Foreign Capital Not a Panacea

Foreign capital does not necessarily spur growth in non-industrialised countries and hence it ought not to be considered a panacea. Non-industrialised countries are better off focussing their energies on domestic reforms. This was the crux of the 57th Anniversary Lecture of the CBSL, delivered by Prof. Raghuram G Rajan, University of Chicago.

Macro-economic theory suggests that the marginal productivity of capital should be high in poor countries that are deprived of capital. Hence, the logic goes, capital should flow from rich to poor countries and - within poor countries - to the most productive of them. Over time, less capital has been flowing to poor countries even though they have improved their financial systems. Foreign capital has not even been flowing to the fastest growing economies; in recent times, the direction has been reversing. Foreign direct investment from private sources does follow the theoretical expectation, admits Prof. Rajan, but a different pattern emerges when one looks at the big picture.

A reason for this anomaly is the limited ability of domestic financial systems in non-industrial countries to effectively absorb and deploy foreign capital. Where financial infrastructure is poor, the ‘development effect’ of capital on growth is diluted or eliminated, postulated Prof. Rajan, who is an Eric J Gleacher Distinguished Professor of Finance.

Basing his findings on empirical data from 1970 to 2004, Prof. Rajan highlighted that the pace of growth in non-industrialised countries is positively correlated with savings rather than with investment. Therefore, in what was probably a message for Sri Lanka, he recommended reliance on financing through domestic savings rather than from foreign capital sources. “Be open without being excessively reliant,” he said.

In fast-growing economies, excessive domestic consumption and dependence on foreign capital leads to currency over-valuation and concomitant lowering of exports. This adversely impacts returns on investment and overall growth. Besides, as country income increases, people spend on low-supply goods, resulting in higher inflation.

Earlier, delivering the inaugural address, Ajith Nivard Cabraal, CBSL Governor, admitted that the country’s per capita income of US$ 1,355 does not reveal the actual situation. The Western Province has a per capita income of US$ 1,900, while the other eight provinces average less than US$ 800. We cannot double per capita income every six to seven years with our own resources, he said. “We need to look at foreign direct investment and borrowings.”

Cabraal emphasised the need to make ourselves, as a country, more marketable. With infrastructure projects worth US$ 5 billion in the pipeline, he urged the gathering of bankers to move forward despite the challenges.

W A Wijewardena, Deputy Governor - CBSL, spoke on Central Banking: Six Decades after John Exter, the first governor of the central bank. The Exter Report presented the case for a central bank in the country. That was at a time when Ceylon was operating under the Currency Board system and the country’s currency was backed by foreign reserves maintained with the Reserve Bank of India.

'Cloning' Credit Cards

Advancements in technology, especially in the financial services industry, and the ease with which cross-border flows of financial transactions can take place have made it easier for criminals - including terrorists - to take advantage of liberalized financial markets and innovative technologies.

Recently, LTTE terrorists successfully perpetrated a massive credit card fraud in London, costing the British public - according to reports - about GBP 100 million by skimming credit cards belonging to the British public. Skimming has been a common technique used to raise funds for terrorists in Algeria, Kashmir and Chechnya, and now it is clear that it is being extensively practiced in the Western world too.

The modus operandi in this case was said to be the ‘cloning’ of credit cards skimmed at petrol sheds in various parts of England by the LTTE to fund its terrorist activities in Sri Lanka. It has been reported that about 200 independently owned petrol stations are under investigation, where LTTE terrorists operating under the guise of petrol shed staff have been involved.

The investigations have also apparently revealed that the credit cards cloned in Britain have been used to obtain funds in Thailand, and some other far-off parts of the world. In that context, it is important to note that such criminal activities could very well be happening in our own countries too, and we may be inadvertently funding terrorism ourselves.

Today, combating terrorism cannot be considered the sole responsibility of single governments or single sets of soldiers who fight at the front at the risk of their lives. We must all get involved in an international effort if we are to defeat this menace.

(Excerpts from keynote address by Ajith Nivard Cabraal, CBSL Governor, at a workshop in Colombo on May 7th 2007)

30 Years of Liberation

July 2007 marks the 30th anniversary of the free market in Sri Lanka.

“The United National Party led by Junius Richard Jayewardene (‘JR’) swept to victory over Sirimavo Bandaranaike's Sri Lanka Freedom Party. With JR’s swearing in as Prime Minister on July 23rd 2007 came liberalisation of the economy. The shackles of a closed, state-controlled economy - which witnessed bread queues and foreign exchange shortages - were broken. JR opened the economy to market forces, to which many credit the subsequent growth - but also greater social divisions. The move also destroyed local industry to some extent.”

- Feizal Samath, Business Editor, The ST Financial Times (STFT)

STFT: Has the open economy brought gains to this country?

AM: Yes… The foreign exchange crisis of the 1970s brought home the message that we are living in an interlinked world. We realised, even before other countries did, the need to set our sails according to the new economic winds that had begun to blow across the globe.

STFT: Would we have done any better under a free market if not for the conflict that broke out in the early 1980s?

AM: Yes… The conflict represents a diversion of productive resources for destructive purposes. These could have been better deployed on infrastructure and social development.

STFT: Assuming there had been no conflict, would Sri Lanka have developed to become a successful state like other thriving Asian economies?

AM: Yes… It is estimated that the conflict has trimmed 2 percentage points off our GDP each year. The compounded effect is that our per capita income would have been at least 60% higher than it currently is. Besides, the 'brain drain' phenomenon wouldn't have been as rapid.

STFT: Has local industry been affected by the free market?

AM: Yes… Economic forces have caused some domestic industries to perform and others to perish. With uncompetitive firms having fallen by the wayside, there have been social costs.

WANTED: ‘One-Stop Shop’

The Industrial Association of Sri Lanka (IASL) and Institute of Policy Studies jointly embarked on a process, last year, to cobble together a National Industrial Policy Framework (NIPF). The consultative exercise collated views of key stakeholders in Sri Lanka - including industry, employees and public authorities. The initiative, funded by World Bank, was completed and the report handed over to President Mahinda Rajapakse, also Chairman of the Economic Council, in March 2007.

Key conclusions of the NIPF:
Overall economic stability is essential for growth
Rural development must come from business linkages, not handouts
Industry requires better access to finance and information
Trade remedies are essential for protection of domestic industries

Final policy recommendations, based thereon:
The government must facilitate, by establishing an umbrella organisation/ one-stop shop for industry
Policy should be a consistent, consultative and transparent
All constraints must be addressed fast, within this framework

Addressing the AGM of IASL this week, Dr Anura Ekanayake, Chairman, spoke of the consultative process that had been followed. He was pleasantly surprised to note the degree of understanding and goodwill that emanated from the trade unions. “They are aware of productivity issues and competitiveness concerns,” he remarked.

Drawing on CBSL statistics, Dr Ekanayake expressed concern at the persistent decline in industrial growth, quarter by quarter. After recording 8.3% during 2005, growth had slipped to 7.2% during 2006; Q1 of 2007 has been a matter for real concern, with growth declining further - to 6%. This trend is particularly worrying because the slowdown is happening “despite the economy benefiting from increasing external and domestic demand for factory products”. Intensified global competition in the apparel industry and deceleration of economic activity in the North & East complete the gloomy picture.

