Sri Lankan economy has many challenges ahead

Following is the inaugural speech of newly-appointed National Chamber of Commerce of Sri Lanka President Nandika Buddhipala, at the 62nd Annual General Meeting held on 26 January at Hotel Kingsbury, Balmoral Ballroom

Ajith Nivard Cabraal, State Minister Money and Capital Markets and State Enterprise Reforms and former Governor of the Central Bank of Sri Lanka, excellencies, diplomatic community, Government officials, international agencies, business community, distinguished invitees, members of National chamber and print and electronic media representatives, welcome to the 62nd AGM of the National Chamber of Commerce of Sri Lanka. I would like to thank Hon. Ajith Nivard Cabraal, State Minister, for accepting our invitation to be our Chief Guest and appreciate your presence here today.

I am honoured to be elected as the 34th President of this prestigious Chamber. I assure all of you that I will move forward the good work done by my predecessors to take the Chamber to greater heights during the year 2021 and beyond.

The National Chamber was established in 1948 over 70 years ago, with distinguish co-founders, from very diverse backgrounds representing the true cross section of Sri Lankan society with a common objective of assisting local entrepreneurship post-independence. We as National Chamber have travelled through thus far with such a diversity manifested by our founders while keeping inclusivity at the forefront and our close affiliation with the regional chambers made our inclusivity more meaningful and I warmly welcome representatives of such Chambers who are here with us today.

At our Chamber today we work with all the five generations from Traditionalists to Generation Z and our establishment of the National Chamber of Commerce Youth Forum (NCCYF) few years back and expanded our horizons to include the youngest generation into the Chamber umbrella. I earnestly hope their interaction with our regional Chambers moving forward will increase the value addition to the objectives of the Chamber.

Our Vision itself is a clear manifestation of our strong linkage with SMEs of the country where we have given special emphasise on the development of Micro, Small and Medium Enterprises. In order to achieve our vision, I emphasise that we need to get ourselves out of our traditional domains and need to reach out to Micro and SMEs.

At National Chamber we have a very strong team supporting each other and I will be marching forward with almost the same Council except for only very few changes. 

Global economy 

Year 2020 had been a very critical period for Sri Lanka as well as the world’s economy. As a result of Covid-19 global activity is estimated to have contracted 4.3% in 2020, making current crisis as the fourth most severe global recession of the past 150 years, exceeded only by the First World War, the Great Depression, and the Second World War according to the Global Economic Prospects, January 2021, World Bank publication. It is estimated that working hours equivalent to 495 million jobs were lost during the second quarter of 2020 amounting to 14% of the world entire work force and only half were expected to have been recovered by the end of the year, according to ILO and World Bank data.

The global economy is estimated to have contracted 4.3 percent in 2020however; disruptions from the pandemic in the majority of Emerging Markets and Developing Economies (EMDEs) were more severe, resulting in deeper recessions and slower recoveries. However, after sharp contraction in 2020, it is expected to global growth to bounce back in 2021. 

Aftermath of Covid-19, global economic output is expected to grow at 4% during 2021, however, expected to grow at slower level than pre-pandemic growth levels even during 2022. The negative impact emanating from pandemic is expected to hinder investment and human capital in emerging markets eroding their potential growth prospects. It is expected that the emerging markets growth potential excluding China would be on average around 3.5% in 2021-22 as a result of slow recovery in consumption and investment.

It is expected to reverse the two decades of steady global poverty reduction and the pandemic crisis is projected to push poverty rates back up to levels last seen in 2017. Developing and emerging economies that have a weaker public health system and larger dependency on global trade, tourism, foreign remittances, and commodity exports will have a tougher hit, it will further bring the effects on long term impacts such as lower investments, human capital erosion breakdown of supply chain channels, etc. 

Sri Lanka economy in the present situation 

The Sri Lankan economy was gradually recovering from the severe impact of the Easter Sunday terrorist attacks in 2019 when we had the hit from the global pandemic. The tourism and related sectors were saddled with a serious impact with closure of airports which was unavoidable. The situation was even made severe with more and more Sri Lankan employees wanted to return to back, which had an impact on private remittances. The government was forced to limit imports with the intension of saving out flow of USDs with considerable amount of loan repayments that we had to go through during the year 2020 and moving forward.  

