Sri Lanka Monthly Business Review: April
2009
Businesses Face Painful Adjustments to Global Recession
Ananda Jayawardane
 The
business climate in Sri Lanka remained volatile and turbulent
during the month of April 2009. The global financial crisis
has caused a substantial reduction in the demand for Sri Lankan
goods and services in many overseas markets thus adversely affecting
revenue and foreign exchange earnings. Tourism, garments, manufactured
goods, tea and services such as business process outsourcing
(BPO) and software development were some of the worst affected.
Loss of jobs and repatriation of Sri Lankan workers in the Middle
East, especially the highly paid professionals engaged in the
construction and related industries have created numerous problems
for both the employment agencies and the job seekers.
The tourism industry which has been in the doldrums because
of the escalated war has further declined. For the first quarter
of 2009, total arrivals fell by 21.3 percent to 106,702 visitors
compared with the same period in 2008. According to Sri Lanka
Tourist Board, arrivals have fallen sharply from key Western
European, Eastern European, South Asian and South East Asian
markets. The country’s biggest exporter, the apparel industry
has seen some tough times since the onset of the global economic
crisis. According to the Chairman of the Joint Apparel Association
Forum (JAAF) about 50 garment factories have closed down over
the past six to eight months mostly in the SME sector resulting
in the loss of about 40,000 jobs, though exact data is not available
for the period under review. A large number of export-oriented
manufacturing organizations complain that their exports have
significantly dropped due to either cancellation or delaying
of orders by the foreign buyers. Tea started to pile up at the
Colombo tea auction due to sharp drop in buyers during the early
part of 2009 but this situation did not last long due to positive
responses shown by Middle East and CIS countries. However, dry
climatic conditions have caused a significant drop in the yields
thereby reducing the quantities available for export. According
to Sri Lankan Tea Board, tea exports in February 2009 have fallen
by about 26% in volume terms compared to 2008 to 38.67 million
kg and by 29.2% compared to 2008 to US$ 131`.3 million in value
terms.
 With
a view to incentivizing exporters, the government has introduced
an Export Development Reward Scheme (EDRS), which is seen as
a pro-labor support package by the business community as no
reductions in employment levels are allowed for reaping benefits
under this scheme. In addition, only those who have continuously
exporting since 2006 will be eligible to apply and that they
should maintain a minimum of 90% of exports for each quarter
compared with the corresponding quarters of 2008 to earn a reward
of 3% of the export value. A reward of 5 percent will be paid
to those who equal quarterly export proceeds. However, the exporters
claim that this package is not workable as these targets are
difficult to achieve given the slump in international trade
and weakening demand for Sri Lanka’s exports and have
offered their inputs and suggestions to the government.
In the domestic environment, high interest rates, high taxation,
artificially strengthened rupee until April and then allowing
it to float and drop in sales due to low disposable income levels
of the consumers despite the drop in inflation to 5.3 in March
2009, had a cumulative adverse effect on businesses in several
ways. Bank interest rates which are as high as 25-35% caused
a serious problem for businesses in meeting their financial
needs. Moreover, banks also adopted a policy to be extra cautious
in lending due to widespread default problem experienced by
many financial institutes. The SME sector was the worst hit
as a result of this situation. During the month of April, Central
Bank of Sri Lanka requested commercial banks to reduce their
lending rates. Accordingly, most commercial banks reduced overall
penal rates of interest applicable to unauthorized excesses
to a figure not exceeding 29% per annum from 39%. In a statement
the Sri Lanka Banks’ Association said its member banks
will also consider a further reduction for priority sector facilities
within their respective bank portfolios on a case by case basis.
In addition the two state banks- Bank of Ceylon and Peoples
Bank reduced their interest rates by 2% points for development
oriented loans and by 0.5% points for other loans. However,
most of the other banks are yet to fall in line.
High taxation by the government further aggravated problems
faced by the business community. The excise duty imposed by
the government in January 2009 on the importers of liquid petroleum
(LPG) gas at Rs.8.00 per kg was a heavy burden on the ceramics
industry in Sri Lanka which is the largest consumer of gas in
the country consuming over 1170 metric tons per month. Amidst
this problem the government increased this duty to Rs. 27.50
per kg by March 2009 leaving this industry in dire straits.
The raised duty increased their energy cost to about 50% of
the total cost of production thus making Sri Lankan ceramics
highly uncompetitive in foreign markets. However subsequent
to constant lobbying, the government recently decided to waive
this excise duty for bulk users of LPG gas thus benefiting the
ceramics industry. Having granted some relief to the ceramics
industry, the government has recently increased Nations Building
Levy (NBL) from 1% to 3% with effect from May 2009. This is
payable by businesses on a quarterly basis if the turnover for
that quarter exceeds Rs. 100,000.00 which means that even small
businesses will be liable for this burden under difficult conditions.
