There was a period where Sri Lanka enjoyed very high production levels for most of the consumer goods produced in Sri Lanka. The era was from 1970 to 1977 where imports were curtailed to the maximum levels.
Our essentials such as milk products, grains, jams and cordials, dry fish, fish, rice and vegetables were produced locally in large quantities. I can remember many instances where the northern public garlanded the visiting Colombo VIPs made up of onions, chillies, vegetable and fruits. The cooperative movement was at an all time high with a good distribution network. Industries such as steel, salt, paddy milling, oils and fats, fisheries, palmyrah, cement, soap, chemicals and many other industries were thriving on the steady and continuous support given by the state.
Agricultural sector benefitted most, with prices of most consumer goods were at very low levels. Only adverse point was that certain consumer items were given free in limited quantities and there was a ration card for each family.
Even though certain quarters criticized the then government, the system was very helpful in bringing down the trade deficit to all time lower levels. At that time Sri Lanka increased their export levels greatly with the assuming of the chairmanship of the Non Alligned Movement. After the non alligned conference was held in Sri Lanka in 1976 we also generated foreign employment for our citizens on a greater scale in addition to an export boom in our traditional goods.
However, this favourable forex situation changed dramatically with the change of government in 1977,they relaxed all import regulations without any controls at least for the agricultural produce. The adverse effects ran into 4 vital areas and we are in this sad plight today. Firstly, the northern youth lost their livelihood with the flooding of imports into consumer markets.
Secondly, our trade deficit widened at an alarming rate and at now edging up on a near us dollars 1 billion per month with imports leading over exports in leaps and bounds. Thirdly, our national reserves falling to a level of 4 to 5 months of imports.
Bangladesh, one of the poorest countries in the world in 1977 has foreign reserves of 30 billion us dollars now. The fourth debacle is the rapid depreciation of the rupee vis a vis most important foreign currencies. The sterling pound which was at Rs. 16 level in 1975 has now crossed the RS. 200 level. Even now we are importing a variety of unwanted consumer goods which are manufactured or cultivated in Sri Lanka.
Our government must provide ready assistance to import substituition industries if we are to reduce this trade deficit. Over us dollars 7 billion of the current trade deficit is funded by the inward remittances of Sri Lankans working abroad. Open economy was good but it should have had some controls when introduced. The depreciation of the rupee has a telling effect on our foreign loans.
A system of foreign exchange entitlement certificates known as FEECS was introduced in 1975 in the country for any person to import goods based on the level of exports effected. Imports were allowed only up to a limit of foreign currency brought to the country so that there will be a surplus of foreign currency .There were strong import control measures at that time. What we should have done was the “capacity enhancement” of all industries sufficient for local needs and also to improve quality and capture export markets. This aspect was totally forgotten. From a stronger forex situation, we have now sunk deep in the world forex market. Our consumers who are also the voters and politicians are totally responsible for this pathetic forex situation.
It has now come to a situation where some of our industries cannot compete with the imported goods. Consumers prefer the low price forgetting the motto ‘buy Sri Lankan.’ Certain racketeers engage in smuggling activities and flood the market with lowly priced imported goods in the absence
of import duties and import taxes/levies. Even goods coming through the official channels take advantage of loopholes in systems, importing goods of foreign origin at lower costs, posing competition to the local manufacturers. Modernisation of customs and port procedures using sophisticated testing and other equipment is a must. Secondly, the naval patrols be improved with solid and productive incentive/reward schemes.
Most of the overseas manufacturers enjoy the benefits of “economies of scale” to produce at lower costs. It is also a known factor that the overseas industrial giants produce their outputs to suit different markets at different cost levels.
These are smart moves on their part varying factor costs to suit different markets. If we are to follow these tactics we are compelled to strengthen raw material bases in Sri Lanka and lobby for effective changes in our Labour Laws.
However, the following points also are of paramount importance in assisting our industrial sector.
