The private sector speaks, Mr. Prime Minister!

From left: Daily FT Editor Nisthar Cassim (moderator), Access Group of Companies Founder and Chairman Sumal Perera, Hirdaramani Group Director and former Chairman Janak Hirdaramani, Vallibel One Group Founder, Chairman and Managing Director Dhammika Perera, Stassen Group Chairman and Managing Director Harry Jayawardena, MJF Group Founder and Chairman Merrill J. Fernando, Softlogic Holdings Founder, Chairman and CEO Ashok Pathirage and ICC Sri Lanka Chairman Dinesh Weerakkody (moderator) at the panel – Pic by Upul Abayasekara

In the recent past there have been many views about Sri Lanka’s performance. From the Railway strike to students of higher education and recently the fishermen community are some of the indications that there are deeper issues in the system that need to be addressed. 

Some have got the eye of the policymakers to readjust and focus on a stronger performance whilst some of the key issues remain to be addressed.

Last week Sri Lanka saw six heavy weights give their views on Sri Lanka which was interesting in the backdrop of the President being in Nepal for the BIMSTEC summit while the Prime Minister was in Vietnam, again on a global summit. 

Consumer spoke – 10 February 2018

When the Sri Lankan consumer voted in the current Government in 2015, people were expecting ‘strong governance’ and a focused economic management agenda which would see a lifestyle change to a common man. But sadly it has hit a bottom-of-the-pyramid situation after three years. On 10 February, Sri Lanka voted in a new brand ‘Pohottu’ at the MC elections to give a signal to the world the discontent among the average citizen. 

This was the first formal feedback that the current Government received, but sadly no major attitude change has happened to the workings of the Government. For instance, a change of ministers post the elections was announced but the status quo continued without any groundbreaking changes.

At the consumer end it’s been tough for six quarters in a row since the beginning of 2017. To be specific, as per the reliable Nielsen report, there has been a contraction of household consumption of 3.3% in Q1, 3.1% in Q2, 3.7% in Q3, and in the final quarter by 8.2% in 2017. The negative trend continues this year too with a -11.7% performance in Q1 2018 and it has hit all-time low of -14.5% in Q2 2018. However, sadly Sri Lanka has not seen any drastic changes to driving the Sri Lankan economic agenda by the policymakers.

The Nielsen report explained how consumer household dynamics with job prospects being Excellent/Good dropped from 34% to 8% in the last two years and state of personal finances being Good/Excellent dropped from 22% to 5% which means that things are seriously rough. Apparently, 52% of households say that they do not have any spare cash which can be mirrored to the private sector performance in Q1 2018(April-June quarter). But sadly none of these facts tend to affect the hierarchy of the country and the way the country is managed just continues like a rudderless ship out at sea.

Q1 2018 business results poor

The diversified top conglomerate which operates in a cross section of businesses, John Keells Holdings PLC (JKH), has reported a dip in profit, reflecting challenging economic conditions to several of its core sectors, though a few remained resilient to improve their bottom line. JKH’s Group profit before tax (PBT) at Rs. 2.91 billion in the first quarter of the financial year 2018/19 was down 29% from a year earlier. The profit attributable to equity holders declined by 23% to Rs. 2.19 billion. The last time JKH suffered a dip in 1Q was in 2013/14 FY which indicates the deteriorating economic performance in Sri Lanka. 

Another diversified entity Aitken Spence Group reported operating profits of Rs.720.4 million for the April-June period on revenues of Rs. 10.6 billion compared to Rs. 911 million profit and Rs. 11.6 billion revenues for the same period last year. This means a drop of 9% on top line and a 21% decline in the bottom line which once again reads the declining performance due to the challenging environment that it operates in. 

But we see that the political hierarchy oblivious to the data, continuing ‘motherhood statements’ like Sri Lanka will be debt free by 2020 or that exports will cross $ 28 billion by 2022 which everyone knows will never happen with the current performance of the Government and given the radical policy changes required as per the National Export Strategy document.

