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Wednesday June 7th, 2023

UNIDO to help Sri Lanka formulate industrial policy

Rene van Berkel (far right) was in Colombo to work on the UNIDO Country Program for 2020-2024. Source: UNIDO

ECONOMYNEXT- The United Nations Industrial Development Organization will help Sri Lanka to create an industrial policy to move into more innovative, higher value-added sectors, a top official said.

“Sri Lanka does not have a separate industrial policy,” UNIDO India Regional Office Representative Rene van Berkel said after consultative sessions for the next country program with Sri Lanka.

“All the policy that affects industry is made in the dark, on guesswork on how many firms we have, what sectors and what are the contributions, because just over 21,000 official industrial certificates have been issued,” he said.

“There’s many more industrial players here in Sri Lanka, so if you use that data for policymaking, you’re not doing the right policy.”

Past government policies have typically not been consistent, and there has not been a common framework to support multiple initiatives for different industries such as tea or coconut processing, van Berkel said.

The Sri Lankan Ministry of Industry and Supply Chain Management invited UNIDO to formulate the 2020-2024 country program and the government is keen to implement it, he said.

While the three earlier five-year country partnership programs were of smaller scale, the latest would be at a greater scale, but still would focus on a number of focal points which have yet to be decided.

“The effects would be limited if we go for a scatter gun approach and do a little bit here and a little bit there. So it’s better to be focused,” van Berkel said.

He said the new country program would emphasise setting up an evidence-based industrial policy, which would target sectors where Sri Lanka has the highest comparative advantage.

The new policy would enable enterprises to grow in the most promising sectors for Sri Lanka, and help reach the Sustainable Development Goal 9 on industrial innovation and infrastructure.

However, the UNIDO representative, who is a former professor on clean production at Australia’s Curtin University, said the policy document would not become a gamechanger for Sri Lanka if it is only published, like many other plans the country had made but not acted on.

He said the policy would require Sri Lanka to commit resources and institutional capacities to deliver on the plans.

The policy document would be preceded by a process to collect data on Sri Lanka’s industrial sector and ascertain the strengths and weaknesses of the country.

The main aim would be to move Sri Lanka from its dominance in low technology industries such as apparel (even if the industry has moved to wearable technology) to high technology manufacturing and engineering where the country could earn more, ven Berkel said.

At end-September 2019, industrial activity contributed 26.8 percent to Sri Lanka’s gross domestic product, with 27 percent of the labour force engaged in the sector.

However, van Berkel said once construction is removed from the equation, Sri Lanka’s manufacturing contribution has historically remained stable at 16 percent.

The Rajapaksa governments have tended to favour construction as the main driver of economic growth, which is a non-tradable sector, typically funded by debt.

Economists however have called for catalysing the tradable sector to boost exports.

Van Berkel said stable industrial contribution to GDP means that the sector’s growth has kept pace with economic growth, and Sri Lanka’s manufacturing has expanded faster than India, Nepal and Bangladesh.

“But we still have a lot of catching up to do if we want to be in the same league as Malaysia, Indonesia or China. We cannot immediately set up a heavy manufacturing base, but we need to start moving.”

Component manufacturing will be a starting point for more complex electronics, van Berkel said.

Even in agriculture, where Sri Lanka exports bulk raw material, processed goods would bring greater revenue, he said.

Agriculture, where wastage is high, material could be repurposed as well.

“We need to see where we already have strengths and where can we add more value, like using all of the banana tree.”

Fibre from the banana trunk as well as straw that usually goes to waste could be used to mill fabric, van Berkel said.

The UNIDO country program would also set up a base line for the environmental impact made by industries

“At the moment it is difficult to make environmental commitments to the industry sector beacuse there’s no base line.”

“Some companies are producing and publishing data, but for the sector as a whole, it’s difficult to get an estimate.”

“Under the energy and climate change component of the country program, we will attempt to build the baseline data on emissions and energy efficiency,” van Berkel said. (Colombo/Feb05/2020)

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Sri Lanka’s shares slip on profit taking and selling pressure

ECONOMYNEXT – Sri Lanka’s shares closed lower on Wednesday after four consecutive gains in previous sessions spiraled into selling interest and profit taking, an analyst said.