Attempting to examine some of the causes of this trend, Dr Ekanayake spoke of higher and more volatile energy prices. Domestic prices are determined by international markets. The higher prices have had serious repercussions on manufacturing industries across the board. Predictably, these implications have been harsher on industries that are energy intensive.

The sharp rise in administered interest rates has raised financing costs. Due to the lower operating margins that they typically command, the “small and medium sector has suffered more than others,” Dr Ekanayake clarified. The deterioration in exchange rates has affected the competitiveness of domestic industries by increasing their cost of imported inputs.

Local industry was further impeded by delays in implementing infrastructure projects. By end-Q1 2007, only 8% of funds had been deployed, against the 25% that it should – on a pro rata basis – have been. Dr Ekanayake urged Kumara Welgama, Minister of Industrial Development - and Chief Guest at the AGM, to ensure that “expenditure be invested rather than diverted for other purposes”.

Welgama asked members to focus on the broader picture of balanced regional development. He urged industrialists to avail of the concessions offered by the government to invest in remote areas.

Sops for Nissan, Kyron & Amby

The government is pulling out all the stops in a bid to attract foreign automobile majors to assemble cars in Sri Lanka. At least two rounds of discussions were scheduled during the week to iron out certain impediments and improve the feasibility of such a move.

Speaking to The Sunday Times FT, Kumara Welgama, Minister of Industrial Development, highlighted one significant change that would attract the motor industry to invest here…

Foreign manufacturers have already rejected the minimum local value addition norms of 30% that had been stipulated. The local auto ancillary industry is at a nascent stage, they say, and components are not available to that extent. They have sought that the norm be relaxed to 15%, which would make investment worth considering because tyres, batteries and upholstery are available locally.

Indicating a refreshing sense of flexibility, Welgama expresses willingness to concede the concession. He says, “We can gradually increase the local value addition to 30% later”, as ancillary industries develop and grow. Another positive fallout of such a move would be the generation of employment at the assembly units that would be set up.

It is expected that, once that is approved, motor companies would seriously consider biting the bait. There are a few companies that are already lining up to set up assembly lines. These include Nissan Motor Company and some Korean carmakers – including SsangYong, which launched the ‘Kyron’ last year.

Hindustan Motors is also in contention. The company’s most visible product is the Ambassador, which has been ruling Indian roads for generations and is a quaint sight on Indian roads even today. Originally based on the Morris Oxford (UK, 1948), its dependability, spaciousness and comfort factor have made it Indians’ most preferred car for generations.

"Down with Trade Unions!"

Causes of Conflict at Workplace
The root cause of conflict at the workplace, where Trade Unions (TUs) are concerned, is that most of them have political agendas. Neville Joseph, Supreme Court Advocate, elaborated on this and other themes in an interview with The Sunday Times FT last weekend. He indicated that the trend was traceable to a slogan that TUs thrived on: “Down with capitalists! Down with employers!” That was a Marxist concept that permeated into our system, was blindly followed by the workers and has now boomeranged on us.

TUs can carry out a very important function in Sri Lanka, he affirms. They should be social partners whose role is to ensure productivity and enhance workers’ standard of living. However – excepting the Mercantile Union and the Bank Employees’ Union (“the educated lot”) – they have become political stooges of the government. As a consequence, even legitimate rights of workers are subjugated for political reasons, to appease the government.

What to Do When Management Is Unreasonable?
The main weapon that workers have is strike action, confirms Joseph. But, it is only as an ultimate resort that workers should strike work.

Before engaging in strike action, responsible TUs must agitate before the Commissioner of Labour for a settlement. There is a conciliatory process where workers can complain to the Commissioner and ask that the matter be referred to arbitration. While arbitration is going on, workers are working and livelihoods are secured.

Adequacy of Labour Legislation in Sri Lanka
Labour law is the most dynamic area of law in the world today because - unlike civil and criminal legislation - labour law affects the entire society through the working class. Being the ‘living law’, it must necessarily be dynamic, not static.

However, our labour legislation, being over fifty years old, is outmoded, opines Joseph. India has a National Labour Commission (NLC) under the stewardship of a retired Chief Justice. The NLC continuously measures changes in global labour standards, based on which it makes amendments and places them before the government for consideration. Hence, labour legislation in India is brought upto the required standard through amendments that are appropriate for the evolving environment.

An NLC on the footing of the Indian model is imperative. Sri Lanka has many erudite scholars, judges and TU leaders who can serve on the commission and evolve a law that is compatible with the changing circumstances.

The high cost of living is a matter for national debate, but a related aspect is the wage structure... Today, we are faced with a market where the buyer calls the shots. Employers say, ‘Paying Rs 6,000 or Rs 12,000 is not a problem, but will the buyer pay us? Or will we lose the market to China and India?’ A National Wages Commission can play a role by examining the problem holistically; establishing such an agency is the onus of the government. Before doing that, the private sector must improve productivity, says Joseph.

Luminaries Speak On Industrial Relations
Three space travellers aboard a rocket to the moon were explaining the reasons for their voyage:
The American astronaut says, “My country intends to dominate outer space.”
The Russian astronaut says, “My country must compete against the Americans.”
The Sri Lankan trade unionist says, “In my country, full moon days are holidays and – on the moon, every day is a full moon day.”

This joke was narrated at a seminar on ‘Conflict Resolution at the Workplace’ last weekend, to indicate the prevailing work ethic of trade unions in our country. The seminar was organised by Knowledge Agent, a company that offers a suite of training inputs through a faculty that includes professors and professionals.

Sri Lanka has witnessed an unprecedented wave of strikes in the public and plantation sectors recently. These highlight the adversarial nature of the relationship between managements and trade unions (TUs), which is a vestige of the country’s colonial past. In this context, the effective and tactful handling of TUs by employers would contribute towards minimising industrial unrest.

G Weerakoon, retired Commissioner of Labour (1982 – 1994), said that a major problem in dealing with TUs is the multiplicity of unions and their political affiliations. In a country with eight million workers, less than 30% of them are organised into unions. Nevertheless, there are as many as 1,600 TUs in operation. Unlike in South Korea and Japan, very few of these are enterprise-based TUs.

Many unions are controlled by outsiders with political connections and most employers would prefer not to deal with - or even recognise - them. This is perfectly legitimate, avers Weerakoon, because present labour laws do not compel employers to recognise TUs. The amendment to Industrial Disputes Act (No 56 of 1999) merely mandates employers to bargain with a TU having membership strength of at least 40% of the workforce.

After a country has ratified any Convention of International Labour Organisation (ILO), there is an obligation for organisations to comply with it. Sri Lanka has ratified ILO Convention 87 on ‘Freedom of Association and Protection of the Right to Organise’. Sharing information with the workforce helps in building up greater rapport between the two sides, observes Weerakoon. This is typically done through in-house bulletins and newsletters, to avoid disinformation and miscommunication.

In an address peppered with humourous anecdotes, Neville Joseph covered a wide range of issues. He identified two challenges confronting human resource management - to maintain harmonious relations and to have a contented workforce.

Thatcher’s Conservative government implemented labour legislation that curbed TU power. A classic example of the hard negotiation stance adopted was the twelve-month Miners’ Strike in 1984/85 that led to the rout of the union. In countries like Switzerland and Germany, public servants cannot strike. Joseph draws a stark contrast with the situation in Sri Lanka where “all strikes are legal.”

Joseph also narrated the case where the Joint Apparel Association Forum obtained a favourable Supreme Court verdict against the Port Trade Unions.

