- Opportunity for local businesses in current crisis
By Sarah Hannan
With the Covid-19 pandemic virtually shutting down all economic activity in Sri Lanka and pushing the rupee further down to record lows, the Government has resorted to restrictions on imports to save foreign exchange. At a time like this, it is imperative that the local industries are given the necessary concessions so that they could start manufacturing most products that are currently being imported from other countries.
Transforming from an import-based economy to a manufacturing-based economy would not take place overnight, and there would be several challenges that local entrepreneurs might have to face in the transition. At the same time, these entrepreneurs will need immense support from the Government of Sri Lanka in order to commence manufacturing these products.
The Sunday Morning last week discussed with Sri Lanka Trade Development Council (SLTDC) Chairman Roshana Waduge the challenges local entrepreneurs would face in this attempt and how SLTDC, which represents the interests of small, medium, and larger-scale local enterprises in Sri Lanka hailing from various business sectors, envisions overcoming such challenges.
“The economy of Sri Lanka started to deteriorate after 2015 and the worst affected were the local entrepreneurs. Last year, our council made a special request to all presidential candidates including President Gotabaya Rajapaksa noting that once they are elected to office, it was important to safeguard the local traders and entrepreneurs in order to safeguard the economic stability of Sri Lanka,” Waduge explained.
The suggestion to empower local traders and entrepreneurs was presented to the President even before he was elected; upon his election, he had taken these suggestions into consideration and issued a moratorium for local businesses in the form of relief loan packages.
Even though a moratorium was introduced, the President, Prime Minister, and the new Government had to face practical issues with regard to safeguarding local entrepreneurs whilst stabilising the economy of the country.
According to Waduge, while the President issued necessary directives to implement the moratorium, the relevant officials were facing issues in putting these directives into action. When they discussed the proposed moratorium for businesses with the respective banking institutions, the agreement had been drawn up more in favour of the banks.
“In this backdrop, the businesses were never afforded any benefits through the relief loan packages made available to them. While these relief loan packages were being rolled out, Sri Lanka also had to take stringent measures to prevent the spread of Covid-19. We cannot therefore pin the blame on Covid-19 for the destabilising of Sri Lanka’s economy as it was already on a downward spiral since 2015,” Waduge elaborated.
Although the President announced that local businesses and trade would be given various concessions, during his address to the nation, not all sectors were covered by the relief that was listed. A moratorium for a six-month period was declared along with withholding instalment collections for vehicle leasing and loan instalments for a selected few business sectors.
Not only have the big businesses been impacted, but also the small businesses such as the village tea stand. Therefore, Waduge pointed out that if the Government is to provide benefits to big businesses, they should consider giving these benefits and reliefs to the entire business community.
Working capital
“Meanwhile, the President also informed that he will be providing working capital for businesses with an interest rate of 4%. While the directive is very timely and could help businesses immensely, the banking institutions have now instructed that businesses should forward their requests to the relevant banks before 30 April, which means the businesses will receive the working capital only after about two months – after they evaluate the request that is put forth,” Waduge noted.
Many businesses, even after having to shut down their operations mid-month, had managed to pay the full salaries of their employees for March. However, they will not be able to keep paying full salaries for employees going forward. Even with the Government issuing directives to immediately provide businesses with a working capital, businesses that have more than 50 employees could not continue to pay salaries in the coming months.
“Say the companies decide to lay off people from work. The burden will surely circle back to our Government as there will be a reduction in the workforce. Therefore, it is crucial that the promised working capital is released for all businesses of concern. The President’s directives are set in motion very slowly by the respective authorities. The authorities need to understand that this is an emergency situation and by delaying the salary payments for companies, employees might create bigger issues,” Waduge reiterated.
For now, many companies have resorted to sending in the required information to the banking institutions so that they could process the necessary requests to obtain the allocated working capital. With the Covid-19 pandemic, many of the businesses too have been shut down, making many businessmen rethink their working methods.
It is no secret that the imports have been completely halted after the Government closed down airports and seaports. Not many of us have been motivated to manufacture goods in Sri Lanka as importing and selling goods were a better option and there is no government mechanism that empowers local manufacturers and entrepreneurs. But with the present situation, the Government is looking at implementing a mechanism to support local manufacturers.
Empowering manufacturers
Waduge reiterated that while the Government devises a suitable mechanism to support local manufacturers and businesses, the community should look at ways to manufacture goods that are currently being imported; Covid-19 has actually opened up opportunities to innovators in Sri Lanka to redesign most of these goods using local material.
“While we as businesses think about growing our businesses, we also have to look at avenues to strengthen the country’s economy. We should be a strength to the country instead of being a burden to it,” he said.
