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Saturday September 30th, 2023

Call to liberalize Sri Lanka shipping for export competitive economy

ECONOMYNEXT – Liberalization of Sri Lanka’s shipping business to end current protectionism in the agency business, with other countries now taking the initiative to move ahead, two senior officials representing shippers have said.

Countries that liberalized have seen more overall businesses, including for small and medium businesses they said. Protection and restrictions however may be holding back the potential for Sri Lanka to become a maritime hub going beyond transshipment.

“The only beneficiaries of such policies have been those who hold agencies with the major shipping lines,” Global Shippers’ Forum Chairman and the Chairman of the Apparel Logistics Sub-Committee of the Joint Apparel Association Forum of Sri Lanka (JAAF), Sean Van Dort said in a statement.

“But the harsh economic reality we now face as a nation have made it impossible to justify sacrificing the interest of the nation, and the competitiveness of its exporters, exclusively for the benefit of just a few parties.

“Based on what the President and other key officials have stated in the lead up to Budget 2022 and subsequently, I believe that policy makers are starting to appreciate this fact.

“Throughout Sri Lanka’s post-independence development, every Government has signalled their ambition to transform our nation into a regional maritime hub.

“However with the exception of the bold efforts of the late Hon. Mangala Samaraweera, there has never been a Government that was willing to pursue the liberalization policies necessary to facilitate such a transformation.”

Reaping the benefits of an open, liberalized economy starts with shipping

From a global perspective Sri Lanka’s unwillingness to reform risks eroding the overall competitiveness of its logistics sector as a whole, Shippers’ Academy International Founder, Rohan Masakorala.

“Across Asia, and particularly in the Indian Ocean, Sri Lanka remains the only country to have maintained protectionist policies for shipping agents,” he said.

“By contrast, acknowledged global leaders in maritime logistics like Singapore and the UAE allow for 100% ownership of shipping and freight forwarding agencies, while countries like Malaysia are over 70% open.

“Most recently, Philippines and Vietnam also announced plans to liberalize their domestic industries, while Europe, the U.S. and even China allow for foreign ship owners to open local offices.

“If we fail to commit to a similar path of reforms, we risk lagging even further in our development, and eventually being left behind altogether Either we reform and adapt or we perish. There are no other choices.”

Opening for foreign investment and ownership, the sector as a whole would be forced to enhance its competitiveness, and eliminate hidden inefficiencies, he said.

It was as mistake to believe that opening will overall reduce opportunities for local businesses, as evidenced by countries like Singapore which has seen an overall growth.

Singaporean logistics sector, was home to 140 global shipping line headquarters, and still has room for over 5,000 local shipping agents.

“Meanwhile, the investments, knowledge and technology transfer infused through foreign ownership would expand the economies of scale across the Sri Lankan logistics sector, creating new niches for smaller players, and making export markets more accessible to Sri Lankan SMEs,” Masakorala said.

Those opposed to liberalization say that the shipping industry is already liberalized except for the “insignificant” business of local shipping agents, which are currently protected from foreign ownership, Maskorala and Van Dort said.

Opponents of liberalization also say opening up domestic shipping agencies to complete or even partial foreign ownership would risk removing domestic participation in this lucrative business, without securing any significant benefits for the nation.

Proponents of liberalization have argued that such policies only protect the interest of local shipping agents, while discouraging global shipping lines from engaging with the domestic market, and blocking private sector foreign direct investment into critical infrastructure.

While both camps have been deadlocked for decades, Sri Lanka’s unprecedented economic crisis and urgent need for foreign currency inflows has re-energized arguments in favour of liberalization the duo said.

In Sri Lanka freigh forwarding is also restricted for foreign investment.

The success of ExpoLanka, in which foreign investment was allowed with a temporary lifting of restrictions demonstrated the potential, Van Dort said.

“Foreign ownership brings numerous extremely valuable benefits, and we need not look further than the success of Expolanka, or any of the other logistics hubs that Sri Lanka is competing against to see the proof,” he said.

“By lifting ownership restrictions, we encourage international ship owners to get engaged and invested in Sri Lanka, and properly utilize our location to link up with their global networks.

“Instead we are currently treated as purely a cost center that feeds regional competitor ports that actively encourage ownership from global shipping lines. The added control that results encourages them to instead treat such ports as profit centers.”

Countries like Singapore and Dubai however have monetary stability allowing for stable economic conditions.

Sri Lanka however has a flexible exchange rate which has led to currency crises, permanent depreciation and social unrest. Instability has worsened after so-called flexible inflation targeting, where an attempt is made to target inflation without a floating exchange rate. (Colombo/Jan04/2022)

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Sri Lanka bank bad loan expansion slows in June quarter

ECONOMYNEXT – Bad loans at Sri Lanka’s banks, measured as ‘Stage 03’ loans to total loans and advances expanded by 0.5 percent to 13.7 percent in the second quarter of 2023, central bank data shows, which is a slower pace than the previous three quarters.

Bad loans went up 1.9 percent in the September 2022 quarter, and 1.0 percent in the December quarter and 1.3 percent in the March quarter, as debt moratoria also ran out.

In Sri Lanka and other countries, large spikes in bad loans are usually ‘hangover’ of macro-economic policy deployed target growth.

Amid a stabilization effort, credit can also contract, making the bad loans bigger.

Sri Lanka’s bad loans usually spike after period of credit growth re-financed by printed money (reverse repo injections made to artificially target a call money rate), and not real deposits, which then trigger balance of payment deficits which require steep spikes in rates to restore monetary stability.

