• In an exclusive interview with The Daily Morning, Ajith Perera, Former Secretary General/CEO of FCCISL said the transformative role of coaching develops skills and mindset, support building strategies to overcome challenges and achieve sustainable growth  

 In an exclusive interview with The Daily Morning Business, Ajith Perera, Executive Secretary of APTA Chamber of Commerce and Industry, President of the Professional Business Coaches Association, and former Secretary General/CEO of the Federation of Chambers of Commerce and Industry of Sri Lanka (FCCISL), shared his insights on various aspects of the country's economy. With a wealth of experience in business coaching and commerce, Ajith Perera highlighted the importance of strategic coaching in driving growth for small and medium-sized enterprises (SMEs).

He emphasised the transformative role of coaching in empowering SMEs and helping business owners and leaders is to develop the necessary skills, mindset, and strategies to overcome challenges and achieve sustainable growth.

Perera reiterated on pressing issues the industry encounters such as increased taxes, the economic crisis, the potential relocation of businesses, the impact of the IMF, and the challenges faced by exporters reviewing each topic, drawing on his extensive knowledge and practical experience.

Following are excerpts from the interview. 

What is your view on increased taxes? Can a country compete with other nations without increased taxes? What will be the long-term impact of such an increment?

Last October, Sri Lanka increased the corporate tax rate to 30%, bringing it more or less in line with countries such as India, Bangladesh, and Pakistan. However, some countries like Vietnam, Hong Kong, and China maintain relatively low tax rates in the region, contributing to their explosive export growth and high foreign direct investment (FDI). It is worth noting that many countries have tax slabs, with lower rates granted to strategically important sectors based on their needs.

Previously, Sri Lanka had lower tax rates applicable to 13 identified sectors, including small and medium industries, manufacturing, agro-processing industries, and export companies. However, the country has now adopted a common corporate tax rate of 30% across all sectors. This has an impact on the cost of production, making products less competitive in the global market. Nevertheless, it is important to recognize that even advanced economies like the UK have had to increase their standard VAT to 20% and standard corporate tax to 25%. Therefore, the immediate impact on our products is relatively less significant. However, high tax rates can discourage work, saving, investment, and innovation, while specific tax preferences can affect the allocation of economic resources.

Tax reforms can be challenging as it produces winners and losers. However, international experience has shown that diverse countries have successfully implemented reforms that substantially increased income and improved the quality of life for their citizens. The implications of taxes are variable, and lower marginal tax rates on returns to assets, such as interest, dividends, and capital gains, can encourage saving. Reducing marginal tax rates on business income can prompt some companies to invest domestically rather than abroad. Tax breaks for research and innovation can also stimulate the creation of new ideas that benefit the broader economy.

What are the effects of the economic crisis on the country? 

Sri Lanka's GDP has contracted for the fifth consecutive quarter since 2022. The most affected sectors are manufacturing and agriculture. However, there has been a marginal increase recorded in sectors such as construction, mining, services, and transport from the fourth quarter of 2022 to the first quarter of 2023. Looking at the full year, Sri Lanka's GDP shrank by 7.8% last year, and the economy is expected to contract further by 3% this year. However, a rebound is anticipated in 2024.

In this crisis, the impact on small and medium-sized enterprises (SMEs) is severe, and they are already experiencing its effects. Financial institutions are pressuring their clients for payments and taking legal actions. Many business organisations are now focused on survival and are undertaking measures such as downsizing or right-sizing their operations. This includes staff retrenchments, cutting non-statutory payments to the workforce, resource reallocation, and the introduction of multi-tasker programmes. Another consequence of the crisis is the migration of technocrats, experts, and experienced workers to other countries. A considerable number of experts from both the government and private sector have already migrated, while many others are waiting for opportunities. As a response, the Government changed the approval process applicable to state employees seeking to work abroad.

Many businesses are planning to move their business overseas. What is your opinion on this?

Based on the information available, it seems that the claim of many businesses planning to relocate to other countries is not accurate. Relocating a business, especially large manufacturing units, is a complex process that involves significant costs and time for approval and resuming production in a new country. While there may have been a few instances of business withdrawals in the past, it would be unreasonable to label it as a trend.

Additionally, the global business environment is currently challenging, with geopolitical tensions, weakening global demand, and tighter monetary and fiscal policies putting pressure on global trade. The volume of global trade in goods and services is forecasted to grow by only 2.3% in 2023, well below the pre-pandemic trend. It's worth noting that the economic slowdown in the West has also resulted in reduced demand for apparel, which may impact the entire South Asian region, including Sri Lanka's apparel industry.

