The European Union has decided to withdraw its GSP+ tariff concessions for exports from Sri Lanka from August this year (temporarily).This is a zero import tariff (duty) concession with a tariff advantage of about 9-18%. Few countries extend such an attractive import duty concession except under a free trade agreement. From all accounts the loss of it will have quite a damaging effect on exports of a variety of products (such as garments, cut and polished diamonds, frozen fish, tyres and tubes) and therefore on the economy. The extent of the damage is expected to be heavy; the EU has been absorbing around 38% of Sri Lankan exports, the total value of the latter being about US$ 7 billion (2009).
 Not done our homework
Now the question that arises is why do we have to depend on such concessions sometimes extended with an ugly display of arrogance? The answer is that we have not done our homework to make our production and exports competitive in the face of stiff competition especially from East Asia. The next logical question is what do we have to do, to make our production/exports competitive as well as acceptable so that we achieve a higher rate of economic growth mainly for alleviating widespread poverty (the US$ 2 per day rate being about 40% of the population), without depending on the condescending generosity of the EU, the US and other rich nations?
Need to export
The first decision that we have to make is whether to export at all. The writer explained in a previous article that since Sri Lanka is a small country with a small domestic market which does not generate sufficient demand as in the case of the large Indian or Chinese markets, it has to export to the rest of the world to enhance economic growth and be able to import the goods and services which cannot be produced locally.
Conforming to international requirements
Since it is compelled to export in competition with other countries to make a good living, it has necessarily to make its products and services as cheap as possible while respecting the other preferences of customers and conforming to international standards/requirements. These preferences/requirements may not only include various degrees of the quality of products and services but also questions as to whether they are made and exported by countries and communities which pay heed to legally recognized standards of treatment of labour, conservation of the environment and whether these countries respect human rights.
This compulsion to conform to such requirements does not arise if Sri Lanka decides not to export and prefers to be satisfied with the meagre quantum of goods and services produced locally and remaining poor, though of course it can be argued that maintenance of labour and human rights as well as conservation of the environment, etc are in any case necessary for the wellbeing of the people of the country and therefore for internal social stability. The fact, however, is numerous countries in the world (except perhaps North Korea and Burma) vie with each other to conform to these requirements to export as they need the foreign exchange and wish to achieve a faster rate of economic growth, besides being good world citizens. They do not consider their sovereignty is violated in doing so. Sri Lanka should therefore follow suit for its own benefit.
Making the economy competitive
Now let us deal with ways and means of making the economy competitive vis-a-vis the rest of the world to succeed in exports and raise standards of living while alleviating poverty. Only a few strategies are required for the purpose and can be stated as follows:
- a) maintain macroeconomic or budgetary and monetary stability mainly by reducing budget deficits to lower inflationary pressures, (without meaningless ideological fixations), so that those engaged in economic activities could minimize costs and maximize incomes and welfare,
- b) extend uniform incentives to let prices reflect their resource costs by opening markets such as land, labour and capital and by encouraging product and market development,
- c) develop physical infrastructure facilities as well as health and education particularly to improve productivity,
- d) maintain good governance to establish a law abiding and harmonious society as well as democratic processes/rights and depoliticized institutions that provide quality public services including law and order to establish socio political stability, and in addition
- e) maintain good relations with all nations as well as international organizations mainly to be able to win markets and obtain the goodwill of the entirety of the rest of the world for the national economic development effort.
This is actually an economic development strategy. In fact the first four strategies form the gist of an overall national economic development strategy prepared by the Sri Lanka Economic Association. If the economy is well managed on these lines, it will be competitive against the rest of the nations and will succeed in exports as well, without concessions like the GPS+.
It has also to be stated that if such a strategy is implemented consistently the country will be able to attract large scale long term domestic and foreign investments for the economy to grow at a faster clip and increase real incomes more quickly without offering over-generous tax concessions and other incentives as they will ensure socio- political and economic stability. Hong Kong is one example of a country which has not offered special incentives for investment as it is its stability and the well managed economy that were the real magnets for the investments to that island.
