Sri Lanka must move from politics to busines

Thursday, 17 August 2017

Last week, the Yahapalana Government, which came on the promise

of good governance and weeding out corruption, had its first blow, when a senior
minister and deputy leader of the party had to resign over allegations of
corruption.
Whilst the share of voice on media was very high, research insights revealed the
fundamentals of the country was facing more severe challenges. In fact, these
issues must be addressed as a priority than the country focusing on the
governance issues, is the view of the private sector that is responsible for paying
salaries of people and giving them a livelihood.

Sri Lanka must become a $ 100 billion economy from the current $ 83 b
economy 3.8% growth

The overall GDP growth registered a 3.8% growth in the backdrop of a severe
drought in fourteen districts and the health issues related to dengue reducing the
productivity levels of the people, but the fact of the matter is that island nations
must grow by 5-6% if the people must feel it in their daily lives.

Whilst we can be positive, Sri Lanka is going through some rough times and we
must accept that the economy has slowed down. The issue is to find out if it is
due to the macro economy or is it due to the inefficiency of the system. The
private sector agitation is that that government machinery is moving too slow and
it was not what was expected by the people when the new Government was
voted in on 8 January, 2015. In addition to that, when corruption issues keep
surfacing, resulting in a high share of voice leading to resignations from the
hierarchy and governance, issues like the cocaine discovery in government
warehousing tends to point the finger to the root cause which does not augur
well for the country.

The last three quarters performance as per the Department of Statistics: the
agriculture GDP numbers have declined by -2%, -8.4% and -3.2% respectively.
Whilst this can be attributable to the adverse weather, the service sector which
accounts for almost two thirds of the economy also depicting the negative trend
is worrying. To be specific, a 4.8% GDP growth in Q3 2016 to 4.6% growth in Q4
2016 and this year to 3.5% in Q1 2017 means the service sector economy is
contracting. Rather than the higher share of voice and high share of media on
issues like corruption its time that Sri Lanka focus on correcting these issues
which will alter the fundamental that lead to stronger business growth is the
private sector view. End of the day almost 70% of the economy is driven by the
private sector and if we move the economy from $ 83 billion to $ 100 billion by
end 2017 we have to listen to the deeper vibes of the private sector.

Key issues

If one does a deep dive on these numbers at a household level, the real burning
issues emerge. The overall consumption of the FMCG industry at a household
level has declined by -3.1% in Q1 to -2.5% in Q2, 2017 as per the latest report by
AC Nielsen. What this means is that either people are moving out of the category
or they are reducing the usage of product. I guess at a micro level a company can
study by way of a gains and loss analysis and thereby get a better insight to
consumer behaviour at the ground end. But the fact remains that inflationary
pressure is driving a behavioural change. In this backdrop, the planned provincial
council elections will not be positive to the government in power. We must also
note that all basic staple foods like rice, sugar, lentils, cowpea, sprats are all being
imported into the country hence the depreciation of the exchange rate tends to
have an impact on the price and there by the consumer selling price. This further
aggravates the quality of life of the lower of the pyramid which is almost 40% of
Sri Lankas population. These are the issues that need to be focused on by
policymakers, is the cry from the housewives of Sri Lanka. The policy some years
back was to change the tax structure so that the cost of a plate of food remains
stable, which in fact was a pragmatic view of managing the economy. But today,
when taxes are levied based on categories it leads to inflationary pressure.

Lifestyle changes

If we analyse the AC Nielsen report from a segmental basis, we see that the food
and beverage sector records a negative growth of 3.2% and 1.4% respectively in
Q1 and Q2 of 2017. This is reflective of the slowing down of the business of
packaging suppliers.

On the personal sector side of consumption, the numbers have reduced by 1.2%
and 5.5% respectively in the two quarters of 2017 which is worrying. The
challenge is to identify the root causes for the declining trend and how it can be
corrected. May be a provincial sub sector analysis can point what impact the
drought had on the numbers.

Whilst on the household side of the business, the GDP value has contracted by
2.7% and 6.1% respectively which is a sharp decline that needs to be clearly
analysed. Maybe consumer end health check will explain the logic more precisely.
A point to note is that these numbers will result in a down turn of the overall
retail trade and this in turn will have a spiral affect across the value chain. Maybe
the monsoon rains will help to change the growth trajectory of these numbers.
Time will tell I guess.

Property market bubble?

The Central Bank Governor has hummed the warning bells on the bubble forming
of the property market which has led to the squeeze in funding from the lending
organisations. Whilst this may be true of the luxury end condominiums at the
middle income households, the appetite for convenience living is yet there, is the
view of the industry. Whilst there is a slowing down of the business, the opening
up of foreigners having the ability to purchase apartments even close to the
ground floor at a premium could stimulate demand whilst the access to loan
facilities can help stable this business, but the inflationary pressure on the system
is creating a strain in the country which is not healthy as the construction sector
was the most robust business for the Sri Lankan economy. Maybe its time that
the industry comes under the belt of exports and looks for new markets globally
or moves into aggressive marketing in the service apartment business so that a
new market like tourism will come into the game plan.