Sri Lanka economic bureaucrats cut rates with the printed money in the belief that there is a growth shortcut by cutting rates to target real GDP, which has led to external crises since a central bank was set up in 1950.

However, policy worsened after 2015 when the International Monetary Fund taught the country to calculate potential out and dangled the number in front of a central bank which had taken the country to the agency multiple times after running down reserves.

In December 2019, inflationists also cut taxes on top of rate cuts, deploying the most extreme Cambridge-Saltwater macro-economic policy ‘barber boom’ style with predictable results.

When rates are hiked to restore monetary stability, bad loans rise and a currency collapse destroys purchasing power of the consumers and sales of firms which had taken loans.

When central banks cut rates with liquidity injections bad loans also go up in floating rate regimes (the housing bubble), but balance of payments are crises are absent. (Colombo/Sept29/2023)

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Sri Lanka expects restructuring decisions from all creditors: Minister

ECONOMYNEXT – Sri Lanka is engaging positively with all foreign creditors State Minister for Finance Shehan Semasinghe said this week as an International Monetary Fund review hangs in the balance on restructuring.

“All creditors are engaging positively with us,” Minister Semasinghe said. “We expect decisions from all our creditors. For us earlier the better.”

Sri Lanka is negotiating with Paris Club creditors and several non-Paris Club creditors like India and Saudi Arabia together and China separately. China is an observer in the Paris Club meeting.

The Paris Club held a meeting on Sri Lanka on September 22 with China as an observer.

Though Paris Club creditors have a well-oiled mechanism to give a quick decision on countries that default, the entry of China which had earlier not been willing to restructure debt, but was willing to give fresh loans to repay instalments, have complicated matters.

“Let me say again that we support Chinese financial institutions in actively working out the debt treatment with Sri Lanka,” China’s Foreign Ministry spokesman Wang Wenbin told reporters on September 26.

“We are ready to work with relevant countries and international financial institutions to jointly play a positive role in helping Sri Lanka navigate the situation, ease its debt burden and achieve sustainable development.”

There are expectations that Sri Lanka may be able to wrap up a preliminary deal with official creditors as early as October 2023 around the time IMF’s annual sessions take place in Morocco.

Sri Lanka President Ranil Wickremesinghe is to make an official visit to China October.

Sri Lanka is expected to finalize a refinery deal in Hambantota among other investments during the visit, according to reports.

Completing Sri Lanka’s external debt restricting is key to completing the first review of the island’s reform and stabilization program with the International Monetary Fund, which is expected in October or November.

Without completing a review Sri Lanka will not have formal IMF economic targets for December, and no disbursement of the second tranche.

World Bank and IMF with the G20 group, which include India and China has formed Global Sovereign Debt Roundtable has been trying to fine tune debt restructuring going beyond the Paris Club.

IMF’s Senior Mission Chief for Sri Lanka Peter Breuer said Sri Lanka’s debt is ‘spread around quite a bit’ to a question whether an IMF review could progress without China, possibly indicating that the lender would prefer to have the country on board.

“This is a process that we have that applies in the case of Sri Lanka to both official creditors, meaning other countries that have lent to Sri Lanka on a bilateral basis as well as commercial creditors, for example, bond holders,” Breuer told reporters in Colombo.

“And as you know, the government is in discussions with all of these groups. In Sri Lanka’s case, the debt is spread around quite a bit externally and domestically.”

READ MORE Sri Lanka’s external debt restructure ‘progress’ decision by IMF exec board

Out of Sri Lanka’s 36.59 billion US dollars of central government debt, multilaterals held 29.8 percent or 10.9 billion US dollars which will not be restructured.

Bilaterals held another 29.9 percent of which Paris Club was 12.1 percent and China 12.7 percent.

Of the commercial debt which was 40.3 percent, China Development Bank held another 6 percent, relating to a monetary instability loan it has given as a bailout without asking for rate hikes to stop output gap targeting.

China without AIIB held 6,850 million US dollars or 18.7 percent of central government external debt. (Colombo/Sept29/2023)

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Sri Lanka can build strong tourism ‘eco-brand’: UN official

ECONOMYNEXT – Sri Lanka can build an ‘eco-brand’ catering especially to younger tourists who feel strongly about the environment, United Nations Resident Representative to Sri Lanka, Azusa Kobota said.

About 70 percent of global travellers prioritise sustainability in their holiday choices, marking a ten percent increase from 2021, while around 30 percent of travellers feel guilty about flying, due to carbon emissions, she said.

“As the world embraces green thinking during this time of economic recovery efforts, the objective of the tourism sector cannot simply be about increasing the number of inbound tourists,” Kobota said at an event marking World Tourism Day in Colombo.

“It has to be about enhancing their experience through green lenses, by implementing a responsible, eco-conscious paradigm for the sector and building a stronger eco-brand around the sustainable agenda for Sri Lanka,”

“This is no longer about reducing the trade offs between growing the industry and protecting the environment.

“We must see nature as our asset and solutions to be obtained for the exponential growth for our future generations.”

The sustainable tourism market is estimated to have earned 195 billion US dollars in 2022, and is expected to reach about 656 billion US dollars in 2032, she said.

“Tourists, particularly the younger generations from gen X,Y,Z are deeply, deeply conscious about the long term choices of their actions, and the adverse impact of tourists on the environment.

“Statistics show that a significant proportion of global travellers, about 30 percent, feel guilty about flying due to the environmental impact and 22 percent say they actively prefer public transport and bicycle rental options, over renting a car.”

Sri Lanka welcomed one million tourists by September 26 and is expecting more that 1.5 million tourists by the end of the year. (Colombo/Sept29/2023)

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