Themes from the Summit

The Dividends of Peace
US Ambassador Robert Blake quoted Colin Powell when he said, “Capital is a coward. It flees from conflict and unpredictability.”

Giving the example of Northern Ireland, British Ambassador Dominick Chilcott said that – following the outbreak of peace – unemployment had fallen to 4.2% in 2006, lower than the average for Britain as a whole. He said that peace would provide the best opportunity in Sri Lanka.

Indian Ambassador Alok Prasad echoed these sentiments, describing peace as an essential element to restore business confidence.

Clean & Easy Business Climate
In the Business Climate Rankings, Sri Lanka stands 89th on ‘ease of doing business’. Calling for improving the ease of doing business, Dr Nihal Samarappuli, Executive Director (Research), Board of Investment of Sri Lanka, said that prospective foreign investors perceive our business climate as ‘quite average’.

Similarly, Malik Fernando, Director of MJF Holdings – the company that turned a bulk tea business into the Dilmah brand - advised firms to “incorporate integrity and ethics into your business model.”

Potent Trade Agreements
Julian Wilson, Ambassador – European Union, indicated that despite being the only country in Asia to which GSP-Plus had been granted, Sri Lanka is under-utilising the opportunity. Although 98% of exports to Europe were eligible for GSP-Plus, Sri Lanka is availing of the facility for only 40%. The rules of origin issue could possibly be relaxed during the coming year, which should increase the opportunity available.

Prasad made a similar comment when he exhorted manufacturers to tap potential under the FTA. He expressed optimism that the Comprehensive Economic Partnership Agreement (CEPA) would be concluded by the end of this year. The CEPA would introduce shorter negative lists, recognise standards and simplify customs procedures.

Carving Out Your Niche
When Dayasiri Warnakulasooriya, Chairman/ Managing Director, Midaya Ceramics, spoke of the market for designer ceramics – and the potential for manufacturers to work with ‘studio potters’, he was talking niche marketing.

Asoka Hettigoda, Managing Director, Hettigoda Industries, similarly spoke of the opportunity and potential in ayurveda; global trade in herbals has an estimated value of US$ 120 billion.

Fernando advised exporters not to sell cheap and to “always position your product as a premium product.” He emphasized productivity and an entrepreneurial culture when he urged the audience to “break out of the comfort zone that you are in.”

Tertiary Education and ICT
Opportunities in the education and information and communications technology (ICT) sectors were also described as promising. Blake called for permission to be granted for more foreign universities, and partnerships to staff the nascent ICT sector.

Chilcott also spoke of the need for high-performance ICT and remarked at the rising number of students going overseas for education.

Policy Climate and Funding
To attract a sharp increase in private investment – predominantly FDI – that could bridge the technology gap, a more consistent and predictable policy climate is desirable.

Farmers and SMEs located in rural areas have low access to bank funds, which needed to be addressed.

"Growth as a Panacea"

On the sidelines of the Sri Lanka Economic Summit 2007 (SLES-07), Mahen Dayananda, Chairman, The Ceylon Chamber of Commerce, spoke exclusively with The Sunday Times FT. Some excerpts:

Objectives of SLES-07
The main objective is to address the huge mismatch in regional development. The Western Province has a per capita income approaching USD 2,000, which is very impressive. However, the situation is very different in the regions. Moneragala is at USD 600; we cannot justify this disparity any longer.

The main issue that we intend to address is the development of infrastructure, which is so important in addressing imbalance. The more regional imbalances there are, the more the potential for dissatisfaction.

The Western Province is so active and productive because we have much better infrastructure than the regions do. We have the port; the only international airport in the country is 45 minutes from Colombo. We want to come to some affirmative action to address these issues.

Widening growth will address several issues apart from economic development - social issues, most definitely. It can contribute to a rapid settlement of our ethnic problem; with economic prosperity, the people’s mindset changes.

SLES: History and Achievements
There have been five ‘business conventions’ previously. This is only the second economic summit. The significant difference is that we have been upgrading. The main point of departure is the increased number of participating ministers. We are doing this with a chosen partner - the Board of Investment, to add value by encompassing a much wider spectrum.

We are looking at the Indian model where CII (Confederation of Indian Industry) has an annual economic summit that is on a public – private partnership basis. Most leaders relevant to economy participate at the forum: Prime Minister, Finance Minister and Commerce and Industry Minister. That is what we are trying to replicate.

Foreign Investment: Sectors
Foreign investment is definitely required to develop our infrastructure. We most definitely need inputs - not always investment, but foreign technology.

We also need to add value to a number of our commodity exports. Tea and spices are classic examples of where we need to go up the value-addition chain. For that, we need foreign technology, specifically for upgrading quality standards. Today, tea has moved from being a bulk commodity to being an ISO-certified product. That’s no longer enough; we have to be HACCP-certified. All this means investment, technology, and foreign inputs.

On IT and BPO: HSBC, ‘the world’s local bank’, has a BPO facility in Colombo that was entirely driven by foreign input in terms of how it was set up. Similarly, the font of IT in Asia is India, whose input is going to be essential.

To Avoid ‘Talk Shop’ Label
Extensive notes will be maintained by the CCC throughout the summit. We will extricate the important issues that emerge from the deliberations. Having done that, we will prepare a document encompassing them all and present it to the government, who will take it very seriously.

Opening Night: SLES-07

When you’re at the summit, you must be closer to the stars. The Sri Lanka Economic Summit 2007 was no different. The stars were all there, at their brilliant best – Naoko Ishii of World Bank, Richard Vokes of ADB, British High Commissioner Dominick Chilcott, Swiss ambassador Ruth Flint, several members of the diplomatic community, a sprinkling of ministers and a strong delegation from the Confederation of Indian Industry.

At another summit in Heiligendamm, Germany, world leaders were discussing the state of the planet on Wednesday. But – at the Cinnamon Grand – all eyes were riveted on Sri Lanka. It was, as Dhammika Perera, Chairman/ Director General, Board of Investment of Sri Lanka, put it, “the ideal forum for all in the public and private sectors, to pool resources and formulate future strategies”.

Presidential Secretary Lalith Weeratunge delivered a message from President Mahinda Rajapaksa, in which he pointed out that last year’s GDP growth of 7.4% had been the result of careful planning and effective implementation. Even so, he emphasised the need to sustain an average annual growth rate of 8% over the next five years, in order to perceptibly raise living standards.

In sync with the summit’s theme, ‘Spreading the Wings of Development’, Chief Guest Dr Sarath Amunugama, Minister of Enterprise Development & Investment Promotion, stressed the need to develop outlying areas to counter regional imbalances. A focus on infrastructure – roads, power and water – would bring rural areas also into the growth trajectory. Dr Amunugama indicated that, led by the service sector, the Western Province had recorded a growth rate of 12%.

Quoting from a Newsweek article, Dr Amunugama said that India’s middle class of 50 million people would multiply ten-fold by 2012. “Which other island nation can boast of being twenty miles away from the world’s biggest market?” he gloated, indicating that Sri Lanka’s hub status would be a crucial factor during the next decade.

Commending the private sector for being model employers, Dr Amunugama specifically alluded to the positive image that the garment industry had earned by adopting best practices.