The main All Share Price Index was down 0.28 percent or 24.39 points to 8,722.06, this is the lowest the index has been since May 02, while the most liquid index S&P SL20 was down 0.40 percent or 9.92 points to 2,468.44.

“The market was gaining in the previous sessions and there is selling and profit taking present today, due to continuously being on green,” an analyst said.

In the previous sessions the market was seeing gains, due to lowered policy rates and low inflation stimulating buying interest and driving the sentiment up, an analyst said.

Sri Lanka’s inflation in the 12-months to May 2023 has eased to 25.2 percent from 35.3 percent a month earlier according to a revised Colombo Consumer Price Index calculated by the state statistics office.

The central bank cut the key policy rates by 250 basis points to spur a faltering economic growth as inflation was decelerating faster than it projected.

“There are gradual improvements in the market sentiment, with positive sentiments coming in from lowered policy rates and inflation,” an analyst said.

The market generated foreign inflows of 12 million rupees and received a net foreign inflow of 18 million rupees, due to low share prices and discounted shares followed by a dividend announcement.

The market generated a revenue of 554 million rupees, this is the lowest the turnover has been since May 10, while the daily turnover average was 1 billion rupees. From the total generated revenue, the banking sector contributed 120 million rupees, Diversified Banks contributed 115 million rupees and the Capital Goods Industry generated 78 million rupees.

Top losers during trade were Sampath Bank, Commercial Bank and Aitken Spence. (Colombo/June06/2023)

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Sri Lanka Treasuries yields plunge, 12-month down 318bp

ECONOMYNEXT – Sri Lanka’s Treasuries yields plunged across maturities at Wednesday’s auction with the 12-month yield falling 318 basis points, in one of the biggest one day falls, data from the state debt office showed.

The 3-month yield fell 244 basis points to 23.21 percent.

The 6-mont yield fell 339 basis points to 21.90 percent, along with the 12 months to 19.10 percent.

The short-term yield curve is inverted.

The central bank last week cut its policy rate 250 basis points in a signaling move but is not printing money to enforce the rate cut.

The debt office sold all 140 billion rupees of offered securities. (Colombo/June07/2023)

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Sri Lanka forex reserves rise US$722mn in May 2023

ECONOMYNEXT – Sri Lanka’s foreign reserves grew 722 million US dollars to 3,483 million US dollars in May 2023 from 2,761 million US dollars in April, official data showed amid weak credit and better inflows.

Sri Lanka lost almost all its reserve in over two years as the central bank sold reserves and printed money to keep rates down (sterilized reserves sales) including borrowed dollars from India.

Gross official reserves fell to a low of 1,705 million US dollars in September 2022.

Sri Lanka’s central bank hiked rates in April 2022 to slow credit and also stopped printing money after it ran out of borrowed Asian Clearing Union dollars from India.

Sri Lanka’s gross official reserves are made up of both monetary reserves of the central bank and any balances of the Treasury account from loans or grants it gets.

The central bank’s net foreign reserves are still negative after busting up borrowed reserves to suppress rates. By April (before the collection of reserves in May) the central bank’s net reserves were negative by 3.7 billion US dollars.

In May alone 662 million US dollars were bought from the market, Central Bank Governor Nandalal Weerasinghe said.


No pre-determined level to stop Sri Lanka rupee appreciation: CB Governor

Borrowing dollars through swaps and busting them up, was invented by the US Federal Reserve as it was printing money and breaking the Bretton Woods system in the early 1970s.

Sri Lanka received a 350 million US dollar tranche from the Asian Development Bank and 331 million US dollars from the IMF to the Treasury for budget support.

The loans can be sold to the central bank by the government to generate rupees and spend. However, since credit is weak, not all the inflows go out of the country particularly as the central bank is conducting deflationary open market operations on a net basis.

By allowing the rupee to appreciate unlike in previous episodes of recovery in an IMF program, after a bout of money printing, the central bank is bringing down inflation – in some cases absolute prices – and restoring confidence and easing the ‘pain’ of ‘monetary policy’ or stimulus.


Why is Sri Lanka’s rupee appreciating?

Though exports are falling, tourism revenues are also picking up.

The budget support loans, tourism receipts less the reserve collected will widen the trade deficit. Building foreign reserves involves lending money to the US or other western nations and is similar to repaying foreign debt. (Colombo/June07/2023)

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