As a strategy to face the difficult situation Central Bank of Sri Lanka introduced many measures to reduce interest rates, enhance market liquidity, manage foreign exchange flows, maintain exchange rate stability and preserve international reserves, maintain financial system stability and enhance credit flows, ensure uninterrupted currency operations, payments and settlements of public debt, etc.

Lower interest rates reduced the burden on entrepreneurs who were facing various difficulties, while announced debt moratoria and working capital loan schemes provided concessions to businesses and individuals. 

As some research agencies highlighted that the domestic debt which is estimated at 52% of the total debt burden of the government used to attract over 70% of the total interest cost of the government. Therefore, we infer that keeping local interest rate down would not only help local entrepreneurs to facilitate sustainability of their businesses and new investments but help the government to manage debt burden as well. 

Another research report published by HSBC Global Research in last December predicts that Sri Lanka should bounce back impressively and in fact that is the biggest upgrade to their forecasts they made recently. They further observed that mainland China, Taiwan, Vietnam, and Korea as well as Sri Lanka has seen among the fastest increase in shipments, with others lagging the recovery. 

They expected that Mainland China, Sri Lanka, Taiwan, and Vietnam would start 2021 either at, or above, the level of activity before the break-out of COVID-19. They expect Sri Lanka GDP is likely to grow by 7% y-o-y in 2021, largely due to base effects since they estimated 5% drop in GDP during 2020.

The CBSL policy rate cut by 250 bps, bringing down Standard Lending Facility Rate (SLFR) to 5.50% has been fully transmitted through lending rates easing off by 280 bps during the same period. 

They are of the view that the public debt sustainability is amongst the biggest risks for Sri Lanka for the next five years.

Even rating agencies including Fitch in their report on September 2020 estimated GDP growth for 2021 as 4.7% whereas 2020 estimated as minus 3.7%, Moody’s on September 29, 2020 GDP growth in 2021 estimated as 3.6% whereas 2020 estimated growth as minus 3.2%. However, all the reports expressed their concerns regarding Sri Lanka debt sustainability and the government revenue collection target.

The understanding of the economic behaviour has been challenged by current developments such as Dominant Currency Paradigm where it stated that a dominant currency in world trade – US Dollar has striking implications for economic spillovers. Monetary policy shocks in the dominant currency also have strong spillovers to the rest of the world while the dominant currency country is largely insulated from the inflationary consequences of fluctuations in its currency, which are absorbed instead into prices and trade in the rest of the world.

The concept of Small Open Economy demonstrates that it is an economy that participates in international trade, but is small enough compared to its trading partners that its policies do not alter world prices, interest rates, or incomes. Thus, the countries with small open economies are price takers.

The RORO or Risk-on: Risk-off behaviour which discusses the investor mentality where during periods when risk is perceived as low, the risk-on risk-off theory states that investors tend to engage in higher-risk investments. When risk is perceived to be high, investors have the tendency to gravitate toward lower-risk investments. During highly volatile episodes’ safe haven currencies tend to appreciate since investors tend to drop other currencies and to turn towards safe heaven dollars even with very low yields. 

I believe the understanding of current markets may be not complete if we do not discuss such phenomena in order to have a better clarity in understanding situations instead of running into conclusions. I think we discussed once or twice at the council meeting deliberations on economy which was very receptive and I expect to continue such deliberations with the council moving forward. 

SME development

Micro, Small and Medium-sized Enterprises (MSMEs) have been hardest hit by COVID-19. According to the Global Risk Report 2021 SMEs are often collectively the largest employers in a country: in China, for example, they generate around 80% of employment. An estimated 18% of companies in China went bust between February and May. It is observed that in the United States, 20% of firms with fewer than 500 employees closed permanently between March and August. Many that survived the initial lockdowns remain dependent on state support—the result of continuing restrictions and decreased consumer confidence.

Similarly, in Sri Lanka the main driving force of the economy is considered to be SMEs. Approximately 75% of the enterprises in the country can be classified as SME and they provide approximately 40% of the employment in the country in diversified sectors, ensuring growth and contributing 52% to the GDP. It is noted that many SMEs do not use latest technology and having limited access to finance due to collaterals not being available. Further, SMEs are not directly connected to markets especially in the case of exports.

