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Monday February 6th, 2023

Sri Lanka apparel exports to lose US$1.5bn as Coronavirus cripple buyers

ECONOMYNEXT – Sri Lanka’s apparel industry is expecting to lose 1.5 billion US dollars’ worth of revenue between March to June as the Coronavirus from Wuhan sweeps through western markets, battering economies.

“Finally, the impact we feared would come from our customers has hit us very badly,” Rehan Lakhany, President of Sri Lanka Apparel Exporters Association told EconomyNext.

“The impact has been quite massive; we are estimating the loss to be in the region of about 1.5 billion dollars which accounts to the revenue from March to June (almost a quarter).

Initially, the industry expected the loss of orders to be around 200-500 million US dollars.

Sri Lanka’s apparel industry accounts for almost 40 percent of the total exports and 52 percent of merchandise exports while contributing 6 percent to the GDP.

Buyers Crippled

As a high revenue export industry, it brought in 5.5 billion US dollars out of the total 11.9 billion dollars of foreign revenue in 2019.

The US and Europe are Sri Lanka’s largest apparel export markets accounting for almost 90 percent of the turnover.

With the COVID-19’s disruption on Chinese supply easing, Sri Lankan manufacturers were faced with massive hits on the demand side when Italy became the new hotbed for the novel Coronavirus sickness in Early March.

“A lot of factories have got orders which were running in their production were suddenly cancelled, almost all customers have said to stop production and shipments of the products that have been already produced,” Lakhany said.

“They are considering it as cancelled without any liabilities due to the corona issue”.

Apparel industry works on long calendars, the manufactures produce garments six to four months ahead of entering retail stores.

The products which are being cancelled went into production in January, when COVID-19 was at its initial stage.

“Our members are also hit by the fact that product that is ready to be shipped cannot be moved due to the lockdowns,” said Lakhany.

“Even if cargo could be moved the reduction in flights has meant a huge reduction in air freight volumes and a consequent increase in freight rates.”

Sri Lanka imposed strict curfews Island wide from the second week of March, after the first domestic patient, a tour guide was identified.

Cash flow constraints

As the order cancellations take place, buyers in the export markets have also requested an extension in the credit period from 30 days to 120-180 days for already exported goods.

“All of the above will mean a massive hit on the cash flow of companies in the next 4 months,” Lakhany said.
“In the absence of any revenue for the minimum of the next 3 to 4 months, the ability of companies to pay even basic salaries will be constrained. This will threaten the very future of the industry in Sri Lanka.

“So, we have to wait till the situation to settle down to find out what the status of the payments is. It looks like there won’t be any production for at least for the next three-months.”

Medium Term Prospects

The industry is worried that even after the coronavirus is settled, there won’t be enough business like in the past.

“Western markets are not going to back in full swing. We expect it would take about 1-2 years for their economies to come back to normal as those economies will almost surely be in recession themselves,” said Lakhany.

“Therefore, there have to be some layoffs as well in the industry. That’s the way the industry is thinking, they know they can’t pay salaries; there are no orders, there’s no money, massive losses are happening for the industry and if they don’t lay off then the industry will get wiped out.”

Sri Lanka’s apparel industry workforce consists of more than 990,000 workers, in other terms 15 percent of the country’s total workforce.

Lakhany said the survival of the industry itself is in big question looking at the way things are at this moment.

However, he said “the government has made available details of a relief package for the industry and we are working closely with the authorities on implementing of these relief measures.”

Globally the virus has infected more than 650,000 people and killing more than 30,000.

Western countries are in lockdown as the infection cases surge. The US alone has 100,000 active infection cases meanwhile the death toll in Italy stands at 9000.

Sri Lanka has been aggressively contact chasing quarantining arrivals. (SB-Colombo/Mar31/2020)

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Sri Lanka’s banks may have to re-structure loans caught in progressive tax

ECONOMYNEXT – Sri Lanka’s banks should explore restructuring loans of salaried employees hit by progressive tax, Central Bank Governor Nandalal Weerasinghe said as progressive income taxes were imposed at lower thresholds amid high inflation following a sovereign default.

There have been complaints mainly by picketing state enterprise executives and also other workers of such agencies such Sri Lanka Port Authority that high progressive taxes were putting their bank accounts into overdraft after loan installments were cut.

“Yes, they have mentioned that,” Governor Weerasinghe said responding to questions from reporters.

