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Thursday December 8th, 2022

Sri Lanka firms with global links learn to compete better and raise standards

ECONOMYNEXT – Sri Lanka firms with foreign investment or demanding global customers learns to raise standards and compete while protected firms may be left behind, participants of an online seminar said.

“The inconvenient truth is that if you look at Sri Lanka, all the firms that have developed very professional practices whether it’sproduct, service, employee, value proposition, have three factors in common,” Chanakya Dissanayake, Global Head of Investment Research, Acuity Knowledge Partners told an online seminar organized by the Friedrich Naumann Foundation and EconomyNext.

“Either they are forced to compete in anoverseas market with developed world competitor, they have Tier One global clients who impose the global best practices on them or they operate domestically with Tier One competition created by multinational corporations and best in the world.”

Dissanayake said services firms like the one he worked for was one type of example but it also applied to other sectors.

Though it started over a decade earlier with two dozen people it grew and was acquired by a Fortune 500 company.

Businesses Forced

“We were forced because we had all three of those factors we have operate in overseas markets, Tier One clientele and our competition was also world class.”

“But we are not the only one. If you look at our apparel industry because of their joint venture partners they got the same thing.”

Sri Lanka’s Millennium IT started off as a Sri Lanka based SME which competed against some of the best securities trading systems to win the Colombo Stock Exchange deal on its own merits.

The firm used Sun servers for its trading system based on innovative middleware, when competition was offering ‘mainframes’.

“So the question is, why should a small and medium enterprise now starting off pure local business should aspire to basically have this global professionalism?” Dissanayake asked.

“In my opinion they should do that to basically break the negative cycle. Because if you don’t have world-class professionalism in your products, we saw even in your employee value proposition you end up always with Tier 2 clients who can never pay you enough to have the world-class standards.

And that becomes a never-ending negative cycle. You can’t hire the best quality people, you can’t retain the best quality people, you don’t have enough resources or your finances or investors don’t trust you to give you the money to come up with that.

Forcing Consumers

In Sri Lanka however Latin America style import substitution industrialization (ISI) to ‘save foreign exchange’ is widespread.

A Latin America style central bank was set up in 1950 by a US money doctor that has printed money and created chronic depreciation and forex shortages, had provided an ideal excuse for rent-seeking import substation firms to sell goods at ‘black market’ prices to consumers with state sanction.

A German Historical Economics style infant industry argument is also peddled by protectionists advocates though protected firms are now decades old and geriatric.

Sri Lanka’s Hemas Holdings which has operations in pharmaceuticals and fast moving consumer goods is operating in both Sri Lanka and Bangladesh competing against multinationals.

“If you’re a truly Sri Lankan company, my argument is you know the Sri Lankan consumer better,” Kasturi Chellaraja, Group Chief Executive, Hemas Holdings said.

“MNCs can claim to be knowing but your roots are here”

Last year we brought Clogard salt and amazingly it took off because we understood salt culturally.

In Bangladesh a variant of Komarika oil is sold which was relevant.

“So we’ve learnt that sometimes when we understand we will compete differently.”

Hemas is also in pharmaceuticals and recently bought an old established pharma firm, J L Morrisons. Sri Lanka’s government also promoted domestic drug making, giving buy-back agreements from the state health budget and protecting the firms from competition.

However many drugs are under price controls, in a reverse from the protection offered to other goods, amid warnings that such practices may create drug shortages when the value of the currency notes issued by the Latin America style central bank’s collapse.

In medicine it has been harder to push the protectionist argument as sick people get sympathy and it is less easy to get around politicians to exploit them with high prices.

Cost Competitive

Chellaraja said Hemas was focusing on cutting costs by tying up with bigger producers.

“For an example at a Morrisons while we supply to the government our strategy was already onboard two big Indian giants who using this plant to manufacture their brand and we tapped into supply chain of theirs.”

“Technically when you’re producing for 20 million I can’t get the best API (active ingredient) for that small volume, but when you go with the partner and say okay I will do this, you give me your supply chain raw material at your price.”

She said there were lots of media reports saying imports of drugs should be limited, but when the science was not there it cannot be done fast.

It was important to give high quality medicines at affordable prices, she said. (Colombo/July23/2021)

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Sri Lanka in deep talent drain in latest currency crisis

ECONOMYNEXT – Sri Lanka businesses are facing a drain of talent, top business executives said as the country suffers the worst flexible exchange rate crisis in the history of its intermediate regime central bank and people lose hope.

“We are seeing a trend towards migrating,” Krishan Balendra, Chairman of Sri Lanka’s John Keells Holdings told an economic policy forum organized by the Ceylon Chamber of Commerce.

“We have seen an impact mainly on the tourist hotels side, quite an exodus of staff (migrating) to countries we have not seen in the past. 

“We have seen people go to Scotland, Ireland. It has usually been the Middle East and Maldives. Australia seems like a red hot labor market at the moment.”

Sri Lanka’s rupee collapsed from 200 to 360 to the US dollar after macro-economists printed money to suppress rates.

Sri Lanka operates a ‘flexible exchange rate’ where errors in targeting interest rates are compensated by currency depreciation especially after the 1980s.

Classical economists and analysts have called for the power to mis-target rates and operate dual anchor conflicting monetary regimes should be taken away to prevent future crisis.

Currency crises are problems associated with flexible exchange rate central banks which are absent in hard pegs and clean floats.

“Something new we are seeing is that older people, even those in their 50s, which was a surprise, are looking at migrating,” Balendra said.

Businesses are trying to retain talent as real wages collapse.

Balendra said as businesses they see some stability returning and based on past experience growth is likely to resume, and they were communicating with the workers.

“We have a degree of conviction that the economy should get better, its the stability phase now and it will get better going forward so without the way our businesses are placed we should see good growth,” Balendra said.

