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By Cheranka Mendis
The Government recently announced the establishment of Commercial Hub Regulations, which optimise Sri Lanka’s potential and vision to become a key player in the international market as a gateway connecting the Asian region to the East and the West.

Under the regulations, Sri Lanka’s primary sea ports and the four Export Processing Zones are identified as duty free ports and zones which are certain to bring in unprecedented activities and create a new investment climate by increasing trade, expanding logistic services, modernisation coupled with an improved monetary and fiscal regime.

The regulations are likely to give global companies supply chain security and an efficient location for distribution, storage and transhipment through a well-integrated infrastructure network via the largest deep draft ports and two international airports and road connectivity. This will also help companies provide value added services to manufacturing and financial services such as headquarter operations.


The Joint Apparel Association Forum (JAAF), the apex body of the textile and apparel industry, last week took the initiative to discuss the virtues of the regulations among key industry stakeholders. Under the title ‘Commercial Hub Regulations, Free Ports and Beyond Boundaries – positioning Sri Lanka to be the rising economic centre,’ Treasury Secretary Dr. P.B Jayasundera shared his thoughts on the vision connected with the hub concept and the potential for investors as well as the country.

Acknowledging that there has been a delay in the gazette even though the regulations were first announced in the budget proposal made by President Mahinda Rajapaksa in November 2011 when presenting the budget speech for 2012 due to a variety of reasons, Dr. Jayasundera assured the industry that the regulations would pave the way for many opportunities for the development of the business climate and therefore the economy of the country.


Even though the two-year lapse did not cause much harm as the world was still in the waking up process post-recession, if the global economy had moved at the same pace it did in 2010, Sri Lanka would be experiencing colossal losses in the present day, he said.

Post-conflict Sri Lanka
Today, post conflict Sri Lanka is a middle income economy with stability on the political and security front, even though most are still stuck in a mindset that looks at Sri Lanka as a poor nation, Jayasundara said. “The security in this nation is reasonable and probably much more superior to other parts of Asia. Politically we are stable as well with the President is in full control, with 65% public acceptance,” he noted.


Infrastructure is also in place. “Everybody was very critical of what we are doing but today people are beginning to appreciate the infrastructure. Even though there are critics about why we are building so many airports, no flights, etc., in Saudi Arabia one international airport is still not open and they have created the space to be ready when the world demands it. We must think long term and I am proud that the President is doing the same.”


Noting that the country has the finest tax regime, he assured that communities must wake up from the conditioned mind-set of requesting concessions and deductions as was done in the past. “We have never been conditioned for low inflation, clean administration, such infrastructure, best practices, etc. and we are still at the infant stage of realisation. As a result things are not valued.” However, the country now has a more predictable, acceptable, simpler and more competitive tax regime with a viable 12% income tax profit. “You can’t get more than that because someone has to pay my salary,” he quipped.


There are more policy reforms in several areas the Government is intensely engaged in getting things right in respect of skill education, trade and tariff policy, regulatory environment, open foreign exchange regime, a more flexible exchange rate regime, getting the banking system stable and getting the budget right. “These are in place and we are silently making progress.”


“Reversing some of the negatives of the past, the country is moving steadily ahead with low inflation which is likely to remain in the mid-single digit ratio in the future and anticipating a 4% budget deficit which is likely to be the lowest in the post independent Sri Lanka. In the meantime we have made our presence international not in donor forums but in the capital market with the Government presenting a sovereign rating with 10-year maturity. BOC and NSB have been pursued to follow while the country’s premier development banks have also been asked to go international. They have got their rating announcement in November 2012. As they have good governance and best practices, that is probably why they take a lot of time. But hopefully they will also go to the market. You have to take bold decisions but we have created the enabling environment for this.”


There’s nothing called a free lunch
As a middle income nation, Sri Lanka must talk the language of ‘no free lunch,’ he assured. “In the Treasury itself we have a board that says ‘no free lunch’; anyone who comes must be a billion dollar industry because I don’t want to waste my time. No point wasting my time over US$ 10-20 million, because realistically how long will it take to collect 10, 10, 10 and make a billion?”

He noted that his benchmark is 1977 not for any political reasons but for economic reasons. “1977 Sri Lanka was an open economy, a decisive moment as we were the pioneers in opening economies in this part of the world, taking the first step of integration with the rest of the world.”


When the economy was initially open the country’s portfolio was 31% primary agriculture, 29% industry (essentially producing goods for our own consumption,) 41% services.


In 2012, 35 years after agriculture is 11% in creating GDP – importance of agriculture in GDP has declined even though it is bigger than 1977, industry has climbed to 33% and makes goods for international consumption, services have grown to 58%.

While 77% of the country’s exports in ’77 were agriculture, there has been a structural shift in the economy since then and only 20% of agriculture is exported now. 13% of manufactured goods exported in ’77 grew to 79% in 2012. “We are now a manufacturing export economy,” Jayasundara said.


In 2002, Sri Lanka’s industrial exports were US$ 3724 billion, which in 2012 recorded US$ 7371 million. “In 10 years from 2002 to 2012, the country has doubled its exports. We must be proud.”


