South Asia is in the period of transition, there is a need to implement effective economic, political, social and legal structures to support sustained growth. The countries that lead this change will become the new tigers in South Asia just like Taiwan and Vietnam in South Asia. Vietnam has even got entry to the WTO.
Sri Lanka being a resilient economy has bounced backed with a seven percent plus growth in 2006. Whilst we are targeting for strong growth in 2007, are we fire fighting too many internal conflicts that is resulting in Sri Lanka loosing out exploiting opportunities in the global market place.
The magnitude of the opportunity
South Asia is the home to around two billion out of the six billion people in the planet. Data from the World Bank and the ADB suggest that its regional GDP was around US$ 850 Billion at the end of `04, is expected to grow at a rate not less than 5.5% for the next decade. Even with the conservative growth rate of around 3.5% - 4%, by end of 2010, South Asia can aspire to become a trillion dollar economy, with services and manufacturing accounting for a larger chunk of GDP in comparison to agriculture. Sri Lanka is well poised to exploit this opportunity with a 64 percent contribution to GDP, coming from the Service sector. But a key question to ask is, are we getting ready with the necessary structural changes to meet the change in the future.
SAFTA and the Issue
South Asia Free Trade Agreement (SAFTA) will be a critical vehicle for accelerating the transition of South Asia from a `Billion dollar` to a `Trillion dollar` economy. By preferentially reducing tariff and non ?tariff barriers to goods originating from South Asian region (Comprising Sri Lanka, Bangladesh, Bhutan, India, Maldives, Nepal & Pakistan) , SAFTA regime can create investment and trade opportunities having the potential to expand the per capita income in South Asia to an average of 4% per annum in the next decade. Deeper trade integration through SAFTA is expected to generate `Peace Dividend` that might end up channelising billions of dollars into hard and soft ware infrastructure, Manufacturing & service skill development like BPO`s facilitating a more robust level of trade in the region. In this context Sri Lanka should have exploited the serious situation issue that emerged last year in India on fraud, by a BPO employee running to millions of dollars. We should have capitalized this incident and positioned the reliability of Sri Lankan talent. We should also have fostered an efficient institution and drive infrastructure that would have reduced the cost of trading,thereby enhancing the trade competitiveness of industries located in Sri Lanka for instance. This requires focus and strategic investment that cannot be done when the focus is internal fire fighting from strikes in the tea plantation companies, internal security issues and political stability issues.
GDP in South Asian Countries
The World Bank predicted that the regional GDP growth in South Asia is expected to slow down to 6.4% in 2006. However, the latest data has revealed that GDP of South Asia has demonstrated a growth of 8.2 per cent in 2006, with India leading the way at 8.7 per cent with a strong non agricultural sector performance access of ten percent, Pakistan has rebounded at 6.6 per cent, Bangladesh expanding to 6.7 per cent mainly due to high remittances and vibrant service sector. Nepal is growing only at 1.9 per cent due to the intense conflicts in country. It is estimated that the 2007 economic growth will pass the 7.5 percent mark with the service sector fuelling the activity. Given these developments I believe that South Asia is in the period of rapid transition. Hence, we need to implement effective economic, political, social and legal structures to support sustained growth. The countries that lead this change will become the new tigers in South Asia just like Taiwan and Vietnam in South East Asia. Vietnam has even got entry to the WTO.
Implications to Sri Lanka
With the implementation of SAFTA from 1st of January 2006, and the first half of tariff reduction coming to force from the 1st of July 2006, we have seen strong economic growth hitting the region resulting in the world ranking changing drastically to the member countries. By 2013 the tariff and custom duties will be between 0-5 per cent where we will really see, SAFTA ? Real time opportunity becoming a reality. But the key question is Sri Lanka aligning our self to exploit this opportunity. If not, we are loosing out for sure.
Sri Lanka should grow in 2007 at a growth rate of 7.5 percent. Fish production was up by 20.7 per cent and live stock production by 7.5 per cent. Vegetable and highland crops production increased by 8.4 per cent. Agricultural exports are up by 15.9 per cent whist the total exports have grown by 11.7 per cent. The heavy rains had an positive impact of a 44 per cent in 2006, by increase total generation of power. The inflationary rate based on the GDP Implicit Deflator indicated a 11.5 per cent for quarter three in Sri Lanka., which means that the basic economic structure is in place in Sri Lanka. But the key issue is has the country identified what strategic investment is required to cater to this this directional change. If we do not, companies will move to countries in the region who are practicing this change. The best case in point is Brandix the clothing specialists who have set up new operations in India. Sri Lanka has lost out already!
Economy and sectoral trends
As in the past, the services and industry sectors provided the impetus for growth in the last two years. Many agricultural sectors performed reasonably well, despite the poor performance in the fishing industry which was severely affected by the Asian Tsunami. But in 2006, the turnaround of all sectors happen in Sri Lanka.
Export performance by major regions
If we examine the dynamic export sector the table below illustrates that the performance of Sri Lank. It demonstrates that nearly two thirds of our total exports are marketed in two regions; North American Free Trade Agreement (NAFTA) and the European Union (EU). 33% of our total exports were destined to NAFTA where the USA alone accounted for 93% of total exports to the region. Exports to NAFTA increased by 6.4% in 2005. Exports to EU absorbed 28% of our total exports and registered a marginal increase of 2.7% due mainly to the decline in export of garments (2.1%) to the EU region, which accounted for 53% of our total exports to the region.
