Sri Lanka: growing the SME sector and opportunities for trade

Sri Lanka: growing the SME sector and

opportunities for trade

Anushka WijesinhaResearch Officer, Institute of Policy Studies

of Sri Lanka

11th December 2009, Chennai, ‘Trade Opportunities for SMEs in SAARC and ASEAN’

Presentation Outline

1. Why SMEs in Sri Lanka?

2. Growing the SME sector

3. International trade scenario

4. Indo-Sri Lanka trade

5. Future Prospects



2. Growing the SME sector in Sri Lanka



5. Future Prospects

Institute of Policy Studies of Sri Lanka

Source: Central Bank of Sri Lanka, Annual Report 2008

1.1 Why SMEs in Sri Lanka? – Skewed prosperity

Provincial Gross Domestic Productin Rs. Millions (at current factor cost prices)

Institute of Policy Studies of Sri LankaSource: Central Bank of Sri Lanka, Annual Report 2008

Provincial GDP excl. Western Provincein Rs. Millions (at current factor cost prices)

1.2 Why SMEs in Sri Lanka? – Regional Development


1.3 Why SMEs… – Taking growth outside the Western Province…

Institute of Policy Studies of Sri LankaSource: Central Bank of Sri Lanka

1.4 Why SMEs… – Things ARE changing






5. Future Prospects


2.1 Growing the SME sector – current status

• How many SMEs in Sri Lanka?• Difficult to quantify, no accurate data

• Industrial Survey of 2003• 150,000 total establishments

• 100,000 – micro enterprises, self-employment

• 400-500 large enterprises

• So, just over 40,000 SMEs

• 4,700 exporters, nearly 80% are SME suppliers

• Lacking an overall, national definition of ‘SME’ in Sri Lanka

• What qualifies as an SME?

• Different definitions by different organisations

• Key problem cited by nearly every player


• Infrastructure improvement schemes– ‘Gama Neguma’– ‘Maga Neguma’– ‘Neganahira Navodaya’

• Rs. 75 bn invested so far, further 121 bn by 2010

– Uthuru Wasanthaya – Rs. 5 billion for housing and livelihoods

• Promoting industries in rural areas– ‘Gamata Karmantha’

• Promoting rural enterprise growth– Nipayum Sri Lanka– Special N&E BOI concessions– N&E special loan scheme, concessionary loan schemes for

SMEs

2.2 Growing the SME sector – Govt. initiatives I


• ‘Nipayum Sri Lanka’ (led by BoI)– Programme to set up 300 enterprises outside

Western Province– Min. investment Rs. 30 Mn, 200 employees– 5 to 10 years tax exemption depending on

location and employment created– Offered for variety of business areas in all three

sectors of the economy

• North and East regional development – Particular focus on agriculture, agri-business, fisheries,

dairy & livestock, tourism, paper products, textile and apparel

– 10-20 years tax holiday, depending on project/sector– Duty free importation of capital goods and raw materials– State lands can be made available at concessionary rates– Also includes investment to revive sick companies, as well

as expanding existing ones

2.3 Growing the SME sector – Govt. initiatives II


• New loan scheme by Central Bank for the North - “The Awakening North”– providing credit facilities for capital investment– for resumption of economic activities in agriculture, livestock,

fisheries, micro and small enterprises – Rs. 3 bn to be made available through local banks

• Various Concessionary loans schemes by nearly all banks

• But take up is low, banks focus on their own products

2.3 Growing the SME sector – Govt. initiatives II


2.4 Growing the SME sector – Govt. initiatives III

• National Enterprise Development Agency (NEDA)• To become the apex national body promoting SME development

• Currently studying success stories in Japan and Thailand

• In the pipeline…• SME Cluster Policy

• SME Management Training Institute

• Credit Guarantee System

• Business competency certification

• Developing Business Development Services (BDS) sector in Sri Lanka

• SME Council


2.5 Growing the SME sector – NEDA

• Enterprise and Entrepreneur development• New financial solutions

• Identifying competitive business areas – ‘value chain analysis’, ‘local competitive advantage (LOCA)

• Attitudinal and mindset change – moving out of ‘hand-out’ mentality

• Marketing and faciliation• Enterprise associations from the village all the way to national level

• Effective communication between layers

• Catalysing useful business relationships

• Market information + assisting in access to new markets (home and abroad)

• Enterprise productivity• Marketing, energy use, technology transfer, attitude building, quality

consciousness, clinical visits to learn best practices

• Comprehensive online portal – NEDA website• A one stop shop for useful information for SMEs – from loan schemes to

directory of consultants and BDS providers etc

• Database on enterprises, relevant technical research ,resource people, tax and other regulations etc


