“Let’s reinforce the faint economy with the corporate sector” | Sunday Observer

“Let’s reinforce the faint economy with the corporate sector”

18 October, 2020

The corporate sector is a part of the economy made up by companies which include,

* Primary sector – producing raw materials

* Secondary sector – manufacturing

* Tertiary sector – Trading and services

It is a subset of the local economy excluding the economic activities of the government, of private households, and of nonprofit organisations servicing people. The corporate sector has been invariably steering the economy of the country towards development and better prospects in the international market. As such, considering the substantial contribution as the major drive of the economy, the sector has to be reinforced by all means, particularly, at these strenuous times due to the Covid-19 pandemic.

The global economy is currently encountering its worst recession since the ‘Great Depression’ of the 1930s. Several advanced economies such as the United States, the United Kingdom, the Eurozone, and Japan will experience contractions during 2020. Other key trading partners of Sri Lanka, including China and India, are also projected to experience a notable slowdown. Across the globe, the World Trade Organization (WTO) forecasts that the global merchandise trade can decline by as much as 32 per cent in 2020.

Covid-19; Business support – helping in troubled times

The Covid 19 outbreak is having a huge impact on our lives, families and communities and businesses. The Government’s support schemes are important measures to help businesses, secure jobs and secure the Sri Lankan economy during this turbulent period.

Across the financial sector, several measures have been undertaken to ease the burden on corporate sector businesses and people arising from the outbreak and containment measures. A wide ranging debt moratorium has been announced for the tourism, plantation, IT and apparel sectors, related logistics providers and small and medium scale enterprises.

These businesses are also to receive working capital loans and investment purpose loans at concessional rates. Other key initiatives that were undertaken include the introduction of the Saubagya Covid -19 Renaissance Facility, which provides working capital for adversely affected businesses to revive their activities. The Central Bank surpassed the milestone of Rs. 100 billion loans in August 2020, approving Rs.100,017 million worth of loans submitted by 36,489 applicants under the above facility.

The major State bank- Bank of Ceylon has provided approximately Rs. 43 billion for affected businesses and people island-wide as at September 30, 2020 fulfilling its national duty as the prominent State bank in the country. Out of the disbursed amount approximately Rs. 7.5 Billion has been directly pumped to restore the affected corporate segment through the Bank’s corporate and Offshore Banking Division of the Bank.

Awakening economy before the pandemic

From January-September of 2019, the Sri Lankan economy recorded a subdued growth of 2.6 per cent compared to the growth of 3.3 per cent in the corresponding period of 2018. The International Monetary Fund (IMF) expects the real Gross Domestic Product (GDP) growth of Sri Lanka to rebound to 3.5 per cent in 2020 driven by the recovery in the tourism sector.

According to the World Bank, the Sri Lankan economy grew 2.7 per cent in FY 18/19 (ended June 2019) indicating Sri Lanka as one of the poorest performing countries in the South Asian region. Bangladesh leads the South Asian region in terms of economic growth by posting 8.1 per cent GDP growth in FY18/19.

Agriculture, forestry and fishing activities registered a moderate growth of 2.1 per cent during Q3 of 2019, compared to the 4.3 per cent growth in the same period of the preceding year.

Industrial activities and service activities also showed a soft growth of 2.6 per cent and 2.8 per cent during Q3 of 2019, in comparison to growth rates of 1.8 per cent and 4.4 per cent in the same period of 2018. Growth in industrial activities was primarily driven by the recovery in construction and mining and quarrying activities during the period, while the service sector was largely supported by the expansion in financial services, wholesale and retail trade activities and other personal services..

During January-October 2019, a marginal growth of 0.8 per cent was recorded in exports attributing to the growth of industrial exports (accounting for 80 per cent of total exports) which expanded by 2.3 per cent compared to the same period in 2018. Agriculture (-4.4 per cent ), Mineral (-6.3 per cent) and all other export segments (-3.6 recorded) recorded negative growth rates during the same period leading to an overall trade deficit in the same period.