Tourism crossroads

The decline in the tourism numbers by 2.5% in May this year, fuelled by the
dengue epidemic and the drought, was not a welcome shock given that the
formal industry is already reeling due to the market moving to the informal sector
of the country. The overall numbers as at end May is at 4.6%. The graded hotels
are already suffering from a low occupancy and high food/beverage prices that
are having a negative impact on the bottom line. This is usual during the off peak
season but the last two quarters in particular have been outside the usual
seasonal dip. Some hotels are up for sale due to excessive bleeding, whilst others
are acquired by banks for liquidation which does not reflect a positive vibe to an
industry that is identified to lead the economic growth agenda of the
Government. The much talked about global marketing campaign has not yet
materialised even after two-and-a-half years post the new forward-thinking
Government coming into Sri Lanka. It is even more sad that in the last two-and-a-
half years, we see three chairmen been appointed to lead the business when
neighbouring counties like Maldives have a policy of a minimum 5-8 years a
person stay in office so that there is consistency of policy. I guess the result of the
sharp brand identity globally of Maldives has come about due to the consistency
internally in the management. A lesson for Sri Lanka to think thorough.

Maybe another point to ponder is that the last new product launched by Sri Lanka
tourism was in 1972 when the elephant orphanage came to being in the country.
Even after thirty years, the penetration of this product is only 40% as at last years
data of visitors to Pinnawala as against the two million tourists that came to the
country. Countries like Malaysia, Singapore, and Dubai tend to launch new
products every 3-4 years which is how they keep the tourism brand contemporary
and attract new segments of tourists into the country. A classic example is the
theme park feature that will be launched by Singapore tourism in the Changi
Airport. Maybe its based on the research insight that there are many transit
passengers at the airport that can be turned into a revenue source for the
country. An interesting development to the global tourism landscape which I am
sure other airports will follow like Heathrow and Dubai.

Apparel exports at -4.7%

On the export front, in the first five months exports have increased marginally to
4.3% at $ 4.4 billion meaning that the benefits of GSP+ has not kicked into the
system. The overall import bill at $ 8.6 billion at a 12.6% growth does not reflect
well on a country that is stacked on a $ 56 billion debt agenda. Incidentally, 96.5%
of the revenue is currently utilised to service the debt, which means that the
country does not have a bankable balance sheet. Maybe its time that the share of
media highlight these deeper issues than focus the countrys attention on
governance issues which have been perennial problems in Sri Lanka and globally
of any government. Maybe a more pertinent move will be if the appointment of
chairmen by ministers to legitimatise corruption in their own ministries which
many detested and quit in the Yahapalanaya Government. Sad but these facts
must be brought into the mainstream so that a new culture can be brought into
Sri Lanka.

On the area of exports what is important to note is that the current thrusts on
free trade agreements( FTAs) is commendable be it GSP+, FTA with China and the
proposed FTA with Singapore. But the reality of the export industry is that the
core issue is a supply challenge than demand issue. Even if we take the current
FTA with India and Pakistan the supply issues and NTBs are key reasons for the
low utilisation of the facility for the last ten years. A classic example is the FTA
with India. The export numbers have been below $ 1 billion for the last decade or
more even though successive governments have tried strengthening the Indo-
Lanka bilateral ties.

Worker remittance -7.2%

Apart from tourism and exports, a key foreign exchange earner is the worker
remittance. The performance in the first five months is at $ 3.3 billion registering
a decline of 7.2% which is not healthy but we have no option given the Middle
Eastern political turmoil and the unemployment level in Sri Lanka at around 4%.
The latter is particularly a key issue and if we want to move the export business
from 10 billion to 20 billion by 2030 and tourism to target 7.5 billion from the
current 4 billion means we will have to import skilled labour unless the
Government request for a population explosion by the people of the country. This
was done in China at one time but it will not work in Sri Lanka due to strong
cultural nuances and burning cost of living issues.

Next steps

Hence, we see that the issues that the country is faced with are more
fundamental in nature and very disturbing. If we do not move away from the
political agenda and move the country to a business agenda it will further
deteriorate the unbankable balance sheet the country has.
(The author has served the country as the Chairman Sri Lanka Export
Development Board, Chairman Sri Lanka Tourism and Chairman of the 30 billion
Lanka Sathosa retail outlet chain and went on to serve the United Nations
(UNOPS) for a five year tenure when the country won the best global award. He is
an alumnus of Harvard Kennedy School.)
Posted by Thavam