1. Lowering of bank interest rates
2. Lower manufacturing taxes
3. Lower income tax rates
4. Enactment of favourable labour laws for different industries
5. Import duty concessions for new plant and machinery which would result in enhancement of net forex earnings of industries
6. Import duty concessions for raw materials and lower bank interest rates for manufacturing of high quality
Products intended for the export markets. The entire scheme should be closely monitored by Export Development Board, manufacturer’s banker and the customs to ensure the success of the Scheme. The trading results and statistics of the manufacturer should be also certified by the external auditors of the manufacturer in respect of schemes in both 5 and 6.
7. Increased capital allowances on new plant & machinery for new/existing industries
8. A new skilled and semi skilled labour training institute from the age of 18 for our youth.
9. Assistance from chambers of commerce, Export development board and our overseas diplomatic
Missions and trade consuls in procuring new export markets and strategic overseas partners.
10. Arranging state funded overseas visits to our top exporters to increase their annual net forex.
Earnings coming to the country.
Talking about the reduction of Domestic cost of living it would be prudent to concentrate on the following consumer products and their local manufacturers with a view of further assistance to them to lower the unit or batch cost so that the benefit could be passed onto the local consumers by way of price reductions to wholesalers and retailers. Direct selling methods by the manufacturer be also promoted avoiding the wholesalers and retailers so that cash collection cycle and the liquidity of the manufacturer will be greatly improved.
The products are Soap, Toothpaste, brushes, poultry and fish, drinking water, yoghurt and milk products, mosquito coils, biscuits, confectionary, bakery products, local butter, margarine, soft drinks, cooking gas, soya meat, noodles, shoe polish, tea, coffee infrastructure such as electricity, water and telephone, coconut and coconut products, tissue paper, toiletries, grains, petroleum products, rice and rice products, fertilizer, sugar, jams and cordials.
The consumer cost of living deals mainly with above products and items. I wish to suggest the appointment of separate private sector teams with system/financial/costing auditors with a view of finding effective ways and means of reducing the unit/batch cost of each above item and maintain stable pricing structures with regular meetings with manufacturers held on “ bona fide” basis to serve the consumers and also to ensure the long term stability of the manufacturers with a view of making timely factful presentations to the government to implement the decisions reached. Reduced cost of living means increased public savings and disposable income. This will create demand for capital and other goods and the cash circulation in the country will improve resulting in higher tax collections as well.
At the same time industrialists also should adhere to a good system of corporate governance which should include,
1. Reduction of workers and staff by carrying out regular work/time study exercises
2. Minimisation of waste and damages
3. Higher quality control levels
4. Avoidance of machinery breakdowns by a system of preventive maintenance
5. Maintaining optimum span of control for batches of workers/staff
6. Effective storing/distribution
7. “contingency planning” for all key factors and situations
8. Bulk buying and placing blanket orders for raw materials to get discounts.
9. Enhancing productivity by workable schemes of incentives for cost control
10. Cartel agreements with others in the industry for avoiding unproductive competition and for price stability and market share allocations
11. Employment of sound cash flow management techniques
12. Continuous research on production/marketing techniques of other local and overseas manufacturers
13. Seach for low cost funds for working capital and asset acquisition
14. Building of team work, job security, profit sharing and lower labour staff turnover rates
15. Compliance with all local by laws and statutory requirements
As we observe, a very high level of corporate governance is required to ensure the “going concern” Concept of any industrial undertaking as they are subject to sudden business climate changes at any time. A slight error may well lead the way for loss of markets and short and medium term difficulties.
Sri Lanka has many pioneering branded business establishments who have been meeting the needs of the local consumer for many decades. But with product innovations and sound business practices they have been able to meet many contingency situations and stay afloat. Some have very successfully entered the export markets also. The state should arrange a foreign line of credit for the expansion of these pioneering industries with a lengthy repayment period so that the businesses will be able to effect more exports while maintaining price stability for local markets. The industries should also practice green environment standards at all times. Fruitful CSR projects will also gain public acceptance for the product/product range.
Many years back there was an initiative from the us government to assist the private sector by way of an umbrella known as ‘TIPS’ (Technology innovative for the private sector) which assisted the local firms to enhance their technological advances and innovations. We need to embark on meaningful endeavours to procure such assistance from Japan, Germany, France, UK, Italy and other developed countries mainly to stabilize the local industrial undertakings serving the Sri Lankan consumers. A two pronged strategy could be employed. Firstly, to supply the goods at a lower profit and to cater to the overseas markets at a higher profit. As a result, corporate profit levels could be maintained at all times.