We asked Waduge as to what opportunities have opened up to local entrepreneurs and manufactures due to the closing down of trade routes and means of import, as well as what support the businesses are expecting from the Government in this regard.
“The Covid-19 threat has actually presented an opportunity to us all. If we are to manufacture something in Sri Lanka, most of the raw materials must be brought down from other countries. We can look at means to produce the necessary raw materials in Sri Lanka, but it might not have enough demand from all industries. Therefore, when we are importing raw materials for local manufacturing facilities, the Government could provide tax concessions,” he said in response.
He further stated that the Government should look at prioritising the sale of goods that are manufactured locally over the goods that are imported and released to the market. If such a mechanism is in place, Waduge believes that Sri Lankan traders would look at promoting the locally manufactured goods over the imported goods.
“Opportunities will be notably opened up in the rubber industry, especially the tyre manufacturing facilities. We have all the necessary raw materials in Sri Lanka to manufacture tyres and we can easily set up manufacturing facilities to cater to the country’s tyre needs. Over the past week, we also saw how ICU (Intensive Care Unit) beds were made using raw materials sourced from within the country,” he explained.
Waduge is optimistic that if we are willing to explore options to source raw materials for most of the industries within the country, we should be able to succeed. He also noted that when the country’s economy grows, the businesses too can thrive pointing out that the highest expenditure of the country is allocated to import vehicles.
“If our highest expenditure is to import vehicles, I suggest the Government takes a look at a system to export old vehicles to other countries. We have the advantage of the Hambantota Harbour; today, India transships its motor vehicles through this harbour to the West African countries. So, if Sri Lanka one day establishes a vehicle manufacturing facility, it should be easily able to export vehicles to West African countries.”
The export vision
For the moment, Waduge suggested that second-hand vehicles or imported vehicles that are in excess should be reconditioned and sent to these countries through the Hambantota Harbour, adding that Sri Lanka already has the infrastructure to pursue it. Vehicles are considered as somewhat an essential item. With this system in place, the monies spent on imports can be earned back by re-exports.
In addition to that, Sri Lanka can manufacture all the agricultural machinery and tools locally. In the early years, Sri Lanka had its very own tractor corporation which produced mamoties and ploughs, but with its closing down, the country had to resort to importing these tools. Once these industries are re-established, Sri Lanka will be able to save a lot of money allocated on imports.
“Therefore, once Sri Lanka transitions to a manufacturing economy from an import economy, the next stage would be to branch out to an export economy; the demand for goods in Sri Lanka is very limited, which gives the opportunity to export the excess production to overseas countries. Furthermore, Sri Lanka should look at exporting goods to the African market as the trade routes easily lead to West Africa through the Hambantota Harbour,” Waduge explained.
He also stated that at present, China is supplying 50% of the goods to Africa and Sri Lanka could easily tap into that market share as the number of days it takes to ship goods from China is cut short if the products are manufactured and exported from Sri Lanka. A shipment from China would take about 45 days to reach West Africa, whereas a shipment from Sri Lanka would only take nine days to reach West Africa.
Noting how optimistic Waduge sounded when referring to establishing a manufacturing economy in Sri Lanka, we asked how long it would take for Sri Lanka to transition from an import-based economy to a manufacture-based economy and finally to an export-based economy. Moreover, we also asked him how Sri Lankan manufacturers could produce goods on par with international standards.
“Since we already have the basic infrastructure, it can be easily established within a period of six months to one year. In order to ensure our products match international quality standards, all goods that are manufactured in Sri Lanka will have to follow a quality guideline similar to that of Bureau Veritas or Sri Lanka Standards Institute (SLSI), which is why a government mechanism should be in place,” Waduge replied.
While all these will not take place in a span of few weeks, we asked Waduge how the manufacturers could adapt to the transition, as Sri Lanka will not have a high demand for the products that are locally manufactured.
“Our manufacturers will have to start small by first producing sufficient goods to cater to the local demand. In the meantime, the Government could arrange agreements with new trade territories. Once that is in place, the manufacturers can increase their production capacities to cater to the global demand. Therefore, the transition will take place in three stages: (i) Establish local manufacturing facilities, (ii) produce for the local demand, and (iii) increase production for the global demand,” he elaborated.
Research and development
Currently, when establishing businesses and building manufacturing facilities, one must obtain approvals and clearance certificates from various government institutions. Waduge suggested that it would be convenient if the process of obtaining approvals and clearance certificates could be streamlined and issued through one single institution.
He further said that Sri Lankans have the necessary skillsets and the mindsets to innovate, but most often are put off by the inconvenience of having to obtain multiple approvals and clearance certificates prior to establishing the manufacturing facility to produce goods.
