Lack of working capital affects pvt. sector Unemployment hits pvt. sector say TUs
By Maheesha Mudugamuwa
After Sri Lanka relaxed the police curfew that prevailed for over a month, except for capital Colombo and several other districts, last week, economic activities of those areas were recorded at a very slow pace as people chose to grab essentials and stay at home.
Grocery shops, supermarkets, vegetable stores, pharmacies, and banks were seen to be busy engaging in business while the majority of other non-essential shops such as hardware stores, electric suppliers, textile shops, restaurants, etc. remained closed due to the lack of customers.
On the other hand, a section of businessmen are struggling to open their businesses due to a lack of working capital. Speaking to The Sunday Morning, Sri Lanka Trade Development Council (SLTDC) Chairman Roshana Waduge stressed that only 30% of the total trade activities outside Colombo had operated during the past week, which is the first week after the curfew was lifted.
“The problem is without opening Colombo, the businesses cannot be fully revived as the majority is connected with the capital city,” he said, adding that one major issue faced by almost all businessmen was that they had serious financial difficulty.
“A majority of these businessmen have spent their savings to pay the salaries of employees working under them, and they will not be able to do so without the Government’s support in the coming months,” Waduge explained.
In March, the Central Bank of Sri Lanka (CBSL) decided to set up a re-financing facility in order to implement the decisions taken by the Cabinet of Ministers to introduce a wide range of fiscal and financial concessions for Covid-19-hit business activities including self- employment businesses and self-employed individuals.
Among these concessions are a debt moratorium (capital and interest) and a working capital loan at an interest rate of 4% p.a. for eligible customers.
According to the circular issued, these eligible customers include tourism; direct and indirect export-related businesses including apparel, IT, tea, spices, and plantation; and related logistic suppliers that have been adversely affected by work disruption and overseas lockdowns resulting from Covid-19.
Also included are small and medium-sized enterprises (SMEs) engaged in business sectors such as manufacturing, services, agriculture (including processing), construction, value addition, and trading including authorised domestic pharmaceutical suppliers with turnovers below Rs. 1 billion.
Furthermore, self-employment businesses and self-employed individuals who have lost their jobs or income due to the outbreak of Covid- 19 and foreign currency earners (individuals and corporates) who have to repay loans in foreign currency and whose incomes/businesses have been adversely affected due to the outbreak of Covid-19 are also eligible for the concessions.
However, the SLTDC raised concerns over the slow process followed by the banks when implementing the moratorium introduced by the CBSL.
According to Waduge, a number of council members including small, medium, and large-scale businessmen who applied for the moratorium were informed by the respective banks that the decision as to whether their businesses would (or not) be entitled for the moratorium and the working capital will be made by the end of the first week of June. However, Waduge opined that it is really doubtful that the businesses could run until that time without any financial support from the Government.
“If 100 businessmen apply for moratorium, only five of them would be entitled for the grant, and even if the Government said Rs. 25 million will be granted, the reality is only Rs. 1 million would be given,” he stressed.
For businesses, as claimed by Waduge, the need of the hour is the granting of immediate financial support as they couldn’t wait another month, as many of them have to pay salaries of around 50 to 100 employees or more.
“We have already paid salaries for two months but from next month onwards, we are in a real financial difficulty,” Waduge stressed. He also questioned the necessity of providing financial support once the business has collapsed.
In the CBSL circular, it is stated that for the avoidance of doubt, import facilities shall not be permitted under the re-finance facility for imports other than pharmaceutical drugs, medical equipment, food, fertiliser, and essential raw materials, and machinery and equipment.
It is further stated that the financial institutions shall complete processing such requests within 45 days from the date of receipt of the request. Until the processing of requests is concluded, the recovery of loans from the respective applicants shall be suspended.
Highlighting the practical issues faced by the traders, Waduge noted that the circular and the entitlement for the facility had been interpreted by different banks in different ways. Therefore, he urged the Government to declare all the businesses which are entitled and not entitled to the facility.
If the moratorium is not functioning properly, the country would have to face a serious unemployment issue after a few months, Waduge explained.
Highlighting the import and export sector, the SLTDC Chairman noted that around 40% of an employment cut could be expected in the import and export industry, as it was the worst affected industry by the coronavirus.
Crisis after crisis
While the small, medium, and large-scale businesses and the entire private sector are facing serious financial difficulty in restarting their businesses and companies and paying the salaries of their employees, experts warned that the Government would have to face a serious unemployment crisis together with an economic crisis.
The International Labour Organisation (ILO) last month warned that almost 25 million jobs will be lost if the virus isn’t controlled.