Exports to SAARC countries grew by 28% in 2005 to US$642 Million. SAARC accounts for 10.1% of the total exports up from 8.6% contribution in 2004.
Challenges to be addressed
Trade in South Asia is characterized by porous boarders and parallelism. Studies carried out by ICRIER and other bodies show that a magnitude of such parallel trade in goods is depriving the exchequers of SAFTA members. In such a context, SAFTA can be hailed to be a successful agreement if:
? It can sufficiently incentives actors engage in parallel trade, to trade their products using legal channels
? Create a trade facilitating architecture that can arrest such parallel trade.
Whilst reduction in tariff rates might end up moving the trade arbitrates associated with illegal or parallel trade, one cannot deny that major gains from trade under SAFTA are hinged to addressing concerns in the area of trade facilitation in an accelerating manner. Article 3 in the SAFTA agreement states commitment by members to trade facilitation reforms through plans to integrate transport systems and harmonize standards. This can make movement across boarders less costly.
In the above context, care will have to be taken that rules of origin do not become disguised barriers to trade facilitation in the region and at the same time are not flouted at the cost of industry in South Asia. Respecting this thin line of difference will require tremendous will from regulatory authorities as well as industry. Raising sirens and demanding an overall of the system immediately after its implementation n order to address short term fears will only weaken the trade architecture of SAFTA and raise spanners in the time table of tariff liberalization.
SMEs: Opportunities and challenges
In the back drop of the macro picture where Sri Lanka has registered a 28% growth to the SAARC countries we must be cognizant that the size of the SMEs in India is much larger in comparison to the SME counterparts in Bangladesh, Pakistan and Sri Lanka. Which means Sri Lanka SMEs will not have the advantage of economies of scale when it comes to pricing of products. The challenge for a Sri Lankan SME is to segment the consumers in the SAFTA region and identify NICH markets that we can command leadership by customization. We will have the opportunity of pricing the product at a premium price due to customization. There after the challenge will be to close to market so that the SME can drive changing the product based on the changing needs of the South Asian consumer. The proliferation of music and cinema from India to the region whist having cultural issues for a marketer provides the opportunity to use a single advertisement across the region, there by reducing the investment of a separate piece of `creative`in each country of the SAFTA region.
If we are to discuss the issues, look at the major exports and imports of the SAFTA members in the chemicals business reveals that Bangladesh (agrochemical and fertilizers) and Pakistan (Pharmaceuticals, organic and inorganic chemicals) have the capabilities of exporting intermediate and higher end chemicals into the region. On the other hand all countries in the region namely Sri Lanka and India require importing of large quantities of chemicals to be used in their domestic industries. This provides the opportunity for companies to invest in countries such as Sri Lanka using the many investor friendly policies. The 15 year tax holiday for investment of 30 Million and above is one such attractive offer for investors from the region to Sri Lanka. The Sri Lankan facility can be the window to the large Indian market that a typical Pakistan businessman will not have direct access to. This is one such case in point of exploiting the regional opportunity but there can be millions of dollars that can be circulated in the South Asian region with out letting these monies move out to the rest of the world.
If we define our rules of origin requirements properly then there is every possibility that our exports can even enter European markets competitively using the cumulative rules of origin benefit extended by the European Union to SAARC.
But there is every opportunity that a non Sri Lankan company might also use the SAFTA frame work to import products from a country like India where one can enjoy the economies of scale principle and there by have more competitive pricing. The domestic industry must understand that there are not going to be any tariff walls to protect local companies from the competition emerging from SAARC countries and in the near future from ASEAN countries too. I strongly advocate that Sri Lanka must think about non ? tariff barriers such as technical barriers, so that we can have to some degree control on free trade and protection to infant industry. We have to understand that there is nothing call free trade in the world. We have to architecture our own non tariff barriers so that Sri Lanka whilst exploiting opportunities also protects the countries infant industries. If we do not, the world will eat into Sri Lanka.
Proactiveness of chambers and industry
The Sri Lankan representatives in the Industry Chambers such as SAARC Chamber of commerce and Industry (SCCI) will have to start playing an active role as the trade in the region, under the fabric of SAFTA architecture. These members will have to ensure the guidance is given to the policy makers that the evolving trade regime does not surrender its predictability and flexibility to myopic ambitions of a few.
Historically, one finds that the disputes arising from such trade agreements get locked up in long winding bureaucratic discussions and industry continues to suffer. Chambers and industry should press for a strong and time-bound dispute resolution mechanism which can be developed keeping in view the framework of NAFTA or the EU. The best case in point is the recent issue of Sri Lanka exports of Pepper and the Vanaspathi issue. Did Sri Lanka finally loose out. At the same time, we will have to start taking measures to be bring services and investment under the ambit of SAFTA. One can`t forget lessons from Uruguay Round of Trade Negotiations. Liberalization of services including those of financial services might end up reducing transactions costs and time lags associated with trade. Entrepreneurs in Sri Lanka have a real time opportunity opened up for them in the form of SAFTA. They will have to make the most of it just like the Europian Union. If not, Sri Lanka will loose out and lag in the South Asian region.