Guest Speaker Arun Nanda, Chairman/ Managing Director of Rediffusion DY&R, spoke of the need to brand Sri Lanka for the global market. Such a brand must emanate from the characteristic of its people. A national brand identity could even catalyse renewed patriotism, he opined, in addition to acting as a powerful endorser. Suggesting ‘Gifted Commitment’ as a brand value proposition for Sri Lanka, he said that the country’s cricket team epitomized exactly such a spirit.

Nanda recommended a three-pronged approach to address prevailing negative perceptions. First, restrict our market to South Asia, which is more balanced in its perception of violence. Second, counter-reference the issue – like Ireland did by localizing the plague of terrorism to Belfast. Third, host a major sporting event and “let that experience be your media”.

The summit is being hosted by The Ceylon Chamber of Commerce, in partnership with the Board of Investment of Sri Lanka.

Stopping a Galloping Beast

A good economist is a lot like inflation – difficult to keep down. And Harsha de Silva, Lead Economist, LIRNEasia, was as irrepressible as they come when The Sunday Times FT cornered him on the sidelines of a public event for an exclusive chat.

During de Silva’s presentation earlier, he had highlighted a graph indicating a high correlation between inflation and the Central Bank’s (CBSL) net credit to government. That represents extra money that was printed, he explained, which resulted in inflation.

In Zimbabwe, inflation rockets skyward at the incredible rate of 3,700% per annum. “In such an economy, it is more appropriate to measure inflation by the day,” quips de Silva. While Sri Lanka’s inflation – at 16% - seems tame in comparison, it is still the country’s economic enemy number one.

“Prices have been going up because of irresponsible printing of money by the CBSL,” says de Silva. “Since January, they have stopped printing money because they were forced to.” The good news is that if printing money pushes up inflation, stopping will bring it down as fast. That will happen “if Cabraal and crowd walk the talk”, says de Silva.

Explaining that monetary policy has also been tightened, de Silva says, "There are two things CBSL can do to reduce inflation: stop printing money – which they have done – and increase interest rates – which they are now doing.”

The flip side of the coin is that borrowings are becoming more expensive for corporate entities. “Even the prime lending rate is in excess of 20% - and that can be accessed only by AAA-rated companies like Hayleys and John Keells. Small-timers have to pay 30%-plus.” Doing some crystal ball-gazing, de Silva predicts that interest rates will descend only when inflation declines to 10%.

Aid and Economic Sovereignty

The 1990s were marked by a series of crises that posed a challenge to the international financial and monetary system. These crises made it obvious that international capital flows bring concomitant risks, besides the visible benefits.

The relationship between countries and international financial institutions (IFIs) has more substantial effects on the changing nature of state sovereignty in the developing world. This week, ‘Aid and Sovereignty: Role of International Financial Institutions in Developing Countries’ was the subject of a panel discussion at the Bandaranaike Centre for International Studies.

In the context of globalization, Dr M Ganeshamoorthy, Department of Economics, University of Colombo, described economic sovereignty as “the ability of a state to control its own economy in response to its own needs”.

Dr Ganeshamoorthy provided a litmus test of whether a nation is economically sovereign: “It should keep its own currency; it should trade with whomever it chooses to; it should control imports and exports; and it should regulate its currency to protect against speculation, if necessary.” By that framework, he points out, the introduction of the Euro was not compatible with the principle of economic sovereignty. He describes the tendency of World Bank, IMF and WTO to get increasingly and extensively involved in the domestic economic affairs of its members as a kind of ‘neo-colonialism’.

Prof. Nira Wickramasinghe, Department of International Relations, University of Colombo, delivered a message replete with events from history. She questioned the relevance of IFIs and examined the evolution of their roles. Tracing the history of IFIs, she said, “Since the late 1970s, they have provided loans to support economic reforms – currency, exchange and short-term balance of payment.” That role is being challenged, however, with other countries (like China, for Asia) taking on the mantle of lender and developer.

“Aid budgets are being spent on overpriced consultants instead of on real projects,” Prof. Wickramasinghe said. Providing the example of education in Sri Lanka, she contrasted the ‘so much money pumped in’ resulting in ‘declining levels of knowledge of university entrants’. Taking issue, Harsha de Silva, Lead Economist, LIRNEasia, asked, “If 20,000 teachers are absent on a daily basis, is that the World Bank’s fault?”

In his presentation, de Silva said, “We do not have the right to demand aid. If we are asking for aid, reasonable conditions are neither bad nor wrong.” Highlighting the need for proper post-sanction management of aid, he quipped, “Thereafter, whether I buy BMWs and my citizens starve to death is a separate question.”

De Silva pointed out that IMF has clearly indicated that its aid is conditional and is granted “provided that the country is implementing an adequate programme of policy adjustments” (2002).

Turning the mirror inward, de Silva said, “The only available option to protect the sovereignty of our country is for the state to borrow less and let private investments flow in… When foreign direct investment comes, you get advanced technology also,” which is not necessarily the case when you get aid.

The Spice Route to Profits

Feedback: "Well done! It is a fantastic article." - Sarada de Silva, Chairman of The Spice Council

Upali Kodikara of Small Growers’ Spice Society was wearing a broad smile. We were on his eight-acre farm near Kandy, the heart of Sri Lanka’s ‘spice country’. The 1,000 Kgs of spices that Kodikara had sold since July 2006 had been grown organically, using no chemical fertilizers whatsoever. Kodikara’s obvious delight, we soon realized, was not entirely because of The Sunday Times FT’s presence at his farm. It stemmed more from the e-mail printout that he was brandishing like a trophy.

Kodikara had just received the e-mail from a Malaysian buyer. In a nutshell, the mail was an order for 2,000 kilograms of cloves at US$ 8 (Rs 880) per Kg. This was incredible! The last order had fetched an FoB price of only US$ 5 (Rs 550) per Kg. And local traders were offering just Rs 240 per Kg for cloves.

One of the reasons why producers like Kodikara are realizing better prices is that “demand for spices is picking up worldwide”, explains Sarada de Silva, Chairman of The Spice Council, the apex body to develop the spice industry. “However, credit also goes to other stakeholders involved in the industry - The Spice Council, SAPPTA, the DEA and the EDB. Producers and exporters from the private sector have also played a role in earning more foreign exchange for the country,” he adds...


The main spices grown in the country are cinnamon, black and white pepper, cloves and nutmeg. The soil and climate have resulted in superior intrinsic qualities like pungency, aroma, taste, oil and oleo-resin in Sri Lankan spices - compared to other countries’ spices.

However, we stack up rather poorly on productivity parameters. Take pepper, for instance: Malaysian farms yield 3,000 Kgs per hectare, whereas the Sri Lankan average is less than 500 Kgs per hectare. “Our farmers are accustomed to looking at unit price per kilogram, instead of yield per hectare”, explains de Silva, while confirming that there is potential to double this with better agronomic practices.

Cinnamon: Shortage of Peelers
Cinnamon is the major spice of Sri Lanka, accounting for almost 60% of the island’s spice exports. More than 90% of the island’s produce is exported. We have two fundamental problems: quantity and quality. Besides, margins are comparatively low, due to the high cost of peeling, fertilizer and weeding – one can barely expect a 25% margin on a well-maintained estate.

De Silva comments, “We don’t have adequate production to meet current demand; the export market can easily absorb an additional 4,000 to 5,000 metric tons – even more, if available in better qualities. We can sell ‘Grade C-5 Special Alba’ and similar grades to Mexico, where demand is the highest, at US$ 7 to 10 per Kg.”