Leading business chambers are planning on lobbying with the
government to reconsider this tax increase by offering alternative
options for the government to raise revenue.
Central Bank of Sri Lanka maintained the rupee around 108
rupees to one US dollar for several months until April 2009
due to various economic considerations thereby making our export
products overpriced and uncompetitive in foreign markets causing
increasing demands from the business community to allow adjustment
of the exchange rate to an acceptable level. The government
positively responded to this situation by mid April 2009 mainly
because connected action will also meet the conditions laid
down by the IMF for granting a loan of US$ 1.9 billion requested
by Sri Lanka. Since then the rupee started to adjust to new
levels with a rapid rise in the exchange rate and surpassing
Rs. 120.00 towards the end of the month. This is expected to
help exports. However, the increase in cost of imports coupled
with anticipated increase in cost of living which can cause
higher wage expectations among the employees and further erosion
of disposable income of the consumers are likely create continuous
problems for the business sector.
The extremely difficult operational conditions have compelled
several businesses to take drastic action such as re-organization
of their operations, re-scheduling working patterns, laying
off employees on a temporary or permanent basis and closing
of a part of the business or even in full. The Colombo office
of the ILO is in the process of compiling a rapid assessment
of the global economic crisis and its effect on employment in
Sri Lanka. The Employers’ Federation of Ceylon (EFC) is
also working on a survey of the voluntary retirement schemes
that have been offered since the global financial crisis broke.
The Secretary to the Ministry of Labor Relations and Manpower
recently announced that the Commissioner of Labor has received
32 applications, mainly from the SME sector, for laying off
their workers. The industries that are worst affected are the
apparel and textiles, ceramics, leather and tourism. According
to the data released by the JVP-led Inter Company Workers Union
(ICWU), 19 businesses have been already closed while another
29 businesses have laid off part of their employees. In addition
serious problems have arisen in another 29 businesses. The above
mentioned businesses fall into garments, mining, manufacturing,
construction, food, shoe, agricultural, gems, ceramics and financial
sectors.
The Employers' Federation of Sri Lanka has made a submission
to the government drawing attention to the current difficult
situation for the business sector seeking relief in several
ways. There suggestions include, a 5 day week with extended
working hours in place of the present 5.5 day week, approval
for laying off the workers depending on unavoidable business
circumstances, revision in gratuity payment scheme and a number
of other revisions in labour rules and regulations. The government
took some time to negotiate these matters with the relevant
parties and has positively responded recently by permitting
5 day working arrangement wherever mutual agreements could be
reached between the employers and employees thus avoiding possible
reactions of labour unions. Steps have also been taken to approve
laying off the workers depending on the merits of each case
without giving the employers a blanket approval. In such cases,
if companies retrench employees on a temporary basis they should
pay them an agreed partial pay with all statutory payments up
to 3 months and then re-employ them, failing which procedures
pertaining to the termination of employment should be followed,
which includes the payment of termination benefits in full.
The Colombo stock exchange which operated on a low key for
a long time suddenly rejuvenated towards end of April with continued
success in military operations and the anticipated ending of
the war within a short time. Elevation of the investor confidence
level was very evident from increased transactions and rise
in share prices across the board. Speculations relating to possible
privatization of some state entities which is expected to be
a condition laid down by International Monitory Fund (IMF) to
grant US$ 1.9 billion loan also contributed to reactivation
of the stock exchange. Consequently Sri Lanka Telecom share
price rose by 11.4%to Rs. 39.00 during the third week in April.
Amidst all these problems and uncertainties, some Sri Lankan
companies have excelled at international level during this month.
Opening of a modern luxury hotel in the Maldives by Aitken Spence,
opening of a fashion accessories store for women in Singapore
by Odel and Global Finance (USA)'s selection of Commercial Bank
as the “Best Bank in Sri Lanka” for the 11th successive
year could be cited as some examples.
All the key factors and issues, especially the uncertainties
in the business environment, discussed in this review are likely
to remain relevant for the next several months or even longer.
Grand Hotel Blooms Best in Nuwara Eliya
 The
Grand Hotel, Nuwara Eliya that dominates the Annual April Nuwara
Eliya Flower Show did so again this year when it won almost
every award ranging from the Best Collection of Roses to Best
Collection of Potted Plants and all the way to Best Garden Prize
for the Commercial Large Category.
 The
Resident Manager of the Grand Hotel Mr. Raju N. Veerasingham
receives the overall grand prize for the Best Large Commercial
Sector Garden Prize from the Governor of the Central Province
Tikiri Kobbekaduwa and the Mayor of Nuwara Eliya Chandana Lal
Karunaratne.
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