International economic experts claimed the rising unemployment will intensify pressure on governments and central banks to speed up the delivery of programmes to either compensate workers who are made redundant or persuade employers to hoard staff until the virus fades. Failure would risk an even deeper recession or a weak recovery that would require policymakers to consider more stimuli on top of what has already been deployed.
Speaking to The Sunday Morning, Inter Company Employees’ Union (ICEU) President Wasantha Samarasinghe stressed that the worst affected from the coronavirus were the private company employees, and the country would have to face a severe unemployment issue if it did not execute financial support in a proper way.
As explained by Samarasinghe, it is predicted that over one million Sri Lankans will lose their jobs and many companies have already begun to cut down the number of their additional staffers and the salaries of many employees.
“The Government should protect the private sector as without them, the economy cannot perform in the long run and on top of that, another major crisis would be the social issue which would arise with the increase in unemployment,” he stressed.
“Therefore, it is high time the Government protected its private sector and provided financial facilities for them to continue their businesses and protect employment opportunities,” Samarasinghe stressed.
Accordingly, the ICEU proposed that the Government should introduce a relief package to revive the private sector.
The Government should release around 3-4% of its GDP to ensure the GDP rates are positive. The GDP of Sri Lanka is around Rs. 40 billion per day and 1% of GDP equals Rs. 145 billion. Unless the Government takes necessary precautions to balance the economy, the GDP rate is expected to go down to -3% by the end of this year, he explained.
He also proposed that the Government should issue a disaster bond worth Rs. 500 billion to spend on reviving the economy.
Falling rupee set to hurt economy
As economic experts predict, the Sri Lankan rupee depreciation will have a great negative impact on the economy, especially at a time where the world economy is at the brink of a recession.
However, the Government was confident that it would be able to stabilise the rupee despite it recording an all-time low recently when the selling rate of the rupee slid to Rs. 200.46 against the US dollar on 8 April, while the buying rate was recorded as Rs. 193.95 per dollar on the same day.
According to the exchange rates issued by the Central Bank of Sri Lanka (CBSL), the value has appreciated against the US dollar in the last week and as at Friday (24), the selling rate of the US dollar was at Rs. 192.00.
The selling rate was at Rs. 191.72 on Monday (20) and it suddenly increased to Rs. 194.84 on Tuesday (21). However, from Wednesday (22) to Friday (24), the value appreciated with the CBSL controlling the value at Rs. 191.00. Former CBSL Deputy Governor Dr. W.A. Wijewardena predicted that the rupee would further depreciate even though the CBSL intervened and brought it back to Rs. 195 from Rs. 200, which was the lowest recorded value ever in the country’s history.
“Unfortunately, the Central Bank is not in a position to hold it for long because they don’t have enough foreign exchange reserves to back it. Eventually, the rupee will continue to fall and along with that, all the goods that we import from the rest of the world will see an increase in prices which cannot be avoided,” he told The Sunday Morning.
On the one hand, the good side of the rupee depreciation, as explained by him, was the re-emergence of local products and the opening of more space for those locally manufactured products.
“When it comes to things that are produced in Sri Lanka, the situation is a welcome sign because our people may be able to actually supply them with the local products,” he said.
On the other hand, he claimed the situation is not favourable for importers. “The prices of goods like medicine and other essentials imported from other countries will skyrocket,” he predicted. Meanwhile, when The Sunday Morning contacted Co-cabinet Spokesman Dr. Bandula Gunawardana, he said the CBSL had managed the falling of the rupee and it had already reversed it within a few days. He noted that the Government had taken a number of measures including the halting of imports which are not essential, such as motor vehicles, and had also opened a new account for investors. “In addition, local productions including agricultural production have been increased to prevent them from being imported from other countries,” he added.