“However, peeling is a highly skilled job and we are facing an acute shortage of peelers. If not for that, we could increase output by 3,000 to 5,000 tons in one year - as most estates are not harvesting twice a year” says de Silva. He goes on to describe tea-pluckers, rubber-tappers and cinnamon-peelers as being treated the worst of all the social strata. This is one of the main reasons for this depletion – and needs to be changed.

Pepper: Opportunity Lost
Koswana, Matale: T D Karunasena was in his twenties when his parents started pepper cultivation in 1972. The solar dryer that he has recently installed enables him to dry pepper in two days instead of four. He does not need to watch the skies for rain or keep animals away. This provides him more quality time to spend with his children than his parents could ever afford to spend with him.

Today, Karunasena is president of the Koswana Gamunu Farmers’ Organisation in Matale. He gestures towards his tractor and van as assets that he has acquired as a consequence of better prices for his produce. “Pepper pays,” he says quietly. His cost of production is Rs 60 per Kg, and the selling price is almost Rs 400 per Kg. During the past year, he has dried and sold nearly 1,500 Kgs, a quantity that would have been inconceivable before he acquired his solar dryer.

Light pepper berries, typically harvested in four months, have maximum oleo-resin content. Buyers are therefore willing to pay a slightly better price - 5 to 10% more per Kg. Producers seem to ignore the fact that, had they waited a couple of months more, the berries would have become ‘heavy’ and increased in weight by about 50%. Here, time is money - quite literally - and the DEA is trying to get this message across.

“We are not producing enough heavy pepper berries. By harvesting light berries earlier – and exporting them to India, our producers lose value addition,” explains de Silva. India extracts and exports the oil and oleo-resins all over the world as ‘Ceylon pepper’, which has a piperin content of 13% - the highest in the world. (Piperin is what gives pepper its strength and pungency).

Cloves: Infinite Potential
Cloves have excellent long-term potential; de Silva describes demand as “extremely high”. In his opinion, the DEA has been soft-pedalling cloves because it takes seven to ten years for the tree to ‘come into production’. Moreover, prices tend to drop when the harvest comes in. The financially weak farmers sell their produce to traders who have the wherewithal to buy them out.

Nutmeg: Killing the Goose
A similar loss of opportunity takes place in the case of nutmeg, which triples in weight when allowed to mature. This would have enabled the farmer to earn three times the money. To compound matters, the per-kilogram market price for immature nutmeg (say Rs 200) is also lower than the price for mature nutmeg (say Rs 280). Spice exporters like PODIE and Biofoods have been at the forefront of the awareness-building exercise. They advise the farmer not to sell immature produce but to wait and get the higher prices that these exporters are willing to pay (say Rs 360).

Just 5% of Sri Lanka’s spice exports are in nutmeg, which is typically grown in home gardens. Farmers sell immature nutmeg due to the desperate need for hard cash. Another reason for selling early is that thieving is a major issue in producing areas and growers need to harvest before thieves do!

Drying: Changing Times
One universal problem that the industry faces is the drying process. A moisture content of 12% is well accepted for dried products. All these years, farmers have traditionally dried their produce in the open. Spices are dried virtually anywhere – on roads and on cement floors, where dogs sleep and chickens scratch for food. Such open drying gives incompletely dried spices that are of inferior and inconsistent quality, often contaminated with germs due to mould infection.

Shireen Samarasuriya, the National Coordinator for UNDP’s Global Environment Facility/ Small Grants Programme (GEF/ SGP), says, “Drying pepper on the roadside is unsanitary; correct drying is very important. With solar dryers, quality is good; the colour and smell are preserved; exporters like this quality. We have not really had a good dryer until now.”

Things have been changing ever since the Department of Export Agriculture (DEA) started advising farmers on how to improve the quality of their produce. A solar dryer designed by the University of Ruhuna made it possible to dry spices even during harvesting seasons that coincide with the monsoons. Through a process of experimental trials, they have designed what is arguably the best dryer in the country.

The Saviru renewable energy project is an endeavour to introduce solar drying technology to produce high quality spices. Explaining the background, Kapila Weeratunga Arachchi of UNDP-funded AfATE (Alliance for Appropriate Technology Exchange) says: “We had to introduce technology that is appropriate – what the farmer can afford, handle and understand.” The drying process was researched and the equipment was designed and developed.

Generation 1: The Tunnel Dryer
Arachchi, who was conducting research on solar and other methods of drying, had to find implementation funding. In response to UNDP GEF/ SGP’s call, he wrote a proposal linking renewable energy with rural economic development. GEF/SGP accepted his proposal for the drying experiment - and the rest, as the cliché goes, is history.

The SAVIRU solar tunnel dryer is made partly of fibre-glass and typically measures 24 ft long by 3 ft wide. To achieve the optimum temperature of 60 degrees Celsius, two small fans blow air through the tunnel. A separate bin dryer is provided for final drying that is especially useful during wet weather. The price (which started at Rs 28,000) has escalated to Rs 37,000 over the past two years.

Passing the Versatility Test
Until 2004, S J Gunasekara used to work in Anuradhapura, for an insurance company. After opting for voluntary retirement, he returned to his ancestral home in Galekoluwa. There, he learnt the spice trade from his father, who had been in the business for twenty years.

Having adopted scientific practices, Gunasekara says, “Buyers can easily spot the difference between solar dried and open-dried spices by the cleanliness. They are willing to pay a premium of at least Rs 15 to 20 per Kg. Besides, there is less wastage.” Enquiries reveal that wastage is 2 to 5% - against 20% otherwise. “Even if it rains, there is no problem,” Gunasekara says.

While endorsing the efficacy of solar dryers, The Spice Council indicates that it is ideal for small producers’ cloves and pepper because the volumes are small. The Sunday Times FT has spoken to farmers who have adapted the technology for dry chillies, bitter gourd, coconut, jackfruit and breadfruit. Test results on microbial quality by the SGS Laboratories show that quality will pass for spice shipments even to European countries.

The Quality Conundrum
Selling of high-quality spices to buyers paying higher prices would improve farmers’ incomes substantially. But poor quality leads to low-priced markets, a vicious cycle that needed to be broken. The market willingly acknowledges the better quality of solar dried spices, but has not been willing to pay the premium. “This was a typical chicken-and-egg problem,” says Arachchi. “Spice farmers were selling at prices dictated by the buyer. The spice industry wanted to improve quality but the trade just wasn’t ready to pay a premium…”

By improving the quality of spices, small-scale producers at the village level are now earning prices that are significantly higher than prevailing rural market prices. In an experiment lasting three years, two farmers of Dagonna in Gampaha district earned an extra income of Rs 225,000 on about 6 tons of spices.

Atomised Farmers Suffer
75-80% of spice production comes from farmers who cultivate small plots measuring less than two acres. These ‘atomised’ farmers have little bargaining power. Farmers have only recently been organized into village-level organizations to facilitate marketing. The Spice Council/ DEA have a model to encourage these villagers to collectivise themselves for better bargaining.

People’s Organisation for Development – Import and Export (PODIE) is an NGO buyer in the business of processing and exporting value-added spice products to Europe. It has the reputation of offering prices that are almost twice as much as the village market offers. They also work with small farmer groups like the Koswana Gamunu Farmers’ Organisation. Karunasena recalls how he supplied white pepper to PODIE and earned Rs 200 per Kg at a time when the rural buyer’s best offer was Rs 130.