When asked whether the Council is satisfied with the attention the Government of Sri Lanka is giving to improving the manufacturing facilities and whether they expect the Government to invest more in research and development (R&D), Waduge agreed that manufacturers would not necessarily have a budget to allocate for R&D purposes.
He also pointed out that when the government mechanism is in place, it would be easier to get the local university graduates involved in order to make use of their knowledge and skillsets in a practical sense. All these stakeholders should be brought together through the Government and once an expert team is appointed to carry out R&D for various sectors, businesses would be able to easily access this team to develop various products.
Further elaborating, Waduge said: “It is important to have a dedicated centre for R&D for each sector. If not, the switch to a manufacturing-based economy will not sustain and the business would not be able to continuously improve their products. Once this is established and a positive environment is created, it will also prevent the brain drain that is currently taking place. This can also lead to many of our academics returning to Sri Lanka as there would be job opportunities that can open up in the field of R&D.”
The best example of a manufacturing-based economy is China, as the Chinese Government provides low-interest loans for manufacturers to start their businesses, if they have the necessary knowledge and skillsets. Furthermore, if the products are exported and the manufacturer effectively contributes towards the growth of the country’s economy, they are given a further tax concession on their business tax.
Waduge also stated that Sri Lanka should take this opportunity to re-establish manufacturing facilities in the country and also to bring back the experts residing in foreign countries to give a head start in restructuring Sri Lanka’s economy and creating a conducive environment to establish a manufacturing-based economy.
Maintaining relations
Transitioning from an import-based economy to a manufacturing-based economy could have an adverse impact on the ongoing international trade relations Sri Lanka already maintains with several countries. Once the transition takes place, the country will still have to maintain these relationships. When inquired, Waduge said that most of the present agreements are in favour of the other country that has signed the agreement.
“For instance, if we look at the trade agreement we have with India, Sri Lanka is required to import motorcycles and three-wheelers manufactured in India. However, the agreement does not allow Sri Lanka to export any motor vehicles manufactured locally to India. The agreement only indicates that when Sri Lanka imports motorcycles from India, we can only charge a 10% duty fee,” he added.
While the country would have signed the agreement in order to receive loans and funding opportunities from India, if Sri Lanka continues to sign such agreements, the country would only be bound to conditions dictated by all other countries.
However, as Waduge pointed out, the best trade agreement Sri Lanka has at present is signed with Japan. Although Sri Lanka imports Japanese vehicles, most of the components that are used in manufacturing the motor vehicles in Japan are made in Sri Lanka. These manufacturing facilities are established by the Japanese manufacturer due to the affordable labour cost. Yet, the owner of this manufacturing facility is a Japanese national.
“Sri Lankans are offered jobs and are able to earn salaries from such facilities, but the profit goes back to Japan. Therefore, if we are to switch to a manufacturing-based economy, we can still continue trade relations, if we amend the clauses in a much more favourable manner to Sri Lanka. That way, we could retain the profits made through such manufacturing facilities,” he explained.
In such a backdrop, all that is needed is to identify the global requirement – be it in component manufacturing or simply anything. Once the requirements are identified and the necessary opportunities are created, local entrepreneurs and businesses could easily commence manufacturing according to those requirements.
Meanwhile, Waduge suggested that Sri Lanka should look at signing trade agreements with the African market as they have a need for innovative products. In comparison to the European market, the economic growth is upscaling in the African market. He stated that it is about time the Government of Sri Lanka looked into such new agreements that would create opportunities to establish a manufacturing-based economy.
IT and English
Many Sri Lankans struggle with the knowledge of IT and English. In this regard, we asked Waduge whether this would become a barrier to local entrepreneurs when doing business internationally.
“The best example we could take is China; being the largest exporter in the world, not all of its manufacturers converse in English. Yet, they have managed to conduct their trade relations with other countries. You do not have to necessarily be well versed in the English language or have the IT knowledge, as you could always have an interpreter and IT professional to handle the IT department,” Waduge said.
If Sri Lanka is to take China as an example and work towards using the available resources to build businesses, Waduge believes that Sri Lanka too could achieve its desired economic growth in a manufacturing economy. Furthermore, when it comes to knowledge in IT, Sri Lanka has enough and more IT professionals, but the only issue is that the country is not making the best use of their knowledge due to the lack of opportunities. Sri Lankan software developers have even developed systems used by the United Nations (UN), especially for their food distribution network.
Waduge in conclusion reiterated that if Sri Lankan businesses tap into the knowledge and skill pool that is already available in the country, they could easily flourish in the international trade arena.