“We have told the banks earlier as well. Because the interest rates are high and their business being reduced, the SME sector, the repaying capability has reduced.

“We have told them to explore their repaying capabilities and restructure their loans in order to safe guard both sides. At this time also we are asking the banks to do that.”

In the case of some state enterprises, the Pay-As-You-Earn tax, through which income tax is deducted from salaried employees in the past was not paid by the employee but the SOE.

Bad loans of the banking system overall had risen after the rupee collapsed, reducing the spending power in the economy, while rates also went up as money printing was scaled back, foreign funding stopped and the budget deficit widened.

The rate hike has prevented possible hyperinflation and a bigger implosion of the economy by stabilizing the external sector in the wake of previous mis-targeting of interest rates.

In the current currency crisis a delay in an IMF program due to China not giving debt assurances as well as fears of domestic debt re-structure has kept interest rates elevated.

Sri Lanka’s economic bureaucrats in 2020 cut taxes and also printed money, in a classic ‘Barber Boom’ style tactic implemented by UK economists and Chancellor Anthony Barber in 1971 to boost growth and employment.

The ‘Barber Boom’ ended in a currency crisis (at the time the UK did not have a floating rate and the Bretton Woods system was just starting to collapse under policies of Fed economists) and inflation of around 25 percent in the UK.

The UK implemented a three-day working week to conserve energy after stimulus while Sri Lanka saw widespread power cuts as forex shortages hit.

Read more:

Anthony Barber budget of 1971

Anthony Barber budget of 1972

Similar policies saw a worldwide revival as the US Fed economists injected money during the Covid crisis mis-using monetary policy to counter a real economic shock and boost employment while the government gave stimulus checques.

Now the world is facing an output shock as a hangover the Covid pandemic recedes.

The re-introduction of progressive tax at a maximum rate of 36 percent while tax brackets high jumped with the rupee collapsing from 200 to 360 to the US dollar had reduced disposable incomes further.

Salaries employees were encouraged to get loans in 2020 with the central bank mandating a 7 percent ceiling rate for five years.

However, any borrower who got loans on floating rates long before the scheme are now facing higher rates. (Colombo/Feb06/2023)

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Sri Lanka to address SME tax problems at first opportunity: State Minister

ECONOMYNEXT – Problems faced by Sri Lanka’s small and medium enterprises from recent tax changes will be addressed at the first opportunity, State Minister for Finance Ranjith Siyambalapitiya said.

Business chambers had raised questions about hikes in Value Added Tax, Corporate Income Tax and the Social Security Contribution Levy (SSCL) that’s been imposed.

It should be explored on how to amend the Inland Revenue Act, Siyamabalapitiya said, adding that the future months should be considered as a period where the country is being stabilized.

Both the VAT and SSCL are effectively paid by customers, but the SSCL is a cascading tax that makes running businesses difficult.

In Sri Lanka SMEs make up a large part of the economy, accounting for 80 per cent of all businesses according to according to the island’s National Human Resources and Employment Policy.

(Colombo/ Feb 05/2023)

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Sri Lanka revenues Rs158.7bn in Jan 2023 up 51-pct

ECONOMYNEXT – Sri Lanka’s government revenues were 158.7 billion rupees in January 2023 but expenditure and debt service remained high, Cabinet spokesman Minister Bandula Gunawardana said.

In January 2022 total revenues were Rs104.5 billion according to central bank data.

Sri Lanka’s tax revenues have risen sharply amid an inflationary blow off which had boosted nominal GDP while President Ranil Wickremesinghe has also raised taxes.

Departing from a previous strategy advocated by the IMF expanding the state and not cutting expenses, called revenue based fiscal consolidation, he is attempting to do classical fiscal consolidation with spending restraint.

President Ranil Wickremesinghe has presented a note to cabinet requesting state expenditure to be controlled, Gunawardana told reporters.

State Salaries cost 87.4 billion rupees.

Pensions and income supplements (Samurdhi program) were29.5 billion rupees.

Other expenses were 10.8 billion rupees.

Capital spending was   21 billion rupees.

Debt service was 377.6 billion rupees for January which has to be done with borrowings from Treasury bills, bonds and a central bank provisional advance of 100 billion rupees, Gunawardana said.

Interest costs were not separately given. (Colombo/Feb05/2023)

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