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An industrial policy framework is long overdue: IASL

06 Oct 2015 - {{hitsCtrl.values.hits}}

Following is the speech delivered by Industrial Association of Sri Lanka (IASL) Chairman Nilam Jayasinghe at the association’s 24th Annual General Meeting (AGM) held at Cinnamon Lakeside recently.

Ladies and gentlemen, welcome to the 24th Annual General Meeting (AGM) of the Industrial Association of Sri Lanka (IASL). The membership of the IASL comprises of 70 plus members representing a diversity of industries large and not so large, extending from glass to electronics to energy and to the fast-moving consumer goods (FMCG) industry. Therefore, the issues and challenges faced by the membership are both unique and specific to an industry, but some are also common to all industries.

I’m sure you will agree that we are conducting the AGM of the association at an opportune moment after the general elections in September. The industries functioned in the past six to eight months, in a period where there was a degree of uncertainly and indecisiveness. However, with the mandate and wish of the masses, there is a new government in place, which we believe, will have both the will and ability of embarking on an uninterrupted programme of development over the next six years.

The IASL, as in the past, has made representations to regulatory agencies regarding issues faced by our members. These vary from taxation to tariffs, labour-related issues and also regarding policy. However, we are also encouraged to see the progress made by the Ease of Doing Business forum initiated by the Finance Minister engaging the private sector to deal with the specific issues faced by them, to be resolved promptly.

We are also heartened by the government’s five-point plan of a ‘new country’ by building the economy, developing infrastructure, developing the education system, ensuring due freedom to people and eradicating corruption within 60 months, as committed in the election manifesto. We, the private sector, sincerely hope and wish that the government will be able to deliver the expectations of industries and society at large, while the association will support the government in meeting its desired goals, when and where necessary.

Ladies and gentlemen, Sri Lanka today is in the category of lower-middle income country. But if it is to migrate to a higher-middle income country, it needs to move strategically, from low productivity agriculture, low-tech manufacturing and low-value services to high-tech agriculture and manufacturing and high value-added services, in the next three to five years. To do this, we need to focus attention and deploy necessary resources right now and not in the future, as the opportunities of doing so might fade away.

In relation to what I have mentioned before, I wish to stress on a few areas in my address:

The economy
Sri Lanka’s economy that grew by 7.4 percent in 2014 is expected to slow down in 2015, to approximately 6.4 percent as predicted. The industry sector, which is the second largest, contributed 32 percent of gross domestic product (GDP) in 2014 and grew by 11.4 percent during the last calendar year. Most members represent the factory industry sub sector, the largest contributor to the manufacturing sub sector, which has has grown by 8.5 percent in 2014 and contributed 16 percent towards GDP. However, as in the more developed economies, the contribution from the factory industry sub sector needs to be increased to at least 25 percent of GDP in the next two to three years.

There are also some concerns I wish to raise in relation to the economy. On a cumulative basis, the trade deficit during the first six months of this year increased by 15.6 percent to US $ 4.1 billion.

The overall balance of payments is estimated to have recorded a deficit of US $ 791 million during the first six months of 2015 in comparison to a surplus of US $ 1.95 billion recorded during the corresponding period of 2014, which is also of concern.

The gross official reserves were US $ 8.2 billion, a comfort zone, and equivalent to 5.1 months of imports by the end of 2014. However, gross official reserves have declined to US $ 7.5 billion as at end-June 2015, equivalent to 4.5 months of imports. These factors perhaps trigged the Central Bank to effectively float the rupee on September 4, which resulted in a fall of the rupee by almost 4.5 percent against the US dollar. While this move will be welcome by exporters, as done in 2011 where the rupee fell by 17 percent and as well as what has been done this year, one off devaluations of this nature are not considered healthy and it is advocated that the true value of the home currency be maintained on a continuous basis.

Meeting revenue targets is going to be equally challenging for the government this year. Therefore, it will be quite interesting to see what the budget will have to offer in November.

Fast-tracking export development
I wish to make reference to the address by the Prime Minister at the recently concluded Economic Summit, where he stressed that increasing export revenue was the only way forward, if Sri Lanka is to reach its true potential.

Exports as a percent to GDP, which was 34 percent in 2000, had declined to 17 percent by 2010 and has now further declined to 14 percent in 2014. On a cumulative basis, exports declined by 0.6 percent during the first half of this year in comparison to the same period last year. Apart from the success seen in apparels, value-added exports need to grow significantly if Sri Lanka is to control its widening trade deficit, which grew by 15.6 percent during the first six months of the year.