The closer links that have been created between farmers and buyers have also facilitated more efficient marketing.

More Value Addition, Please!
De Silva speaks of the need to encourage farmers and others to move up the value chain. “That would insulate us from price fluctuations in the world market,” he points out. “Grinding is the natural value addition,” he says. Then, there could be essential oils, oleo-resins, mixes and formulations. Why, we could even consider house brands for Wal-Mart!”

Generation 2: Saviru Jeewa Dryer
The Saviru Jeewa Dryer has been developed and patented by AfATE. It consists of a drying cabinet that holds lots of 3 foot by 2 foot trays. A fan circulates air through the cabinet to enhance the drying process. The dryer includes an external hot air generator, heated by a compact downdraft burner that burns gliricidia wood – an abundant local fuel resource. Interestingly, the gliricidia tree is used as a support for pepper vines and its leaf is useful for goat fodder and mulching.

In 2006, Sri Lanka showcased this technology at the International Pepper Community, the largest international gathering of pepper-producing and -consuming countries.

The Spice Council is developing a model Spice Processing Center in Galekoluwa, Matale, to demonstrate good manufacturing practices. A 450-Kg Saviru Jeewa dryer has already been installed there. This has been assisted by The Competitiveness Program of USAID.

Farmers in Kandy, Matale and Gampaha have been given subsidies by UNDP’s GEF/ SGP scheme. They have also been taught to access the market. Of the UNDP’s contribution, Samarasuriya says, “We are trying to address the issue of how to use solar dryers in the spice industry.”

The Government Can Help
With this new-found awareness, the spice industry has been seeing a revival of interest in Sri Lanka lately. Much, however, remains to be done, and all eyes seem to be focused on the government. Samarasuriya says, “We can only show the way. Others - like the government - must get something going on a commercial scale. We have our hands full with 115 different projects at various stages of progress.”

De Silva points out that there is very little investment by the government in comparison to the export earnings. The potential of the sector could grow exponentially if we could add value and increase productivity. “Though the DEA has 900 employees, its research and extension services divisions are short-staffed and need further strengthening.”

“Our spice exports were on par with India’s in 1984,” says de Silva. Then the Indian Government made huge investments: They subsidized new processing and grinding plants; they supplied electricity at subsidized rates; they provided easy financing for extraction units. Today, they are number one in the world oleo-resin industry.”

Balanced Duet: Maldive Fish..!

Mohammed Jaleel, the Maldives’ Minister for Economic Development and Trade, spoke to The Sunday Times FT on the sidelines of the inaugural meeting of the Sri Lanka – Maldives Bilateral Business Council.

“Presently, we import a large proportion of our requirement of vegetables, meats and fruits from Sri Lanka. However, we also import our requirement of high value-added food products from Australia, Europe and Singapore,” Jaleel said. The challenge, according to him, lies in identifying those areas of the supply chain where the Maldives and Sri Lanka can work together to increase trade.

This would not necessarily tilt the balance of trade - already in favour of Sri Lanka – further “if these are joint ventures“, opines Jaleel. Besides, “We are also looking to increase our exports, mainly of fish and fish products, to Sri Lanka,” says Jaleel. “There’s plenty more that Sri Lankans can take.” Maldive fish already constitutes 72% by value of the Maldives’ export basket to Sri Lanka.

Trade barriers seem to be a bigger concern for Jaleel: “We have issues about putting certain items on a sensitive list. For small countries like ourselves, it’s no good for either.”

“The way forward is to have a reciprocal dialogue to eliminate trade-distorting tariff barriers in a time-bound manner,” says Jaleel, “We can then work together on creating trade-enhancing measures… In any case, we are all bound by SAARC and SAFTA rules on eliminating trade tariffs within a particular period.”

J Kehelpannala, the newly-elected President of the Executive Committee, is Executive Vice President at John Keells Holdings. In his opinion, there has been a lot of investment made by Sri Lanka in the Maldives – which ought to be reciprocated. “We should also look at new initiatives in other areas,” he said.

Biggies Green; SMEs Amber

Surrounded by rocky outcrops, lakes and forests, Kandalama is home to a variety of indigenous species of birds and wildlife. It occupies a unique place in the cultural heartland, flanked by two world heritage sites - the 1st century BC Dambulla temple and the 5th century AD Sigiriya fortress. Kandalama Hotel is the first hotel in the world to be awarded the prestigious ‘LEEDS Green Building Certification’.

Prema Cooray has been Secretary General/ CEO of The Ceylon Chamber of Commerce for some time now. However - especially with the development of Kandalama Hotel - his reputation as the pioneer in developing eco-friendly tourism in Sri Lanka precedes him. Therefore, when he addressed The World Conservation Union (IUCN) last week, one was compelled to sit up and take notice.

“Many large companies today are committed to striking a balance between the planet, the people and the profits,” Cooray revealed. He dispelled the perception that the private sector is interested solely in the financial bottom line. “Companies are convinced that investment in environmental conservation provides for the survival of mankind in the long term, while yielding economic benefits to the organisation,” he said.

There is, however, some ambiguity about whether the SME (small and medium enterprises) sector has taken this concept seriously. Cooray appeared to condone their lukewarm approach when he said, “Their problems are so many – financial, technical, marketing… It’s a tough world that they are living in.”

To rectify this situation, the IUCN is involved in a programme where they enable the SME sector to have a greater sense of commitment towards the environment. One of the IUCN’s focus areas is to ensure that Sri Lanka’s business community incorporates environmental concerns into its operating and decision-making practices.

One obstacle is that the benefits of investing in the environment are not easily measurable, Cooray pointed out. IBM has done a comprehensive exercise in this area; their CSR Annual Report 2005 evaluates their investment in the environment against the benefits that accrue. The company says that, over a period of time, the ratio of savings to expenditure will be 2.5 to 1.

Sri Lankan companies, on the other hand, have not done such a detailed analysis in terms of cost versus benefit. There have been isolated attempts at evaluating certain investments – such as: What would we save in electricity charges by investing in alternate energy like biomass?

They appear to be bent on competing with each other by revealing more and more of activities in corporate social responsibility (CSR), suggests Cooray. Most annual reports of companies devote a substantial number of pages to CSR, of which the segment on environment takes pride of place.

Cooray observed that many companies in the hotel sector have gone green. In his own experience, the Kandalama Hotel was able to command a price premium over the competition. This is visible in the marketplace and also in the profits the hotel has generated over the years.

Who Will Bell The Cat?

M B S Fernando, Chairman of the Road Development Authority (RDA), has views that are somewhat radical but certainly worthy of consideration. Talking to The Sunday Times FT last week, he said, “To solve our transportation problem, we need to invest on public transport systems instead.”

The occupancy of an average car plying on the roads is only 1.3 passengers. A bus built for forty, however, carries one hundred commuters. Fernando points out that this represents uneconomical utilization of available road space – and leads to traffic congestion. The problem is that we are not paying adequate attention to improving public transport and infrastructure.

Who will foot the bill? Fernando proposes that the money be raised from private car owners. “We import 400 million litres of petrol,” he says, “most of which is consumed by car owners... Charge higher prices for petrol and invest the extra proceeds in public transport.”

If we were to increase the price of petrol by Rs 100 per litre, Fernando suggests, that could generate Rs 40 billion. Even with lower demand, we would generate Rs 20 billion to invest in state-of-the-art buses and trains, which are clean and run according to timetables.