Time to bear fruit
At this stage it must be stated that it will take sometime for this strategy to bear fruit and therefore the export sector will have to be offered a temporary set of incentives to make it internationally competitive. First, a study will have to be undertken to determine the quantum of assistance required for the purpose. Then it is a matter of deciding on the incentives required.
Temporary incentives
The first incentive that comes to mind is avoiding an overvaluation of the rupee or go further and undertake an undervaluation. The latter, however, would push up the costs of imports and increase debt servicing costs, as Sri Lanka is a highly indebted country.
So the first measure that can be recommended is depreciation, stopping short of an undervaluation of the currency for enhancing the competitiveness of exports and limiting a rise in debt servicing charges as well as of the cost of imports. What this means is the abandonment of the present policy of keeping the currency overvalued, as a rapid expansion of export earnings would help to push up the rate of economic growth as stated earlier.
If the study of the quantum of assistance required to make the export sector indicates that a policy of avoiding the overvaluation of the currency is inadequate to achieve full competitiveness, a compensatory grant on the basis of export earnings will have to be considered. However, it will have to be recognized that only part compensation will be possible as the government will not have all the funds necessary for the purpose and there is an urgency to persist with reducing budget deficits.
The government has actually offered such incentives before, to compensate for the loss of export competitiveness. The Export Development and Investment Support Scheme (EDISS) of the Export Development Board offered in the nineteen eighties and nineties as well as the Export Development Reward Scheme (EDRS) extended by the Department of Commerce to the sector recently are examples. The EDRS is not actually compensatory scheme as a large number of exporters have not been able to qualify to receive it due to a plethora of requirements. It will therefore have to undergo amendment to become a full fledged compensatory scheme. An alternative is to extend an EDISS like grant which encouraged value addition as well through higher rates of payment for such exports. The EDISS, however, required that these grants be ploughed back for further expansion of exports. This delayed payments. The writer’s opinion is such requirements should not be insisted upon as the idea is to enable all exporters (not a selected few) to quote lower prices to their buyers abroad.
Another measure that can be considered is the extension of tax holidays which are a stay of the payment of income tax on profits earned from exports. Here the problem is that all exporters may not qualify as some of them will not earn profits. Compensatory grants can therefore be offered in addition to tax holidays.
A great need where Sri Lankan exports are concerned is to add value without exporting goods in the primary form and the compulsion to differentiate products and activities to deal with heavy competition, in order to earn a higher return. Therefore the package of export incentives should necessarily include part reimbursement of training, product and market development expenses. Part payment is required to obtain the commitment of the exporters.
Removal of disincentives
Apart from action on the incentives, a point that has to be stressed is that disincentives to export such as delays at the point of Customs clearance (Sri Lanka still has not introduced a paperless system like most other exporting countries) and difficulies of obtaining additional supplies for export have to be reduced drastically as they involve expending a great deal of time and money to the businesses. These costs like other costs such as taxes cannot be passed on to the buyers abroad due to the heavy competition prevailing in the overseas markets.
Once the country begins to implement these incentives (and removal of disincentives), the EU may also find that Sri Lanka is on the way to become eligible for the GSP+ as this particular programme includes good governance that would lead to better public institutions, democratic processes, protection of human rights and law and order conditions as well as an effort to improve relations with the rest of the world. This is a more dignified and mature way of qualifying for any international assistance and co-operation as it does not involve going behind the EU, the US or any others in the external world for favours.
Review of competitiveness
One other thing that has to be stated before winding up this discussion is frequent review of this set of incentives and of competitiveness is necessary, even if the five strategies mentioned above are fully implemented, to ascertain whether there is adequate motivation for making the export sector internationally competitive and undertaking adjustment upwards if they are found to be insufficient to meet the objective. |
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