A leading exporter has charged that the government had done little, if nothing, to boost the country’s exports.
DSI Samson Group Managing Director Kulatunga Rajapaksa told a recent forum that 2012’s trade deficit was almost equal to total export earnings that year and despite export earnings being on a declining trend as a percentage of GDP, the country’s export sector was struggling in a challenging environment with little support from the government.
After growing nearly 100 percent in 2011, the country’s trade deficit declined by 4.1 percent in 2012 to US$ 9,313 million as at end December from US$ 9,710 million a year earlier. Imports fell 5.8 percent to US$ 19,086.5 million while export earnings fell 7.4 percent to US$ 9,773.5 million.
In January 2013, export earnings fell 18.2 percent year-on-year to US$ 726.7 million.
Export earnings at 30.58 percent of GDP in 2001, declined gradually to 16.44 percent last year.
Rajapaksa listed several impediments to much needed export growth:
"Energy costs are too high. In fact, the rates we pay are the highest in Asia. We have unproductive labour laws. There are too many holidays. Finance costs are high. It is also very unfortunate that budget allocations for research and development are low. General overhead costs are high. We have to maintain two desks to handle EPF and ETF contributions separately. The exchange rate is unrealistic," he said.
Rajapaksa lamented the absence of an effective incentive regime. "The Export Development Rewards Scheme (EDRS) is not operative," he said addressing a seminar on ‘Sustained Economic Growth in the Midst of a Widening Trade Deficit’ organised by the Sri Lanka Economic Association and Organisation of Professional Associations.
Cess collected from the tea, rubber and gem industries which were supposed to be ploughed back to develop those sectors, were diverted to the Treasury instead. "I am sad to say, nothing happened with regards to the cess."
"Anti-dumping laws are not active," Rajapaksa also said.
Charging that the economy was being manipulated ‘just like the stock exchange was manipulated’, where rupees are being sold to buy dollars to finance luxury vehicle imports, Rajapaksa suggested the government pursue a policy of import substitution and import restriction.
Economists at the forum argued against import substitution because creating trade barriers would only hurt Sri Lanka.
They argued that fiscal policy and monetary policy needed to undergo a structural shift so as to create a macroeconomic environment that would be conducive to both exports and FDIs, as heavy borrowings led economic growth could not be sustained for long. Upholding the rule of law was also cited as a critical ingredient.
Senior Economist Prof. A.D.V. de S. Indraratne said the twin deficits of the trading account and budget posed several problems for the economy.
"Always parallel to the current account deficits we experience budget deficits. When the budget deficit increases it increases aggregate demand that leads to increases in imports, if there is no compensating decline in private sector demand. We will not see a perfect correlation between the two in any given year but most current account deficits in the balance of payments are related to fiscal deficits over time.
"How do we meet these deficits? By borrowing or with FDI flows? While FDI has been flows have been low, borrowing has been increasing. Both foreign debt and domestic debt have been falling as a percentage of GDP but their absolute amounts have been rising significantly and our debt burden as measured by the debt service ratio has not been abating. And the implication is that our future exports have to pay for this increasing foreign debt, and hence we need to increase exports to meet these obligations in the future.
"Borrowing that leads to spending on non-tradable goods, result in rising interest rates and rising inflation because both increase aggregate demand. Government spending would crowd out private credit and thereby private investment and on one hand and raise the production costs of exports on the other and make them internationally less competitive," the President of the Sri Lanka Economics Association said.
"Service on the foreign debt must be paid from export earnings. So there are two major remedies: Higher export growth and higher FDI," Prof Indraratne said.
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