Private sector speaks – August 2018

For the first time we saw in unison the six heavyweights of business voicing their views openly on the state of affairs last week. 

Access Group Chairman Sumal Perera said whilst the Government was grappling to stabilise the economy, they must not give shocks to the private sector. At the end of the day if the private sector is the engine of growth it must have the freedom to do business based on a strategic plan was the sentiment expressed. Access had ventured into the construction business when the tax structure was at 12% but thereafter overnight it was increased to 28% followed with a 2% charge on NBT whilst dividend tax was pushed up by 14% which resulted in a 310% increase in taxes that a typical customer cannot absorb. I guess the argument is valid as the World Bank Competitive Index states clearly that ‘consistency of policy’ is the biggest issue of doing business in Sri Lanka. 

The Stassen Group Chairman was very clear by stating that governance is a key issue in Sri Lanka. He cited how the Bond Commission finding could not be implemented as people responsible were not in the country. The said personality when in the BOI had been taking IOUs for foreign investment promotions to the tune of a quarter million dollars on regular visits overseas. Apparently Harry Jayawardena had intimated this to the responsible authorities when he was to be appointed Central Bank Governor. Today he has done a bigger disaster, he voiced, which was the first time a top corporate personality has been outspoken. I guess at least now the hierarchy of the country must ensure that governance is practiced in Sri Lanka given the ethos of Yahapalanaya. 

The ICC must be commended under the leadership of Dinesh Weerakkody for staging such a high profile event with Daily FT, the leading business newspaper, presenting the program to Sri Lanka. 

Softlogic Holdings Plc Chairman Ashok Pathirage came out strongly on the poor leadership of the country on decision marking. Right now there is no one taking any decision, he voiced. We must have somewhat of a dictatorship so that Sri Lanka can focus on implementation, voiced the top retail space owner who acquired the iconic brand Cotton Collection apart from the other brands he owns like Odel. 

Once again pointing out the direction of the hierarchy it is time that the current Government shapes up and does some course correction given that the Pathfinder Institute highlighted the poor performance of the 2017 Budget proposals where only 28% of them had been implemented fully/partly whilst 11% of the Budget proposals of 2017 were not disclosed on the progress achieved, which is unfortunate given that it accounted for Rs. 21.6 billion in value. Even after this disclosure there was no response from the hierarchy which just tells the people the attitude of the current Government on such feedback. 

3.2% growth means no growth 

As per the data shared by the Department of Census and Statistics, Sri Lanka’s economy grew at 3.2% during the first quarter of this year, with the total economic output of Sri Lanka as measured by Gross Domestic Product (GDP) for the first three months of 2018 reaching up to Rs. 2.224 trillion compared to the Rs. 2.155 recorded for Q1 2017. 

The global view of such a performance is that anything below 6% growth in small economies like Sri Lanka which is $ 90 billion odd, means a typical consumer will not feel a lifestyle change. Some economists voice that 3% growth on an economy below 100 billion means no growth. The agitation Sri Lanka see on the streets are an indicator of the discontent of a typical Sri Lankan household is what research reveal. 

$ 28 billion exports – not logical 

Recently Sri Lanka saw the National Export Strategy (NES) being launched by the Prime Minister with the relevant line ministry. Whist this effort must be commended we cannot lose sight of the words by the ITC Director who partnered the initiative stating that unless strategic reforms are been implemented the document will be merely piece of ‘ good intent’. 

If we do a deep dive, according to the Central Bank data, exports have increased in the first five months of 2018 by 6.7%. If we are to reach a 28 billion dollars the current performance between 2018 and 2022 should be around 10% per annum on average, a jump from the historical average of 7% experienced by Sri Lanka. This will be a very tough task as the challenge in Sri Lanka is not on the demand side but in the supply chain end. This is catapulted mainly due to the current unemployment is at 4.5% which means we seriously have a skill gap issue. In this backdrop and radical reforms required as per the NES makes the document almost an impossible task during an election year like 2019/2020.