The only reason why such a price increase would not be popular is because chairmen of corporations and heads of departments decide policy. These are the very persons who enjoy free cars and petrol as a perquisite! But Fernando has a sugar-coated solution for that too…

It costs Rs 75,000 per month to maintain a car for a public servant. Instead, Fernando suggests that Rs 50,000 be added to his salary in lieu of the perquisite. If the public servant uses public transport, he will still be able to save Rs 35,000. Any takers?

Stalls, Seminars & Positive Buzz

“Construction is the main driver of infrastructure development,” declares Dakshitha Thalagodapitiya, the amiable CEO of the Chamber of Construction Industry (CCI). Being the apex body of the construction industry, the chamber boasts of more than 250 corporate members. Thalagodapitiya was addressing a press conference this week in connection with EXCON 2007, the annual trade fair of the CCI.

EXCON 2007 is being held at the BMICH from May 11th to 13th. The purpose of the exhibition is twofold - to build capacities in the industry and to enhance its competitiveness. EXCON 2007 will unite and enlighten all principal stakeholders, including a large number of construction service providers. There will be 200 exhibition stalls.

The SME sector, accounting for more than 80% of the industry, is being encouraged to form consortiums, establish joint ventures and seek opportunities through mergers.

The CCI is working with the Export Development Board (EDB) to also groom larger companies to undertake overseas projects and to export professional services. At its Export Readiness Clinic, the EDB will demonstrate a software tool that can assess the readiness of prospective exporters. There will also be a seminar that provides pointers to Sri Lankan companies intending to go global.

The principal sponsor of the trade fair is Metso Minerals of New Zealand. Its exhibit - manufactured sand - is expected to be much sought after, being superior to river sand. Metso Minerals’ local representative, Altaf Halil, confirmed that manufactured sand has no impurities and can therefore help achieve greater strength using less cement. Besides, manufactured sand costs less than Rs 4,000 per cube, whereas the price of river sand has increased to almost 7,000 per cube lately. This price increase has been accentuated by the restrictions on mining of river sand.

There are other stalls that help in improving quality of construction while keeping costs down. Practical Action, a British NGO, will be introducing a new and cost-effective construction technology at the trade fair. Their local arm will also conduct a seminar on reducing construction costs.

Holcim Lanka Ltd, EXCON 2007’s strategic partner, will be launching application-based cement called ‘Holcim Piyasa’ at the fair. This is a special mix that will be priced less than normal cement and is targeted for the rural housing market. The company’s representative, Indika Jayaweera says, “We have different cements for different applications.” He describes Holcim Lanka as the only integrated manufacturer of cement in Sri Lanka.

Talking of the hurdles confronting the industry, Thalagodapitiya highlights the shortage of construction labour. He indicates that this is being addressed through a plan to train one lakh craftsmen in four years.

The exhibition will cost Rs 7 million, which is being met by its sponsors. ”Admission is free and we expect that 80,000 people will attend,” concludes Thalagodapitiya. Sponsors include Harris Ceylon Ltd, GTB Colombo Corporation, Road Development Authority, Sri Lanka Ports Authority, Board of Investment, Sri Lanka Insurance and State Mortgage & Investment Bank.

The Economy According To CBSL

• Broad-Based Economic Growth Of 7.4%: Per Capita Income $ 1,355
• Services Has No ‘Natural Limitations’, Will Be Engine of Growth
• Need To Accelerate Infrastructure Development Programme

The Central Bank Annual Report is prepared primarily to fulfill a legal obligation of the Central Bank of Sri Lanka (CBSL). However, over the years, this report has gained in importance and now serves the needs of a broad spectrum of readers. Last week, the ‘State of the Economy’, as dealt with in Part 1 of the 2006 Report, was the subject of a public lecture by Dr P Nandalal Weerasinghe, Director of Economic Research at CBSL.

First, the statistics… During 2006, Sri Lanka’s economy grew by 7.4%, the highest since 1978. In the process, the country’s per capita income rose to US$ 1,355. Unemployment dropped to 6.5%, the lowest level ever. Dr Weerasinghe pointed out that what is commendable about all these accomplishments is that they were achieved amidst several challenges. Some such impediments were high oil prices, an escalation in terrorist activity and counter-terrorism measures, and natural disasters.

Growth was broad-based too - with the services sector growing by 8.3%, industry by 7.2% and agriculture by 4.7%. Dr Weerasinghe, describing the services sector as “the driving force in the economy”, said that the country is poised to become a service-oriented economy.

Explaining the higher growth of the services sector, H N Thenuwara, Assistant Governor, CBSL said,”There are natural limitations in agriculture and industry because they occupy physical space. Besides, our competitive advantage has always been in services.”

The industrial sector needed “to transform itself into a globally competitive, dynamic and technologically sophisticated sector”, said Dr Weerasinghe. He called for further diversification into value-added apparel, minerals, gems & jewellery and industrial goods.

To enhance productivity in the agricultural sector, Dr Weerasinghe suggested adopting consistent trade policies and making rural financing available.

“The external sector also continued to expand, supported by strong global growth and preferential access through bilateral and multilateral trade agreements,” said Dr Weerasinghe.

On the failures side, Dr Weerasinghe said that monetary policy during 2006 was aimed at reducing demand-driven inflationary pressures. The CBSL raised policy interest rates by 125 basis points during 2006 – and a further 50 basis points in 2007. The bank also absorbed excess liquidity through Open Market Operations. However, it was a situation of too little, too late.

Dr Weerasinghe listed four “fundamental forces of productivity improvement” - infrastructure development, technological improvement, human capital development and research & development.

Speaking to the Financial Times later, Thenuwara stressed the need to activate the infrastructure development programme. “The Government has committed financing for the implementation of planned major infrastructure projects“, he said. “Making this available within the stipulated period is a prerequisite to achieving higher growth. Besides, emerging infrastructure requirements need to be financed through public-private partnerships.”

Talking of the need to increase productivity, Thenuwara said that significant improvement in operations of state-owned enterprises is critical.

UNESCAP's Flagship Report

At a simultaneous world-wide event on Wednesday, UNESCAP launched the 'Economic and Social Survey of Asia and the Pacific 2007'. The 59 th edition of the organisation's flagship publication is a comprehensive and extremely readable 190-page report.

In his welcome address at the Colombo launch, Abu Selim, UNDP's Country Director, said the publication would be useful as a policy guide for each individual country. This is because the report considers both the economic and social sides of the development coin.

The impressive 7.9% growth in the Asia-Pacific region's developing economies during 2006 represents one third of worldwide growth. "Despite this encouraging trend," Selim cautioned, "there is no room for complacency." Caught up in the obsession with growth, countries have been tending to overlook the need for poverty alleviation.

Presenting the report, Dr Muhammad Hussain Malik, Economic Affairs Officer at UNESACAP Bangkok, pointed out that the Asia-Pacific region is becoming the engine of global growth. The 2007 outlook for the region is characterized by continuing dynamism, he said. This optimism is despite the slowing US economy and a decline in global electronics demand. Dr Malik described the performance of South Asian economies as "impressive".

The likely global slowdown in 2007 would cast its shadow on Sri Lanka's GDP growth rate, which is expected to decline to 7% this year, predicts Dr Malik. In addition, with inflation ruling at an unacceptably high level, the government could resort to measures that would lead to demand contraction.