There are however only a few companies that have continuously increased their export revenues other than apparels, but these are only a few and far between. As a matter of interest, exports as a percent of GDP in Singapore, is over 200 percent of GDP with resources, absolutely limited. If exports are to make economic sense in Sri Lanka, exports will require registering at least 25 percent of GDP in the next two to three years.
We are also pleased about the initiatives taken by the government in entering into free trade agreements (FTAs) with countries such as India and China. However, we urge that these be pursued with some degree of caution based on the principle of, ‘a level playing field’ and also through a consultative process by engaging key stakeholder, as it has been done otherwise in the past.

Need to increase FDIs exponentially
In 2010, foreign direct investments (FDIs) were US $ 516 million but have steadily grown to US $ 1.68 billion by 2014, which is encouraging. However, this figure is merely 1.3 percent of GDP, which is far below that of most comparable countries, which has a ratio in excess of 3 percent. To achieve this, we really need to improve the ‘Doing Business Ranking’ where Sri Lanka is in the 99th position this year having been at the 85th position last year. This shows that there are almost 100 countries competing for investments ahead of Sri Lanka. The concept of a One Stop Shop has been spoken for years, but this has yet to be a reality. We urge the government to take all necessary measures to encourage investors mainly with Green Field projects by creating a very conducive and investor-friendly environment.

We also wish to urge the government to ensure a consistent policy framework and refrain from imposing one off taxes such as the Super Gains Tax and the laws such as the Land Alienation Bill, which could be harmful to possible FDIs.

Industry competitiveness
Innovation, research and development and upgrading capabilities with the use of advanced technologies such as automation and robotics are essential in maintaining long-term sustenance of industries. While the prevailing interest rates are yet conducive to borrow and invest in such initiatives, industries should be encouraged to do so, to maintain its long-term competiveness.

Labour issues and productivity
We are heartened by the government’s plan to create one million additional jobs to bridge the economic development gap between Sri Lank and Southeast Asian nations such as Malaysia and Thailand. We sincerely hope that this challenging goal can be achieved.

However, industries are faced with an issue of lower productivity and also a scarcity of skilled labour. We believe the long and eagerly awaited labour reforms will be dealt with by the new government as a matter of priority. We also hope these reforms will enable improving labour productivity and will remunerate the workforce in tandem with output and in turn make industries more competitive internationally.

Last year, worker remittances grew to over US $ 7 billion, which is predicted to rise over US $ 8 billion this year. While recognizing the significant contribution to the economy from overseas remittances, this exercise has had a huge psycho-social cost at home to families and also a scar on the dignity of certain individuals. As done in certain other countries in the region, the government is urged to initiate measures reversing this trend by encouraging both blue and white collar workers to return home for gainful employment. This initiative could assist industries plagued with a shortage of gainful labour while addressing the issue of heavy social cost to society.

Industry policy framework
The industry sector as a whole can be expected to benefit from the incentives offered to largely small and medium enterprises (SMEs), the technological upgrading in manufacturing processes, expansion of industries in rural areas, policy changes to support local value-adding industries and establishment of industrial zones in rural areas.

We are also encouraged by the proposal to set up Economic Development Mega Zones and Industrial and Technology Development Zones in Raigama (Kalutara District including Horana) and in Hambantota, Mahaoya, Kandy, Galle, Jaffna, Killinochchi and Vanni, which we believe will enable create an investor-friendly environment also conducive to attract FDIs.

Ladies and gentlemen, there was a long felt need for an industry policy framework which sets out a process by which an integrated approach is used to map the role of each stakeholder in meeting future industry goals. With this in view, A Guideline for Consensus on a National Industrial Policy Framework was developed by the IASL some years ago, which was developed with the assistance of the Institute of Policy Studies with the World Bank’s financial assistance. Though this was made available to the relevant line ministry and key government officials, unfortunately this was not even acknowledged. The IASL yet holds the view that a framework for the development of an industrial policy is long overdue.

The suggested framework would consider the role of each stakeholder, such as the industry participants, technocrats, labour representatives, chambers, etc., and should be carefully thought through integrated approach, for the industries sector to reach a target of at least say 35 to 40 percent of GDP and the factory sector to reach 25 percent of GDP.

With this in view, some initial work has been carried out by the IASL and currently work is in progress. Areas such as the development of SMEs, development of industries in key sectors and industries engaged in import substitution will be included in the policy framework.

The success of any association of this nature relies mainly on the degree of engagement of its members. I hope in the ensuing year, we will have a much greater degree of member involvement, which will generate value and a meaningful contribution both to our members and the economy at large.
In conclusion, I wish to thank the members of the executive committee, our Secretariat headed by Rohan Cassiechetty, the Ceylon Chamber and the general membership for all the support and guidance given to me during the past year.

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An industrial policy framework is long overdue: IASL

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