Garment industry hit hard by Covid-19 The garment industry is witnessing a collapse in demand due to the economic fallout from the coronavirus outbreak, putting jobs across Asia at risk. China is known as the factory of the world, but when it comes to clothes, Bangladesh, Indonesia, Cambodia, Vietnam, Myanmar, and Sri Lanka play a growing role. As stated in international economic reports, garment manufacturing is a crucial industry for many of Asia’s developing economies, with World Trade Organisation (WTO) data showing that Bangladesh and Vietnam are amongst the world’s four largest exporters of clothing. Bangladesh now accounts for 6.7% of market share, followed by Vietnam with 5.7%. Cambodia and Sri Lanka also rely on the industry for more than 60% of their exports. According to the Export Development Board (EDB), Sri Lanka’s apparel and textile manufacturing industry is the most significant and dynamic contributor to Sri Lanka’s economy. Being entirely privately owned and operated, the apparel categories range from sportswear, lingerie, and loungewear to bridal wear, workwear, swimwear, and childrenswear. These products are manufactured and exported with the flexibility of catering to specific seasons of many countries around the world, and the industry is Sri Lanka’s primary foreign exchange earner. In 2018, the industry’s aggregate export revenue amounted to $ 4,960 million, just shy of the high-water mark of $ 5 billion, and the US and the UK have been the highest buyers of Sri Lankan apparel. Exports to the US continue to surpass $ 1 billion, and the EU contracts are worth over $ 1.5 billion, according to EDB statistics. With the coronavirus pandemic, garment manufacturers in Sri Lanka have been hit hard as the demand collapsed as retailers were forced to shut their doors after governments around the world imposed lockdowns. Highlighting the local apparel sector, ICEU President Wasantha Samarasinghe noted that it is predicted that over 200,000 out of 380,000 employees in the apparel sector will lose their jobs by the end of this year. He said half of the factories remained closed as they couldn’t begin operations. Meanwhile, SLTDC Chairman Roshana Waduge stressed that all small, medium, and large-scale garment businesses have been affected alike and many large-scale factories were forced to shut down as they expected that they will not be getting orders for at least the next six months. “This is a major collapse of the local economy and its effects cannot even be predicted,” Waduge stressed. box Auto industry faces uncertain future Another badly affected industry, not just because of the virus but because of the economic crisis of the country, is the automotive industry, as the Government implemented a blanket restriction on the importing of all sorts of automotives to Sri Lanka as a measure to control the rupee depreciation. When contacted by The Sunday Morning, Ceylon Motor Traders’ Association (CMTA) Chairman Sheran Fernando stressed that almost all the industry players were affected by the prevailing situation. However, automotive companies were optimistic about government support for the industry once the economy returns back to normal. However, Fernando predicted that the prices of the vehicles in the country would increase. Nevertheless, the impact of the rupee depreciation would affect only the vehicles that would be imported after the restriction is relaxed. Meanwhile, the Government last week stressed that it would consider relaxing the import restriction imposed on motor vehicles and luxury items after considering the economic situation of the country within the next few months. Minister of Mahaweli, Agriculture, Irrigation, and Rural Development Chamal Rajapaksa told The Sunday Morning that the Government would go ahead with the already declared three-month hold on the importation of motor vehicles and luxury items, but if the country’s economy returns to normal within that period, the import restrictions would be relaxed. Urgent measures introduced by the CBSL last month for banks to follow with immediate effect to ease the pressure on the exchange rate and prevent financial market panic due to the Covid-19 pandemic included the provisions of the Monetary Law Act No. 58 of 1949, the Banking Act No. 30 of 1988, and the Foreign Exchange Act No. 12 of 2017. The provisions state that with immediate effect, the following must be done: Suspend facilitating the importation of all types of motor vehicles, other than those excluded specifically under Banking Act Directions No. 01 of 2020, under Letters of Credit; suspend facilitating importation of non- essential goods specified in Banking Act Directions No. 01 of 2020, under Letters of Credit, Documents Against Acceptance, and Advance Payment; and suspend the purchase of Sri Lanka International Sovereign Bonds by licensed banks in Sri Lanka during the next three months. Essential goods shortage looms Food importers are also in dire straits with certain restrictions imposed on imported goods. They claimed that they had been totally ignored and as a result, the second-level retailers were also affected. In addition, the importers will stop importing this week due to government restrictions and therefore, they predict a shortage of several products in the local markets. Colombo Importers’ Association member Alshafa Yoosuf told The Sunday Morning that the importers were running at a loss, and that with the government restrictions, they were required to keep a 300% bank guarantee to release a container. “We are losing millions and the second and third-level retailers are losing their income,” he stressed. When asked why they couldn’t purchase from local farmers, Yoosuf stressed that the local supply was not adequate to meet the demand and the prices were high. Therefore, many people were not capable of purchasing at such rates. The ban imposed on importing nonessential food items would be further continued despite the relaxing of strict measures countrywide, except for four high-risk districts in view of reviving the economic activities, Minister Chamal Rajapaksa said. He told The Sunday Morning the ban on the importation of certain food items would be continued, so as to promote the local agriculture sector which saw a sudden boost during the quarantine period. However, after evaluating the local production of certain food items, if there was any shortage for the local consumption, the Government would consider importing the respective items to fill the shortage, Rajapaksa explained. He further noted that if the Government relaxed the importation restrictions, the local farmers would be demotivated and they would move away from cultivation, thinking that they would not receive a proper price for their products.