Further, the MCC (millennium challenge corporation) of us a approved Sri Lanka as one of the beneficiary 16 countries many years ago and we can seek sectorial assistance to prop up different sectors in Sri Lanka with MCC assistance. From all above endeavours, the ultimate beneficiary would be the local and overseas consumers by way of good products at affordable prices.
As we know the product life cycle consists of Pre Planning and research, product launch, growth, maturity, peak, decline, obsolescence and dropout. Our industrialists should identify their present position vis a vis the evaluation of budgeted results against the actual. Corrective measures should be taken on a priority basis as any delay will cause extreme difficulties.
Product innovation, diversification and enhancing the product range is advisable only after extensive research and test results. Any difficulties in carrying out the establishment, need be informed to the employees with achieved results and seek their commitment to overturn any periodic adverse business situations. They should be assured of job security and enhanced emoluments on a group achievement basis rather than on an individual basis. Group targets be established for every stage of manufacturing process. Production, marketing, distribution, finance, human resource and other departments should be assigned with pre determined targets.
They should be rewarded on achievement of the targets. It should be a ´Win Win “situation for workers, management and shareholders. The chambers of commerce, industrial associations and regulatory authorities should always ensure fair play, unity and continued existence of all enterprises in the industry avoiding situations of mistrust, hasty action and chaos in the entire industry.
In the alternative, only the companies with stronger financial and marketing bases will survive. Others will not survive in the long term and will be subjected to mass scale unemployment for their workers.
Any industry is associated with inherent risks. They could well be adverse weather, higher material and other factor costs, Trade union action, Security situations, Negative publicity, unfair competition, Tax implications, Entrance of new local and overseas competitors. All industries should take great precautions in arresting any situation with their available resources. It would be advisable for any industrial concern to seek a listing in the Colombo stock exchange to raise further capital by way of bonus and rights issues and long term debentures.
The industry associations are required to monitor market monopolies and “dumping” practices and take effective action with the state to safeguard the industry in total. Imposition of import tariffs are needed from time to time to protect the local industries. Some of our industrial companies have burnt their hands in trying to establish manufacturing plants and bases in overseas countries. It is advisable to add value to the products locally and spend money on business promotion overseas and enter the foreign markets. Market penetration also is a possible strategy with lower prices. Price discrimination and market segmentation is another possible strategy open for exporters.
For the production of capital goods in Sri Lanka, it is always advisable to seek overseas partners of repute for strategic alliances as local companies on their own are unable to find niche markets where the profit margins are high. Strategic foreign partners will bring in new technology, new overseas markets, improved and cheaper logistic chains, fresh equity, improved worker training methods.
All these new value addition measures will place any company in an unassailable corporate position with the task of local management becoming easier and simplified. However, any strategic foreign investor will look into the following salient points in addition to their associations with directors or shareholders,
1. Stability of the Sri Lankan rupee
2. Wage rates prevailing and labour laws
3. Production and other taxes
4. Political stability and country vision
5. Financial stability and goodwill of the company.
6. Foreign reserves of the country
7. Prevailing interest rates of the country
8. Opportunity cost foregone by investing in Sri Lanka
9. Availability of suitable factors of production, at optimum cost levels
10. Infrastructure facilities of the country
11. Percentage of equity for the foreign investor in the venture
12. Security concerns
13. Past performance and credibility of local partner
14. Ease of repatriation of dividends and dividend tax rate
15. Regulations of the board of investment
Since we have cleared two main barriers for our economy and export performance, namely, euro fish/fishery products ban upliftment and the procurement of GSP PLUS, we should explore all avenues to enhance our exports in the short and medium term. However, it is the net forex earnings that matter.
The forthcoming budget proposals in November need be designed in a manner to suit the local industrial sector in a material way as this sector is directly associated with cost of living, additional employment, level of public savings, savings/earnings in valuable foreign exchange and GDP growth levels.
The writer is a professional in value addition to business ventures and could be reached via csassociatescolombo@gmail.com
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