Is the corporate sector of the country at stake?

Yes, Indeed. As we commonly struggle to overcome the situation arisen with Covid-19 pandemic, even large stable economies are also at stake and our corporate sector has also been victimised of the bad repercussion of the pandemic. However, the most significant factor is the remarkable resilience we portrayed as a nation, hand in hand with the corporate sector in the economic revival effort.

The growth disruption due to the Covid -19 is expected to be driven by three factors; (1) demand shock, (2) supply shock, and (3) export shock. Demand shock results initially from the temporary drop in demand from the confinement and then from the loss of real incomes of consumers once the recession is in motion. The supply shock also initially results from the confinement. Thereafter, input scarcity could lead to a drop in supply. The key export markets are also battling the Covid – 19 crisis and those economies are set to take a blow. In the process, they may cut down on the imports, which could lead to a dip in the export demand.

The manufacturing and export related businesses are the key industries of the industrial sector. It has broadly performed well during 2018/19 amid the recovery of the agricultural production. The apparel and textile industry which is a major source of foreign exchange revenue relies on the demand coming from the EU and US markets. Most manufacturing and export oriented industries largely depend on imported raw materials for their value addition process. A great number of export-oriented and manufacturing industries in Sri Lanka had been, affected due to operational and supply chain disruptions.

The impact on the textile and apparel sector will be particularly considerable. This together with the slowdown/cancellation of export orders from the key export markets, would exacerbate the impact on export oriented businesses. Since these industries are largely dependent on the overseas export markets, the recovery of this sector will take a relatively longer time as most overseas markets have been adversely affected from the same. The ability of the Sri Lankan economy to recover to a greater degree depends on how soon the trading partners can recover.

Boosting the corporate sector with novel navigation

1. Diversification of production and exploring diversified markets

Sri Lankan corporate sector has to be optimistic in exploring beyond its traditional export markets. Exports to the American and Eurozone have accounted for over half of Sri Lankan total exports, backed by favourable entrance to some extent including GSP concessions, low tariff etc. However, through the lessons of the pandemic situation, Sri Lanka should gradually shift its focus towards exporting to emerging Asia and other non traditional markets.

In addition to the diversification of merchandise exports, corporate sector needs to focus on further improving services exports. In addition to the already earmarked services sectors such as tourism and IT-BPO, measures should also be taken to improve exports of other important services such as logistics and financial services. The sector can be enriched with more foreign exchange once the Colombo Commercial and Financial Hub is in operation. It is vital that Sri Lanka needs to form strategic economic partnerships with other nations, particularly the regional countries, to promote its exports and maximise benefits from the movement of capital and human resources.

2. Reformation of the business environment and relaxation of rigid policy frameworks

It is admitted that a well developed and relaxed policy framework of a country underpinned by a conducive environment to conduct business, enables the corporate sector to move ahead in terms of attracting investments, thereby boosting overall performances. As all of us are aware, the investors’ perspective is of paramount importance to for the corporate business to thrive. As such, there is nothing to discuss about establishing a promising and relaxed business environment to attract enormous investment.

As per Doing Business 2020, Sri Lanka holds the 99th position out of 190 economies for ease of doing business, remaining below its regional peers. India managed to raise its ranking through streamlining its reform strategies giving priority to the Doing Business indicators. Countries such as Vietnam have upgraded their information technology infrastructure to make it easy to pay taxes.

Recently, Sri Lanka too, made an effort to upgrade the information technology infrastructure by introducing online systems for filing taxes, processing construction permits and business registration. The relatively poor score of Sri Lanka on the ease of doing business indicates that there is ample room for further improvement as a host country for investments in the Corporate sector.

3. Untapped areas but yet rewarding

Sri Lanka’s merchandise export strategy needs to be revolutionised by diversifying to the differential exports and among them, IT export which is currently less tapped, as other evolving markets when Bangladesh, Vietnam in the Asian region have been benefited more from IT exports to the economic development of their countries. The garment trade that began in Bangladesh in the 1970s is now a $30 billion industry. But the economy is diversifying. The services sector – including microfinance and computing – makes up 53 per cent of the country’s GDP.