2.6 Growing the SME sector – NEDA’s cluster approach

• Special Economic Zones – cluster approach• Geographical clusters – e.g. Moratuwa for high quality wooden

furniture, Weweldeniya for high quality cane products

• Domestic AND export orientation

• Helps SMEs engaging in various aspects of this sector to grow collectively, enjoy various scale economies

– Enable more concentrated access to peripheral services, transport, technical advice, joint purchasing, other economies of scale

• Eventual aim is to link with foreign clusters dealing with similar products – cluster2cluster marketing


2.7 Growing the SME sector – at the district level

• District Business Service Fairs• To link SME entrepreneurs with BDS providers

• SME ‘plazas’ – a hub station for SMEs• One stop shop for government services, provincial council approvals,

information on regulations

• BDS providers

• Specialised raw materials providers (more profitable if located at a central hub)

• District Enterprise Forums – policy advocacy• Highlight operational issues + policy issues

• Issues taken up to national enterprise facilitation forums (chaired by Secretary to the Ministry)

• National Enterprise Council (chaired by the Minister)


2.8 Growing the SME sector – strong regional chamber network

• FCCISL, CNCI, NCCSL, Ceylon Chamber of Commerce (Business for Peace Alliance)

• District Chambers of Commerce and Industry

• Apex body for businesses in the regions

• Wealth of information on local economic conditions and business opportunities

• Focal point for business partnerships from outside

• But lacking many competencies to provide guidance to regional SMEs

• Message to all investors – chambers are an invaluable resource!


2.9 Growing the SME sector – key issues

• SME policy direction? – several govt. ministries, coordination is a challenge

• Ministry of Enterprise Development and Investment Promotion

• Ministry of Industries

• Ministry of Rural Development and Self-Employment

• Ministry of Science and Technology

• Ministry of Youth Affairs

• Ministry of Export Development and International Trade

• Finance & credit - lack of access, high cost

• Access to lucrative markets – home and abroad

• Market information

• Technology usage

• Human resources – technical skills, IT skills, managerial skills, English language

• Hand-out mentality, waiting for assistance from government/donors

• Little risk taking by regional entrepreneurs


2.10 Growing the SME sector – what next?

• Key challenge - Building entrepreneurial capacity• Many cannot develop business plans, maintain accounts

• Thus, get rejected from lending institutions

• Need better BDS services – actually an opportunity for SME BDS providers!

• Enhance competitiveness in local and international markets

• Enabling business environment

• Lack of coordination, no unified SME policy framework






5. Future Prospects


3.1 International trade scenario – overview

• SL’s top export markets:1. USA (23%)

2. UK (13%)

3. Italy

4. India (5% of all exports)

5. Belgium

6. Germany

7. UAE

8. Russia


3.2 International trade scenario - Export grew despite tough domestic conditions

– Tea – 7%

– Rubber – 18%, Rubber products -13%

– Vegetables, Fruits, Spices, Cashew – 6-8%

– Fisheries – 7%

– Diamonds, Gems, Jewellery – 10%

– Food and beverage – 35%

– Wooden products – 20%

– Paper, pulp, paper products – 15%

– Minerals, glass, ceramics – 8%

– Chemicals and plastics – 10%

– Base metals (products from aluminium, copper, iron, steels) – 20%

– Electronic, electrical and machinery – 11%


3.3 International trade scenario - Industrial exports

Food, beverages and tobacco

Textiles and garments

Chemical products Petroleum products

Rubber products

Ceramic products

Leather, paper and wood

Plastics

Machinery, mechanical and

electrical equipment

JewelleryDiamonds

Selected Industrial Exports


3.4 International trade scenario - Spices exports

vegetablesfruits (fresh/dried)

Arecanuts

Pepper

Cinnamon Cloves

Nutmeg and Mace

Bulk tobacco

Essential oils

Cashew nuts

OtherBetel leaves

Exports of non-traditional agriculture crops


3.5 International trade scenario - Imports of Major Categories (in 2008)

0 50000 100000 150000 200000 250000 300000 350000 400000

petroleum

textiles

machinery & equipment

Food and beverages

building materials

fertiliser

transport equipment

wheat and meslin

motor cars and cycles

chemicals

paper and paper boards

medical and pharmaceuticalsradio and tv

rubber tyres and tubes


3.6 International trade scenario - Direction of Trade in 2008

(in US$)