"The reform process needs to be maintained, to sustain high growth", urges Dr Malik, while calling for higher spending on rural infrastructure in South Asia. The incidence of poverty in the region is higher in rural than in urban areas. The challenge confronting governments, therefore, is to ensure growth that is inclusive and broad based, he points out. A rupee spent on roads has seven times as much impact on poverty alleviation as a rupee spent on specific anti-poverty programmes.

The UNESCAP report has a chapter on gender discrimination. The annual economic cost of low participation of women in the labour force has been estimated at $ 42 – 47 billion. Dr Malik believes that the drive for a more equitable gender balance would consume little effort and cost, if only there is strong political commitment. In the World Economic Forum's 'Gender Equality Index', Sri Lanka is ranked 13th – out of more than 100 countries assessed. The other South Asian nations languish among the bottom 25.

Dr Saman Kelegama, Executive Director at the Institute of Policy Studies, spoke about Sri Lanka's economy. The Asian buoyancy has contributed one percentage point to the country's growth rate of 7.4%, he suggested. He also said that the country has adequate foreign exchange reserves for three months' imports. Dr Kelegama strikes a note of caution while drawing attention to the budget deficit during 2006. At 8.4% of GDP, this was among the highest in South Asia, "partly as a result of higher military spending."

Single-Digit Inflation?

Sooner Than You Think!

Over the past year, prices – as measured by the Colombo Consumers’ Price Index (CCPI) - have increased by 19.5%. Against this backdrop, the words of Leon Henderson, the American economist, sound ominous. He said, “Inflation is like pregnancy. If you don’t do something about it quickly, it costs you twice as much.”

So, the Central Bank of Sri Lanka (CBSL) has been doing something about it quickly… On the sidelines of a public lecture on Thursday, H N Thenuwara, CBSL’s Assistant Governor, explained: “The very tight monetary policy that we are now adopting will have an impact on future inflation.”

With the CBSL having met reserve money targets during Q1 of 2007, prices have actually come down during this period! This fact has not been reflected in headline inflation numbers, which are typically reported on an annual point-to-point basis.

The removal of the oil subsidy last year resulted in a one-off increase in the administered price of petroleum products. Largely due to this bold decision and consequent trickle-down effects, inflation for the three months March to June 2006 stood at a whopping 12.4%.

“Removal of the oil subsidy helped bring down the budget deficit and was a favourable monetary policy measure in the medium- to long-term”, explains Dr P Nandalal Weerasinghe, Director of Economic Research at CBSL. The subsidy cost the exchequer Rs 23 billion during 2005 and Rs 9 billion during 2006. Weerasinghe also expects that CBSL’s monitoring mechanisms will help reduce inflation to a desirable, single-digit level by end 2007.

With the statistical blip caused by the subsidy removal being factored out by June 2007, analysts are predicting a gradual decline in reported inflation data. Indications are that, barring unforeseen circumstances, inflation will tend towards 10% by June itself.

Rubber: Bouncing Back

Mawanella, nestling in the foothills near Kandy: A group of about 75 men and women stand around a vacant pit. With the exception of one man who is preaching with passion, the group is quiet, their eyes focused on the object being lowered into the two foot square pit. These people brave the midday sun and listen in rapt attention to the sermon being delivered by the missionary. The scene could easily be misconstrued as one of death and burial…

But reality is quite the opposite. What is taking place here symbolises a rebirth, the renaissance of the country’s rubber industry. The ‘preacher’ is Dr Anura Dissanayake, Head of Advisory Services in the Rubber Research Institute of Sri Lanka (RRI) and a grassroots activist. In accordance with the RRI’s focus on small- and medium-sized estates (less than 50 acres), he is teaching a group of rubber farmers the correct way to plant saplings!

Output and Prices Rising – and How!
The RRI’s dedicated band of officers provides the entire gamut of improvement methods, through a mix of classroom coaching programmes and practical skill-enhancement sessions. From scientific planting to disease control, and from fertilizer application to rain-guard fixing... They even impart training on how to manufacture rubber sheets from latex.

The Central Bank of Sri Lanka’s Annual Report 2005 acknowledges that it is precisely these practices that have resulted in increasing the country’s rubber output. Sri Lanka’s rubber production has increased for the fifth year in succession and now exceeds 100 million Kilograms per year. (This puts the country in the 9th position worldwide.) Domestic industries utilize about 70% of Sri Lanka’s rubber output. The remainder is exported and has earns the country more than US$ 400 million in foreign exchange annually.

Increased tapping has been one reason for the increase in output. Under normal circumstances, the tapper does not extract latex on rainy days, which curtails his productive days to 110 per annum, 30 days being lost due to rain. With the introduction of a simple protective device called a ‘rain-guard’, his productivity goes up to 140 days, resulting in the yield increasing by 27%!

The proper application of fertilizer has also seen phenomenal results, with mature rubber plantations yielding 20% more latex than they did without fertilizer. These results have been further magnified by extending plantations to non-traditional areas, thus increasing the acreage under cultivation.

During 2004-05, Dr Dissanayake was Chairman of the Thurasaviya Fund (under the Ministry of Plantation Industries). In that capacity, he imported milling machines that could produce 500 rubber sheets per hour. He also introduced subsidies for fertilizers and rain guard fixing.

The Economic Raison d'Être
At the recent biweekly Colombo auction, rubber – in ribbed sheets form - was traded at Rs 215 per Kilogram (Kg.). The typical farmer would get about Rs 200 per Kg, with the middleman pocketing the rest. That's not a bad deal, considering that the farmer’s cost of production is just Rs 90 per Kg – including expenses on fertilizer, upkeep, weeding, tapping and processing.

Rubber trees have a productive life of thirty years; however, it takes nearly six years, after they are planted, for them to start yielding latex. Although hilly-and-rocky terrain can support either tea or rubber, the latter is comparatively more hassle-free. With rubber prices at current levels, rubber’s profitability per unit of land area is also higher. Industry-watchers predict that prices can only get better in future.

Times sure have changed: In the late 1990s, the price of rubber plummeted to Rs 40 per Kg. Many planters underwent severe losses and sold out. But with the price having crept up to Rs 130 per Kg. (average: 2004) and then to Rs 150 per Kg. (2005), planters who stayed the course are laughing all the way to the bank.

One of the reasons for higher prices is that international demand has increased, driven primarily by China’s insatiable appetite for rubber, to produce tyres and toys. Domestic demand has also been on the upswing, in tandem with the expansion of rubber-based industries.

Addressing Residual Concerns
Rubber plantations commenced in Sri Lanka in 1876, with plants from Brazil. The local manufacturing industry emerged much later, in the 1950s. Two years ago, realizing the need to conserve soil and moisture, the RRI introduced ‘mukuna bractiyata’, a horizontal creeper with a spreading root. This plant enriches the soil by supplying nutrients. In addition, the RRI has also focused attention on eradicating the dreaded white root disease.

When one considers the three sets of activities – i.e. agricultural operations, tapping and processing - tapping requires the most skill. The labour force for tapping is skewed 60: 40 in favour of women. Even in the rubber industry, labour has been a problem; the younger generation has been moving away in droves, to join security firms and the garment industry.

The RRI has been encouraging the youth to join as tappers by addressing the socio-economic dimensions of the problem. With the help of systematic, two-week-long training courses, they are targeting 2,000 new tappers in the next year. They will be certified and designated as ‘LEOs’: Latex Exploitation Officers!