The success of the IT industry is central to the digital transformation and ongoing economic growth of Bangladesh. It exports nearly $1 billion of technology products every year – a figure that the Government expects to increase to $5 billion by 2021. The country also has 600,000 IT freelancers.

It is worth noting that exports and FDI have been key drivers of growth in many successful economies in Asia. However, Sri Lanka’s progress in terms of exports and FDI has been lower compared to its regional counterparts. Sri Lanka has not been able to diversify exports and its share in global trade has declined over time, unlike its East Asian neighbours, and its exports structure has not evolved to the next level beyond apparel, tea and rubber products since the early 1990s. Anti export bias, lack of private domestic and foreign investment in the tradable, particularly the industry sector, lack of innovation and research and development (R&D) have further deepened the woes of the exports sector.

The potential development of the Corporate sector could be optimised when there is a genuinely symbiotic relationship between the actions taken by the Government and the players in corporate sector. The Corporate sector has its responsibility and accountability assure the end use of funds and the end result of the business plan in holistic approach and such approaches should also be recognised. There is a large amount of develop­ment activity that companies have undertaken as part of their core operations: The Government needs to recognise and harness the segment. As the backbone of the economy, the corporate sector needs to be reinforced by all means with the objective of optimising the real gain to the economy, as such considering these factors, robust strategies are required to be put in place with a co-ordinated, coherent and strategic move.

4. Commercialisation of agriculture and investment opportunities in related activities

This sector neglected at corporate level for many years should be promoted as commercialised agriculture in order to face challenges in restriction of imports of agricultural items, generate new employment opportunities and changing mindset of the upper level of the urban people to use local agricultural products.

Way forward; commercialising agriculture

* Establish agriculture banks with soft loan schemes. Commercial banks unable to cater to agricultural needs.

* Construction of warehousing facilities.

* Provision of irrigation facilities

* Promotion of commercialised culture.

* Emulation of modern agriculture facilities.

* Coordinating of institutions like irrigation and water resources, agriculture, agriculture banks and marketing agents and government policy changes and the bureaucracy.

Constraints in the commercialisation of agriculture

* The lack of corporate investment due to uncertain policy limits of the expansion of the sector.

* Frequent annual ,natural disasters such as floods, droughts, wild animals challenges. Such natural events and disasters can be devastating to farmers and their families.

* The biggest impediment to agriculture development is not at policy level, the Government introduces with sustainable policies.

* The weak functioning of research and development programs which are confined to labs and do not adequately reach the purposes.

* The participation of farmer organisations and the private sector in agriculture development are essential for equity based development.

* Reforms are needed to transform of traditional agriculture to commercial agriculture to face global challenge.

The potential development of the corporate sector could be optimised when there is a genuinely symbiotic relationship between Government’s initiatives and the contribution of the players in the corporate sector. The corporate sector has its responsibility and accountability to assure the end use of funds and the effective approaches to attain the ultimate results of the business plan and such approaches should also be recognised. There is a large amount of develop­ment activities that companies have undertaken as part of their core operations: the Government needs to recognise the same and harness the segment. As the backbone of the economy, the corporate sector needs to be reinforced by all means with the objective of optimising the real gain to the economy, as such considering these factors, robust strategies are required to be put in place enhanced with a co-ordinated, coherent and strategic move.

The writer, W.N.P. Surawimala is currently the Deputy General , Corporate and Offshore Banking Division, Bank of Ceylon. He is a senior Banker counting over 29 years experience in both local and international banking arenas.

He holds a Bachelor’s (Special) Degree in Public Administration and Master of Science (M.Sc) in Management specialising in Banking and Finance, both from the University of Sri Jayewardenepura, Sri Lanka. He he is also an Associate Member of the Institute of Bankers of Sri Lanka.