Exports Imports

USA 1869.3 272.6UK 1090.4 243.2Italy 445.1 229.9

Belgium- Luxembourg 425.4 332.9India 418.3 3443Germany 405.3 281.1UAE 252.6 427.1Russia 220.7 5.7Japan 159 424.5France 179.7 182.9

Bangladesh 23.1 9.1Malaysia 44.3 358.4Pakistan 71.3 191.9Thailand 74.9 298.1Phillipines 3.4 7.7Singapore 75.6 1242.6Taiwan 17.3 251.2China 46.8 1091.5Iran 154.5 1194.3

EU 3033.8 1737.8SAARC/SAFTA 560.6 3658.1APTA 520.4 4743.1BIMST-EC 516.6 3760.4


3.7 International trade scenario – major exports to South Asia• India

• Rubber

• Refined copper and alloys

• Bulk pepper and other spices

• Stone, plaster, cement

• Furniture, lamps and fittings

• Apparel and clothing

• Tea

• Paper, pulp

• Bangladesh• Fabrics, dyed cotton

• Enzymes

• Pakistan• Coppra

• Natural rubber, smoked sheets

• Vegetable products

• Coconuts, desiccated coconut

• Tea


3.8 International trade scenario – major imports from South Asia

• India• Kerosene, disesel, gas oil, light oils and preparations

• Aluminium, copper and articles thereof, Iron or steel and its articles

• Cotton

• Motor vehicles, motorcycles, cycles

• Electrical machinery, boilers and machinery parts

• Plastics and items thereof

• Onions and shallots

• Uncoated paper and paperboard

• Bangladesh• Iron or steel and its articles

• Pakistan• Iron or steel and its articles

• Cotton

• Rice, Potatoes

• Knitted. crocheted fabrics


3.9 International trade scenario – future growth areas? (identified by EDB )• Tea

• Food processing, agro-businesses, spices

• Apparel

• Ceramics (tableware)

• Gems and Jewellery

• Rubber (tyres, tubes, gloves)

• Beauty care and herbal products

• Wood furniture and mattresses

• Handicrafts (paper-based, wood, brass) – higher value, innovative products are coming out)

• Cut flowers

• Ornamental fish


3.10 International trade scenario – key agro exports• SMEs mainly ‘feeders’ for larger exporters

• Coconut• Geo-textile – matting to prevent soil erosion – strong demand from Europe

• Coir fibre, rope

• Activated carbon

• Desicated coconut

• Spices• Cinnamon – taste and content is higher than competitors, better than cassia

– main markets of USA, Mexico and India for oil extraction

• Pepper – high oil content, large exports of light berry to India– Indian SMEs set up in SL and re-export in bulk form

• Cardamom and Nutmeg

• Cashew – SL has best cashew, new potential in Eastern Province

• All spice exports are growing EU demand for food ingredients

• Fruits, vegetables, floriculture• Small cultivator groups feed in to larger players

• Pineapple is a potential growth area – best flavour this side of Mauritius!


3.11 International trade scenario – key fisheries exports

• Shrimps and prawns - popular exports to India and the world

• High value fisheries Crabs, lobster, beche de mer, yellow fin tuna (sashimi grade)

• Also, SL imports a lot of regular tuna from India






5. Future Prospects


4.1 India-Sri Lanka trade - overview

• Long history of Indo-SL economic links – far back as 4th century

• Both fell under British rule in 19th century, links strengthened

• But post-independence period both countries focussed inward – import substitution

• But following SL’s liberalisation in 1977/78 economic ties strengthened again, not only with India, but South Asia

• Culminated in regional trade agreements under SAARC – SAPTA/SAFTA (1995/6)

• But regional cooperation got stuck following Indo-Pak tensions, India-SL forged ahead with the bilateral ISFTA (1998)

• Commenced implementation in 2000

• India fully implemented by March 2003

• Sri Lanka fully implemented by October 2008


4.2 India-SL trade - Performance of ISFTA Exports

• Exports have seen rapid growth since FTA• Pre-FTA Exports from SL to India US$ 39 Million p.a.

• Post-FTA Exports from SL to India US$ 418 Million (2008)

• SL’s exports to India grew 10 fold in just 5 years• In 2000 – US$ 58 Mn, by 2005 – US$ 566.4 Million

• But largely driven by copper and vanaspathi (hence the exports dip in 2008)

• Number of product lines exported has increased• From 505 tariff lines pre-FTA to over 1050 tariff lines now

• Exporting high value goods• As FTA progresses, SL has begun to export higher value added products

• Pre-FTA main exports included pepper, waste and scrap steel, areca nuts, dried fruit, cloves, waste paper etc

• Post-FTA in addition to these, value added items like insulated wires and cables, pneumatic tyres, ceramics, wooden furniture, refined copper products, rubber products (gloves), apparel, chemicals, plaster cement and pharmaceuticals


4.3 India-SL trade - Performance of ISFTA Imports

• Imports from India have grown much more• Pre-FTA Imports from India US$ 509 Million p.a.