“We can’t chase compensation that’s just not practical and we are not trying to do that especially if people are looking to immigrate but what we can do is show the career opportunities in the backdrop of the situation that people would rather stay here because its home.” 

Sri Lanka unit of Heineken says it is also trying to convince workers not to leave, with more success.

“We are all facing the effects of brain drain and it’s not just the lower levels… What we are doing is a balance of daring and caring,” Maud Meijboom-van Wel – Managing Director / CEO, Heineken Lanka Ltd told the forum.

“Why I say daring is, you have to be clear in what you can promise people, when you make promises you have to walk the talk. So with the key talents and everyone you need to have the career and talent conversations.

“I am a bit lucky because I am running a multinational company so my career path goes beyond Sri Lanka so I can say if you acquire certain skills here, then you can move out of here and then come back too, that is a bit easier for me but it starts with having a real open conversation with walking the talk – dare and care.” (Colombo/Dec7/2022)

 

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Despite losses, Sri Lanka to resume “park & ride” transport after complaints  

ECONOMYNEXT –  Sri Lanka’s state-run Transport Board will resume its loss-making City Bus service from January 15, 2022 Cabinet Spokesman Bandula Gunawardena said, after the service abruptly discontinued with the state-run firm’s director board citing losses.

The City Bus service was introduced in 2021, under the government of former President Gotabaya Rajapaksa, from Makubura to Pettah and Bambalapitiya.

The service was started to reduce the number of automobiles travelling to and from Colombo and suburbs by providing a comfortable, convenient and safe public bus transportation for passengers and riders who use cars and motorcycles as their means of transportation.

During the time period in which the service was initiated, there were 800 hundred vehicles that would be parked and would use the system, Gunawardena, who is also the Transport Minister, said.

The service was later collapsed due to inconsistencies in scheduling and it was completely stopped after

“Without informing the Secretary or the Minister of the relevant Ministry, the Board of Directors have come to a conclusion that this is loss making route and must be halted,” Gunawardena said.

“The users of the City Bus service brought to our notice and therefore I gave the Secretary to the Ministry of Transport the approval to start the City Bus service from January 15.”

“If we stop all loss making transport services then massive inconveniences will occur to the people in far parts of the island.”

The chairman of the state run Ceylon Transport Board has been asked to handover the resignation letter by the Minister Gunawardana citing that the head has failed to implement a policy decision approved by the government. (Colombo/ Dec 06/2022)

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Sri Lanka may see rates falling next year: President

ECONOMYNEXT – Sri Lanka’s interest rates are high and hurting small businesses in particular but interest rates are required to maintain stability, President Ranil Wickremesinghe said.

“One is, all of you want to know what’s going to happen to the interest rates?,” President Wickremesinghe told an economic policy forum organized by the Ceylon Chamber of Commerce.

“I wish I know. The governor has told me that the inflation has peaked. It’s coming down. You all understandably want some relief with the interest rates to carry business on.”

“I understand that and appreciate the viewpoint. It’s not easy to carry business on with such high interest rates. On the other hand, the Central Bank also has to handle the economy. So maybe sometimes early next year we will have a meeting of minds of both these propositions.”

Sri Lanka’s interest rates are currently at around 30 percent but not because the central bank is keeping it up. The central bank’s overnight policy rate is only 15.5 percent but the requirement to finance the budget deficit and roll over debt is keeping rates up.

Rates are also high due to a flaw in the International Monetary Fund’s debt workout framework where there is no early clarity on a whether or not domestic debt will be re-structured.

After previous currency crises, rates come down after an IMF deal is approved and foreign loans resume and confidence in the currency is re-stabilished following a float.

This time however there has been no clear float, though the external sector is largely stable and foreign funding is delayed until a debt re-structure deal is made.

Sri Lanka’s external troubles usually come because the bureaucrats do not believe market rates are correct when credit demand picks up and mis-uses monetary tools given in 1950 by the parliament to suppress rates, blowing the balance of payments apart.

The result of suppressed rates by the central bank are steep spikes in rates to stop the resulting currency crisis.

A reserve collecting central bank has little or no leeway to control interest rates (monetary policy independence) without creating external troubles, which is generally expressed as the ‘impossible trinity of monetary policy objectives’.

However, it has not prevented officials from trying repeatedly to suppress rates, perhaps expecting different results.

After suppressed rates – supposedly to help businesses – trigger currency crises, the normalization combined with a currency collapse leads to impoverishment of the population.

The impoverishment through depreciation leads to a consumption shock, which also leads to revenue losses in businesses.

The suppressed rates then lead to bad loans.

In the 2020/2022 currency crisis the sovereign default has also led to more problems at banks. Several state enterprises also cannot pay back loans.

“…[T]he bad debt that is being carried by the banks is mainly from the private sector or the government sector,” President Wickremesinghe said.

“Keep the government sector aside. We’re dealing with it. How do you handle it? Look, one of our major areas of are the small and medium industries. You can’t allow them to collapse, but they’re in a bad way.”

Classical economists and analysts have called for new laws to block the ability to central bank to suppress rates in the first place so that currency crises and depreciation does not take place in the first place.

Then politicians like Wickremesinghe do not have to take drastic and unpopular measures to fix crises and there will be stability like in East Asia.

Sri Lanka had stability until 1950 when the central bank was created by abolishing an East Asia style currency board. The currency board kept the country relatively stable through two World Wars and a Great Depression.

In 1948 after the war (WWII) was over “we stood second to Japan” Wickremesinghe said.

“But we started destroying it from the sixties and the seventies,” he said. :We started rebuilding an economy, which was affected by a (civil) war, and thereafter the way we went, is best not described here.”

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