Challenges for SMEs

In developed or developing economies, SMEs are playing a crucial role by contributing to the economy. Be it business numbers, export growth, employment generation, output growth and contribution to supply chain etc. The lack of availability of SME performance related data is making a cloudy situation for policy makers in implementing coherent policy measures. Rapidly changing market demand, lack of capacity in knowledge, innovation and creativity are directly affecting the progress of the SMEs. 

Furthermore, when compared with large multinationals, SMEs are going through excessive challenges such as lack of economies of scale, lack of resources such as finance, technology and skilled labour, market access limitations and shortage of research and development expenses, etc.

In the recent years, the trading atmosphere such as global value chains and information technology revolution are offering more and more opportunities for the SMEs to integrate and remain in the global economy. It is vital to note that, when compared with large organisations, SMEs are having flexibility and capacity to respond innovatively to changes required by the new market conditions. It had paved the way for some SMEs to dominate certain niche markets and stay continuously integrated with large multi nationals as their key partners. 

At same time there is greater opportunity for SMEs to be benefited on the input side of the production by having access to cost effective raw material and labour, technology and knowhow.  It is a proven fact that SMEs will have access to international market opportunities and be a part global value chain through outward FDIs, made by larger companies and SMEs being suppliers to those entities. 

To this end the National Chamber has been very close to SMEs where our Vision statement has given special emphasis to MSMEs and offering helping hand to SMEs has been one core element of our values.  We have been continuously involved in MSME development activities and carries out many programs to assist the small and medium entrepreneurs to develop their businesses. National chamber together with many government and nongovernmental agencies and financial institutions such as banks continue to encourage entrepreneurship in the country with many regional activities being organised in the provinces specifically with our collaboration with regional chambers. 

‘Western Province Entrepreneurship Awards’ scheme for the entrepreneurs of the Western Province which was held continuously from 2016 to date as requested by the National Enterprise Development Authority which opens the path for micro and small enterprises to reach national level standards and compete with larger scale business ventures ultimately through our flagship event, ‘The National Business Excellence Awards,’ being conducted for last 15 years. 

Trade Information Portal and National Single Window 

As a result of closure of entry points to countries global trade collapsed last year and supply disruptions interrupted the international provision of goods and services. It is observed that the goods trade fell more rapidly and recovered more swiftly than during the global financial crisis, while services trade remains depressed. Global trade is estimated to be contracted by 9.5% in 2020 similar to during the 2009 global financial crisis but affecting widespread of economies. It is expected that the global trade growth would experience a strong recovery, averaging nearly 7% over 2021 and 2022.

We as National Chamber has been geared up to provide trade promotion services and assistance required by businesses to function competitively in domestic and overseas markets and to represent them in matters of common and individual interest at all for including discussions and deliberations convened by the government which is an integral part of our mission statement.

Amidst volatile global trade and subdued trade volumes we expect the recovery of trade in the medium term while encouraging import substitution to manage trade and current account deficit of the country. Therefore, we whole-heartedly support the National Trade Facilitation Committee in achieving the ultimate goal of implementing the Trade Facilitation Agreement in Sri Lanka. 

Chamber digital platform

It is vital for SMEs and Micro SMEs in Sri Lanka to access overseas markets through a credible authentic web platform. By creating such a platform for Sri Lanka, the National Chamber believes that potential Sri Lankan products will reach their market destinations easily. In order to meet this requirement the National Chamber has embarked on a nationally important mission to develop and professionally manage a web based platform named ‘fromSriLanka.com’ under Asela’s leadership.

We are conscious of the fact that mere implementation of software is not going to replicate entire success stories in other countries without having proper eco-system, wide-spread collaborative efforts, supportive infrastructure and cultural change inculcated in the mindsets of the people. Therefore, we will continue to develop ‘fromSriLanka.com’ in achieving our ultimate goal moving forward.

I must place on record my sincere gratitude to my fellow office bearers and Council members for their commitment and untiring efforts for making last year successful. A very special word of thanks to Secretariat of National Chamber for their untiring support.