Lankan exports now feeling GSP+ pinch

The removal of the GSP+ facility is one of the main causes of the current downward trend in Sri Lanka’s export sector performance, according to economist and former Director of Economic Affairs at the Commonwealth Secretariat, Dr. Indrajith Coomaraswamy.

“The full impact of losing the GSP+ facility is being felt only now, hence there has been a slowdown in Sri Lankan exports more recently. Exporters didn’t feel it earlier but now I’m told by many in the garment sector that the situation is becoming more challenging,” Dr Coomaraswamy said.

Sri Lankan exports contracted by 4.6% from January to July, generating earnings of US$ 5.8 billion during the period in question. However, the European Union’s imports have actually increased by 4.5% year-on-year, reflecting a drastic increase in competition for market share in the region.

Tax concessions granted by the EU through the GSP+ facility were lost in mid-2010; however Sri Lankan exports, particularly garments, had managed to maintain a strong performance.

Dr Coomaraswamy however asserted that the positive performance of the sector despite the loss of GSP+ was more likely a result of supply-side issues in competing countries such as Bangladesh and China.

“There were labour issues in Bangladesh, and Sri Lanka also managed to secure some of the smaller business that would have normally gone to China and that may have staved off the effects of losing GSP+ but low –end consumer goods were the first to go once austerity measures set in, and this means that there is lot more competition in these markets now,” Dr Coomaraswamy pointed out.

“There is real pain in the EU markets and the United Kingdom, and this will continue for the next two years while the EU itself won’t reach precrisis levels of growth for at least the next decade. Things could get more difficult before they get better,” he added.

Dr Coomaraswamy made these comments during an emergency roundtable meeting on the impacts of t he Euro-zone crisis organized by the European Chamber of Commerce of Sri Lanka recently.

A second cause for the downward trend in Sri Lanka’s export performance was the lack of a competitive exchange rate, despite the Central Bank’s about-face on currency policy towards a free-floating rupee, according to Economic Advisor to the European Chamber of Commerce of Sri Lanka, Dr Dilesh Jayantha.

“Sri Lanka’s exchange rate is still overvalued against the dollar. It should be at least at a level of Rs 135 and ideally at Rs 137 to the dollar and that is a rate that will make Sri Lankan exports competitive again. The targeted level of Rs 125 by the Treasury Secretary is foolish, particularly in this economic climate and if this continues, there will be no incentive to invest in the export sector,” Dr Jayantha stressed.

Meanwhile, commenting on Sri Lanka’s current position with regards to foreign exchange reserves, Dr Jayantha sounded a warning note over the levels of borrowed reserves.

“Commercial borrowings are reaching dangerous levels, and the whole situation is exacerbated by the issuing of sovereign bonds to repay debt, whilst the debts from these sovereign bond issues are inturn, funded by the issue of more sovereign bonds in a manner which if you look at it, is very similar to a ponzi scheme.” “Mark my words, if Sri Lanka continues to borrow to pay its debt and it doesn’t take real steps to improve export competitiveness, then within a few years, we will be right back where we were a few months ago in terms of another balance of payments crisis. Unfortunately, we have repeated this pattern many times over the last 30 years and still we manage to not learn our lesson,” Dr. Jayantha concluded.