A “way out” through the Port City
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Port City under construction.
Imagine a physically weak person with chronic illnesses, getting caught up in stormy weather and getting wet in heavy rain! If this feeble person’s illnesses become serious and fatal, different people may diagnose the cause of his death differently.
Some people may identify the rain under which he got wet as the cause of his death. “He was caught up in the rain, fell ill and died, unfortunately”, one would say.
But others may recognise his historically weak health status and physical complications as the cause of death. They would say that “he already had chronic health issues which became worse after he was caught up in the rain”.
Although what the former group of people said was not incorrect, we may however have to give more weight to the latter explanation. There would have been many people who were caught up in the same rain, but they all didn’t die. Besides, unforeseen shocks such as storms and rains may come and go any time, and everybody must face them expectedly or unexpectedly.
The above narrative, which I have referred to on many occasions, was used to elaborate the real cause of the current economic crisis of Sri Lanka. It’s true that Sri Lanka too had to face a series of shocks which caused the economy to fall, as it did. Above all that, however, Sri Lanka’s current economic crisis is a historical “foreign exchange crisis” so that the way out of the crisis also lies through the way in.
Ending fuel shortage
Last week, we discussed in this column the question whether Sri Lanka can end its current fuel shortage in 12 months. Our conclusion was that without addressing the country’s fundamental cause of the crisis – the foreign exchange issue -, there is no hope; and the worry is that we have not yet even thought of it!
We would not end the fuel shortage and we would not get out of the current crisis unless we sort out the foreign exchange crisis. And the irony is that the more we get squeezed by the fuel shortage, the more we would sink further into the crisis!
Some of our speculators are anticipating a revival in tourist earnings. I would say that tourism is like the “icing on the cake” as it is nice to have tourists and to welcome them with the Sri Lankan smile, but we should bake the cake first. As tourism is an industry more vulnerable to health and security conditions and it can quickly turn away to another destination, it’s dangerous to rely overwhelmingly on it.
Some may count on returning to worker remittances, as people may also leave the country nowadays in increasing numbers. Even if we get its highest level of foreign exchange earnings, which was about US$7 billion, it may not be able to finance the entire current foreign exchange requirement including debt service payments. Although we try to increase it, obviously by making people’s lives harder in the home country, it may happen along with increasing poverty and not with increasing prosperity.
Another argument is to wait for a successful arrangement for “debt restructuring” which has no direct relationship with foreign exchange earnings, but with managing their allocation. Some of us keep counting the days for a positive outcome of the IMF bailout package. In addition, we are still anticipating credit lines and swap arrangements with our neighbouring countries in Asia; that’s all for borrowings under different names, which must be paid back sooner or later.
An opportunity at hand
It may be all good and relevant now, but all these programmes and actions would not have any significant impact on our fundamental problem – the foreign exchange crisis! The problem must be dealt with nothing other than earning foreign exchange.
There are two-fold approaches to enhance the country’s foreign exchange earning capacity: One is to depend on the country’s own savings and investment to initiate export businesses and let them to grow as to become competitive enough to conquer the world markets. Obviously, this may take 100s of years to multiply our foreign exchange earnings.
The second is to overcome the domestic savings and investment gap with foreign investment from those which have already conquered the international markets. This route is shorter and quicker, while it only requires an internationally competitive business environment.
It’s not the fact that Sri Lanka does not have an opportunity to generate foreign exchange. Actually, Sri Lanka is now sitting on an unprecedented opportunity to earn foreign exchange – that is the Port City Colombo. If Sri Lanka’s current economic crisis was the long-term product of the country’s weak export performance, there is an utmost need for generating export earnings. If the Port City Colombo was designed for attracting “world class” international businesses to generate foreign exchange, the opportunity is also readily available now.
While the land reclamation and the ground infrastructure have been completed, the legal and regulatory framework of the Port City as a Special Economic Zone (SEZ) has also been in place now. The original mandate was to attract international investment in selected areas of international finance, hospitality, education, health, convention and exhibition and residential facilities.
Export-oriented industries
Technically, it does not limit the Port City to facilitate and accommodate export-oriented sectors, including the manufacturing activities. It is expected to be a huge step forward to encourage such export-oriented production avoiding the difficulties in doing business in Sri Lanka which have contributed to the country’s long-standing anti-export bias. They can be the existing export-oriented sectors or the potential new export-oriented sectors, while in both cases there needs to be a foreign investment component as well.
While the production segment of the export-oriented sectors can be located outside the Port City, all other service components of the export sectors could be accommodated within the Port City; these service components may include research and development, designing, trading and distribution, marketing and branding, finance and accounting, information and communication, and business processing.
In fact, we need to understand that in the value chain of manufacturing activities the share of service components has grown remarkably over the past few decades; as a result, the production component which includes material, labour and other primary costs of any product account for a minor share of the final value of the commodity.
Slicing up the production component of an economic activity from its service components and locating them separately enables the investors to benefit from locational advantages; the international businesses that are located in the Port City SEZ would have the advantage of the SEZ regulatory framework applied to the Port City.
In addition, the location of the production component of an economic activity outside the Port City is also important for strengthening their connectivity to the national economy. The Port City may also be a good opportunity to diversify Sri Lanka’s exports as well as export markets looking forward to the growing Asian region itself.
The challenge
While there is a need for expansion in the export business and, for that matter attracting investment flows through the Port City, one of the major challenges that Sri Lanka must deal with is the geopolitical turbulence in the South Asian atmosphere. In the first place, it is a good sign that Sri Lanka is not a party to any side in geopolitics, a policy that should continue in the future as well.
Sri Lanka should be a land for economic competition for all interested parties, and not for political competition. It should encourage and welcome more and more investors from all major superpowers, by preparing its free and open economic atmosphere for competition. This may not be an easier task at interactions, when the country has lost its bargaining power in the midst of an economic crisis; but it has to be the firm position of our authorities. In this respect, even the development of our negotiation skills is also an area that Sri Lanka needs to focus on.
(The writer is a Professor of Economics at the University of Colombo and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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