If we carefully analyse the last three years, export earnings have marginally grown by 1.8% from Rs. 11.1 billion to Rs. 11.3 billion during three year period which in other words is a $ 70 million average increase per year. Whilst this performance can be termed good given the sluggish market condition it must be looked at in light with the depreciation of the currency as there is a strong correlation between depreciation of a currency. 

Sri Lanka’s exchange rate against the US$ has depreciated by almost 30 rupees or by 20% during the period. If exports spruce happened due to rupee depreciation at this rate, export earnings could have soared at least by $ 2 billion. This means that the Government has failed in its export promotion drive together with FDI-led export promotion. Although FDI has picked up in 2017, it has not significantly contributed to boosting exports. This means that the new FDI has focused more on local market than export market. Hence we see the wise words of the ITC Director who said radical reforms are required if we are to drive exports at the NES launch ceremony at Temple Trees. 

This comes in the backdrop of the European Ambassador voicing how Sri Lanka’s performance on ‘Corruption’ and ‘Governance’ have deteriorated in the last three years at the NES event at Temple Trees in the presence of the Prime Minister. 

Tourism – impacted Q1 2018.

Empirical research indicates that the tourism industry tends to live on the edge. It the first to get affected due to internal issues like dengue, floods or elections but it the first to recover. One foreign visitor that a country attracts generates four jobs in the local market is the ratio that the world of tourism operates. In a typical island nation the contribution from the tourism sector can be as high as 25% of the GDP. Sri Lanka is at around 5-7% which tells us the opportunity Sri Lanka has to develop this sector and thereby contribute to the economy. Sri Lanka is looking at a quick win for the economy just like what George Surros said in 2015 and was echoed by Ricardo Haussmann from the Harvard University. But sadly the most demanded single activity wanted by the private sector, the global marketing campaign, has not happened even after three years since the new government came to power. There is almost Rs. 5-6 billion lying idle in the tourism account. 

If I may track back, the key initiative required on the development of the tourism industry is to increase the awareness level of Sri Lanka as a tourist destination in the development key markets and thereby make Sri Lanka a top of the mind destination among the potential visitors with a distinctive position as again competitor offerings like the Maldives. Successive governments have tried to address this issue but failed. 

Way back in 2010 when the famous global marketing campaign ‘Miracle of Asia’ was totally developed, on the day of the launch it was cancelled stating that Sri Lanka is not a ‘small miracle’ but a ‘big miracle’ as the country has beaten a ruthless terror organisation called LTTE.

Then in 2015, when the current Government came to power, once again the initiative of the Global Marketing Campaign planned out with the technical committee consisting of professionals but just five days before the top seven global advertising agencies were to present the campaign it was cancelled and the board dissolved. We are now in 2018 and are yet to see the light of day on this activity whilst our competitor destinations like Maldives, Seychelles, Thailand or Malaysia have launched more than 10-12 marketing campaigns in the last 10 years. 

Currently, communication is taking place on CNN, etc., which is a waste of funds given that what Sri Lanka requires is an integrated marketing campaign like any other destination marketing initiative. Sadly the industry has no one to turn to and Q1 performance indicates the low performance of the industry. 

Where do we go from here? 

There is no option but Sri Lanka will have embark on radical reforms structurally to drive up GDP growth and attract higher FDIs. Incidentally these were the very words of ADB Vice President Operations Wencai Zhang, who briefed the media before leaving the country last week. 

Whilst this advice may be sound given that ADB has committed $ 1 billion grant funding for the next three years, a point to note is that radical reform results in hurt to the current system. This means it cannot be done given the election coming up in the next one year. Which means all the above feedback to the hierarchy will be only academic in nature.

(The writer is Country Director for an American investment company for South Asia. The thoughts are strictly his personal views. Writing is only a hobby he pursues.)