However, it is important to consider that some larger players in the industry have already established subsidiaries in the region as part of their global strategy. In the case of businesses relocating, service-oriented manufacturers such as IT companies may be able to transfer orders to their subsidiaries in the region. While there may be compelling reasons for businesses to relocate, such as sudden policy changes in the operating country or disruptions in the supply chain, the prevailing factors in Sri Lanka do not indicate a significant trend of business relocation at present.

What is the impact of the IMF on the country? Are there any forceful implementations of VAT or taxes? What hardships do exporters and importers face due to the IMF?

The Sri Lankan Government sought assistance from the IMF to overcome the crisis in April 2022. As a result of negotiations with the IMF, the Government had to take drastic steps to increase government revenue based on the IMF's recommendations. This included implementing increases in value-added tax (VAT) and corporate tax. 

These measures were implemented at a time when businesses were already facing challenges such as the sharp depreciation of the rupee, high bank interest rates, and increased costs of production and imports. The outcome of these measures was higher product prices and concerns about competitiveness in both local and overseas markets. The contraction of the economy between 2021 and the first quarters of 2023 can be attributed in part to the reduced demand resulting from higher prices.

On the other hand, the influence of the IMF compelled policymakers to take steps to curtail capital expenditure, strengthen the independence of the central bank, and make decisions that had been postponed, particularly regarding loss-making state-owned enterprises.

It is important to note that IMF assistance provides breathing space but numerous policy interventions and implementations are needed to put the country on a sustainable development path. These interventions may include transforming non-tradable production into tradable production, reintroducing tariff rebates for exports, simplifying the complicated tariff structure and HS codes, balancing the impact of welfare measures with export growth or revenue, implementing an export-oriented trade policy, providing Government support for SMEs, and repositioning Sri Lanka as an attractive investment destination.

What is the future of the SME sector in the country? How can Trade Chambers help them upgrade their businesses?

Currently, the SME sector in the manufacturing industry is facing numerous challenges, with approximately 70% of SMEs at the risk of extinction. The Government's approach of providing debt moratoriums from time to time only adds to the burden, as it increases the interest payments for SMEs. To address the issues faced by SMEs, Sri Lanka needs to analyse the root causes. Many SMEs are facing cash flow problems and require financial injection. This can be achieved through interest-free loans or loans with nominal interest rates. Policy makers could also consider fully or partially writing off the interest portion for SMEs. It would be beneficial to learn from other countries' experiences. For example, during the pandemic, the Chinese Government directed government agencies to purchase more from SMEs and ensured timely payments. Similar priorities could be considered in Sri Lanka.

The Dirisaviya board in the stock market provides a good option for SMEs to raise interest-free funds, but adjustments are needed to make it more appealing to SMEs. Currently, SMEs contribute around 50% to the GDP and approximately 15% to exports. In comparison to other countries in the region, where SMEs contribute 40%-50% to the GDP, Sri Lanka lags behind. Policy makers should introduce a national policy and drive to transform SME primary product manufacturers into value-added manufacturers, supported by a national productivity enhancement program. Pakistan has SME industrial parks with incentives for exports, but in Sri Lanka, industrial parks are primarily focused on large companies. Sri Lankan youth have innovative business ideas, and incubators have been set up under various institutions for new product development. However, a mechanism needs to be established to commercialise these new product concepts with the guidance and support of successful entrepreneurs. Building confidence in SMEs is crucial, and the Government can play a role by establishing a one-stop shop and delivering a proper strategic plan backed by commitment and drive. With the achieved financial stability, the increase in tourist arrivals, and foreign remittances, the business sector has a fair chance of recovering.

How has the appreciation of the rupee helped the country's economy, and how has it adversely affected exporters?

The appreciation of the rupee has had positive effects on the country's economy. It has helped lower the costs of raw materials, consumer goods, and finished products, while also curbing inflationary pressures. However, the drastic and uncontrolled fluctuations of the rupee have not been favourable for exporters, and they are already experiencing the negative impact. It is worth noting that exporters have also benefited in the past when the rupee was significantly depreciated. The Government's decision to float the USD was supported by many exporters, but the consequences of drastic fluctuations within a short period were not foreseen. The policy requiring immediate conversion of export proceeds does not provide exporters with breathing space. As a solution, exporters can enter into forward exchange contracts with banks to mitigate the risk of margin loss.