Need for change in exports and imports
“The country now exports almost US$ 10 billion, of which US$ 4 billion is from apparel. This economy depends more on you than others,” he accepted. He noted that rubber and tea fetch US$ 900 million each which could easily be developed to US$ 2 billion industries, while gem and jewellery bring close to US$ 600 million, petroleum US$ 500 million, machinery equipment, etc. US$ 400, IT US$ 600, food and beverages US$ 300 million, and cinnamon another US$ 300 million.


“No Treasury Secretary is proud with just a one billion dollar industry. I need 10 of those if the nation is to get where it should be. We are importing US$ 20 billion worth of goods while exporting US$ 10 billion, a US$ 10 billion gap,” Jayasundera said.


“We need to eliminate this, but it’s not easy. US$ 5 billion is spent on oil and each request we get is for a US$ 150 million shipment. You think we sleep? We have to ensure it is properly delivered and your vehicles are provided with adequate subsidised petrol and diesel, etc. In addition you are given electricity also generated from that subsidised fuel at subsidised price. Just do the calculation. We need a change – from exports and imports.”


Bring in all the cows
Looking at it from a business perspective, one has to look for investments to get out of the current situation, he noted.


If the Treasury Secretary was at the BOI, he wouldn’t be wasting his time approving bicycle factories and tax holidays, but would rather call the three cement factories set up here and ask them to put US$ 200-300 million and replace US$ 400 million worth of cement imports. That saving is as good as exporting US$ 400 million, he said.


“For EDB (the dairy guys have now taken over EDB so I hope this will happen), without importing milk powder from other countries, bring in all those cows here. New Zealand, Australian and European guys who have factories here, ask them to bring all those cows. We have the climate, their managers and factories here.”

The country should also make use of the Rs. 150 billion health budget, which was referred to as probably the world’s best cost effective health system to manufacture at least the essential drugs without importing them, he said.


Free port concept: Sky is the limit
Under the regulation and the free port concept, the sky is the limit for those who dare. “We have now created a new window called ‘free port’. This optimises maximum amount of resources within the Export Processing Zones and allows entry to the global market. You can completely forget the country, shape the boundaries and operate outside the country in a new place we called free ports.”


Two EPZ have been identified – Katunayake and Koggala – along with the new international airport in Mattala and two main ports – Colombo and Hambantota. “Here you can create wonders, much more than you have done. You don’t have to look at import controllers and exchange controllers,” Jayasundera said, assuring that he is also looking at the possibility of offshore banking in the said locations.


“There is nobody there and you can peacefully operate. You can import from somewhere, add value and send elsewhere. Import, put a new label and send. That is how people make money. You can also buy goods from one place and send it to another place, like what the Armour Street people do. But not that type of things but massive shifting of goods and services is necessary today.”


Touching on making Sri Lanka a destination for large scale global companies to set up headquarters here, he persuaded the industry to propose to their friends of such calibre to set up shop here. He assured his support. “Get one or two good names, I will somehow do the rest of the work. We will get, if necessary, the VIP treatment and the President to meet them. We need this. What is Hong Kong and Singapore without these?”


With the likes of Shangri-La and Hyatt coming in and now marketing the destination as a country with the fastest processing time, industries should now look at building up the logistics side here. “From our side we are ready. In a month’s time we will sign the agreement for the northern expressway. By 2016 the country will be much closer. We need more logistics.”


He assured: “Anything you want bring it here the Government is ready to accommodate. You will not be subjected to exchange control and we are determined to establish a much more conducive regime here. India with all its trouble is looking at a much deeper international financial integrations we must look at those as well.”


From a Customs point of view, it is easy from both the import control point of view as well as the business point of view. “Don’t be hesitant to come to us with further improvements. If necessary we will modify the gazette. The generic law is now in place and regulations can be done because we wanted to create the flexibility to accommodate as much creative initiatives that the business community will take. We have done our part; it’s your time now.”


Open up your economies, we are ready!
In order for the business community to make maximum use of the regulation, the Government has had a series of dialogues with countries such as India, China and Japan to open their countries for Sri Lankans to trade competitively.


“In the recent dialogue with the Government of India we took up the agenda and told them that we are open to you and now open for us. We have a US$ 3 million trade deficit with them. We are open for their exports such as motor vehicles, rail engines, machinery, and equipment, etc. On the other hand we can’t export our apparel. My argument is that India is more competitive than us, so they don’t have to worry. They have cheap labour and bigger factories. Give us the chance to compete. I will pursue this line for tea as well.”

Similar dialogue has been made with China as well as Japan, he said.


Each country in its developmental journey needs to find a product or range of products for its identity. The range of products that has evolved in Sri Lanka is high quality products for up end luxury consumers, Jayasundara noted.


“Opportunities have been created and the gazette is in place. I request the BOI to commit to market this properly. Use this strategy seriously. I request the business community, apparel and other international businesses engaged in exports particularly managing logistics to make use of it. I request Customs not to entertain cheap quality bonding facilities anymore. This is for transit. Singapore is created based on transit – passengers and goods. All borders must be exploited and banks must start building banking products to get the right kind of investors here and proper development must happen based on the relocation of head offices. We have a strategic investment law which is ready to accommodate more investment that is capable of altering the landscape of Sri Lanka. We have created that regime to address Sri Lanka’s future.”

Pix by Sameera Wijesinghe

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Sri Lanka Garments

SLAEA Magazine Front Cover 2Journal & Directory of the Sri Lanka Apparel Exporters Association, containing valuable information with regard to the apparel industry.
Issue No. 90


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