be, the country is still moving forward at a slow pace but it is still moving.

Dr Abeyratne urged the government to stop subsidizing fuel and controlling the prices because the burden and the benefits are shared by the wrong people. With the kind of subsidizing and taxing going on, domestic prices do not reflect world prices and there is no incentive to economize fuel consumption.

"The best thing the government can do is to let domestic prices reflect the world prices and that means the user is paying and the non user is not paying," he said. The government should also curtail wastage and reduce or economize consumption. "We have to reduce our fuel consumption, go for alternative means and reduce wastage and this can have a positive impact on our business activities." He added that the government should also look into energy consumption by the public sector because the public is paying for it. Dr Abeyratne said the country is currently surviving because of the economic policy reforms in 1977. "After that, we have failed," he said. "If we had the war prior to policy reforms, it would have been a different country.

The country has been able to cope because of the policy reforms but it's not moving ahead smoothly." He said that now unlike in the 1980's, there is no talk about export promotion and industrialization whereas people should be increasing their incomes from the industry and services sector.

He also said the Balance of Payments (BOP) situation will be worse this time around, adding that the country manages its exchange rate due to remittances and borrowings, all short term solution. "The question is how long we can sustain them." He sees the labour issue (unemployment and in some cases shortage of workers) as a generation problem. People are looking for white collar, urban based jobs but this is true in many other countries, not just Sri Lanka, he said.

"With education, people want to move away from agriculture. Another problem is that we don't have a technical education system established in this country which trains people. The third problem is that there is demand for qualified jobs and there aren't qualified and experienced people at that level."

He also said the North and the East have experienced huge losses in its investor class and institutions due to the war.

Small industry problems

Raja Hewabowela said his business has been heavily affected by the increase in fuel and energy prices. "We can't predict the prices anymore," he said. There was a 60 percent increase in prices last year. "We can't bear up the costs. We can't increase the price of our finished products everyday." Mr Hewabowela explained that freight charges have increased by 46 percent and local transport charges from the port to the factories have increased by 52 percent. Foreign suppliers are only willing to sign short term sales agreements based on LC terms due to the country situation.

Small industries are also facing several difficulties with increasing interest rates and the reluctance of banks to give small loans to small manufacturers. Transport costs from Colombo to the factories outside Colombo have also increased. Mr Hewabowela said there is a labour shortage in areas such as Matara where one of his factories is located.

"Those days, the government would encourage us to employ more people but now, we have to go with automation of factories." In essence, automation for small industries has reduced costs but there could be an employment problem. “Small industries should be mechanized to cut down costs but what will happen to employment?”

Mr. Hewabowela said it is difficult to get accountants and managers into the Matara factory and office because people are unwilling to leave Colombo. "People don't want to go back to where they were born," he said. "They want a better living."

Chamber perspective

Sri Lanka's export economy is about US$7.5 billion which is not a big export earning in terms of the larger international conglomerates, said Rohan Fernando. "We are an externally driven economy, depending on exports, imports and services and we have to look at it from an international viewpoint. Energy and food are two things that have turned the world up side down." However, he said that ‘we’ are imagining a food crisis in Sri Lanka and if there is one, it's a man-made crisis. Food crops here like jak for instance are rotting under trees and there is 40 percent wastage rate to when products get to the market which are the problems the country has to address.

The world is hungry for energy, Mr Fernando said. India, China and Russia are the three largest economies in Asia, representing a third of the world population and are experiencing huge economic development. When India and China experience 2 or 3 percent GDP growth, it makes a huge impact.

Last year, the tea industry crossed US$1.1 billion for the first time in the tea export income and this year, the industry is on course to equal or to surpass that. Tea prices have increased by 40 to 50 percent over the last two years because demand has been created. The same thing is happening to the rubber and coconut industry. "These were the mainstays of our economy since independence," he said. With garments and other industries having overtaken these older sectors, he feels that the traditional industries are once again surfacing. "Garments are not our strength," he said. The import cost of garments is 40 to 50 percent. The import cost of tea is about 10 percent. These strengths are indigenous in the country."

The energy crisis is a problem and his chamber has written to the Minister and the Treasury Secretary to schedule discussions but to no avail. "I know we are having a problem but we want to tell them to look at it differently," Mr Fernando said. "Politics has really ruined the energy policy in this country," he added. The power projects in Norochcholai and Kotmale should have been done 15 years ago. If these projects had been started at that time, energy prices today would be much lower. He said the hydro generation plants are archaic and some of the older plants need refurbishing to work at maximum efficiency to avoid loss of power generation as a result of improper maintenance and upgrading of old equipment. Mr Fernando said losses in power transmission and power piracy is impacting the bottom line.

"If you increase power haphazardly without a national policy, you will reduce productivity of the export industries," he said. If productivity drops, income levels will also drop. He also urged the government to stop subsidizing the Ceylon Electricity Board, calling it one of the biggest messes the country has created which is dragging all of ‘us’ down. Instead, give the subsidies on an increment basis to the industries who are contributing.

Mr Fernando said his factories were set up on an energy efficient basis in 1998 using solar power. This had led to an energy bill of Rs.248,000 after the tariff increase and was only Rs.175,000 prior to the increase. "We have enough sun power and we have positioned all our buildings for solar power. We are using solar curtains to control the light coming into the building. Solar energy can lead to savings."

He also said it is not too late to have research and development on how to maximize energy and how to use energy efficiently. The coming year will be decisive for Sri Lanka with the war, an economic crisis, food problems and labor problems, he said. The chamber has been discussing some options but the biggest issue is the inefficient handling of the CEB. The chamber has also asked for meetings with the Treasury Secretary so that the government can take steps now to avoid the situation deteriorating further. "All the chambers are basically unanimous on this subject but getting everybody together is the biggest problem in this country."