• Post-FTA Imports from India US$ 3.4 Billion (2008)

• India is now largest source of imports to SL • But also largely due to higher price of oil imports

• Petroleum imports from India are on the negative list, so no FTA influence

• Likely to rise more, after further liberalisation since last year

• But many imports from India still on negative list (vehicles and parts, sugar, iron and steel, paper and paper board)

• So wide trade deficit is not necessarily due to FTA, reflects normal trading pattern


4.4 India-SL trade - Indian investments have risen

• Between 1978 and 1995 Indian investment was 1.2% of total FDI to SL

• By end-2007, Indian investment was 6.5% of total FDI

• Recent investments have largely been in the services sector (63%)• Telecoms, health, retail, energy, hospitality and air transport

services

• Some Indian firms set up here and exporting to India

• Surge in investment between 2000 – 2007 is a result of the increased profile of economic ties and increased investor confidence arising from the FTA

• Examples of strong recent success stories – PRIMALA GLASS


4.5 India-SL trade - some issues & challenges with ISFTA• Restrictions of certain port entry, quotas on certain exports

• But much of it resolved during CEPA talks

• But issues such as state tariffs and other opaque levies make trading with India difficult

• Federal govt., so state impose taxes over and above national tariffs

• Particularly difficult in Tamil Nadu – Local producers pay 10.5% state tax, while outsiders must pay 21%

• Delays at customs and bureaucratic red tape• Mainly anecdotal evidence, needs closer evaluation + documented

evidence

• CEPA talks provided a forum for dialogue to resolve many issues

• Was due to sign at 15th SAARC summit

• But now shelved due to domestic pressure• Key lesson - not enough stakeholder engagement prior to signing


4.6 India-SL trade - links likely to strengthen further

• Lesson learnt from global economic crisis – SL must diversify export markets

• Currently, over 60% goes to USA and EU

• Many firms now looking closer at trade with India

• Large potential consumer base, particular affinity in South Indian markets

• But many SMEs unaware of benefits accruing from ISFTA, AFTA etc

• Growing trade in value added goods, not just bulk commodities like before

• Sri Lankan exporters urged to undertake branding for Indian markets

• Already some success stories – Lionco (mattresses), Janet (beauty products), Stone n’ String (gems and jewellery), Dankotuwa Porcelain (tableware)






5. Future Prospects


5.1 Future Prospects – trade with Sri Lanka

• Many trade fairs which Sri Lanka participates in:

• India International Trade Fair (Delhi)

• Aahar Food Fair (March 2010)

• India Rubber Expo (March 2010)

• My Karachchi (June)

• Expo Pakistan (2010)

• Dhaka International Trade Fair

• SAARC Trade Fair (Colombo 2008, Bhutan 2009)


5.2 Future Prospects – way forward for SMEs

• In the near term SL SME exporters likely to be mainly in commodities and bulk goods exports

• But ideal way forward should be branded, niche products

• Some success of this seen already – examples cited earlier

• SME exports• Long way to go Q C D is lacking (Quality, Cost, Delivery)

• Difficult to promote large assembly plant style manufacturing

• Capital outlay for large manufacturing is too high for SL SMEs

• But way forward is ‘feeder plants’

– E.g. mechanical parts manufacturing to supply larger industries, locally + India, Thailand, etc

• Cannot compete on low cost – we missed that bus already!

• Way forward for exports to many countries, incl. India will be through:

• Superior quality

• High standards

• Value adding and branding


5.3 Future Prospects – Adopt PPPs, like BizPAct

• Ground-breaking initiative to bring investments to promising SME projects in the regions


5.3 Future Prospects – key players for trade opps

• Department of Commerce (for trade policies, trade data) - www.doc.lk

• Export Development Board – www.edb.lk

• Federation Chambers of Commerce and Industry – www.fccisl.lk

• Ceylon Chamber of Commerce – www.ccc.lk

• BizPAct initiative – www.bizpact.org

• National Enterprise Development Authority (NEDA) – www.neda.lk

• Central Bank of SL (for macro data) – www.cbsl.lk

• Board of Investment – www.boi.lk


Thank you!

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Blog ‘Talking Economics’ - http://ipslk.blogspot.com

Sri Lanka: growing the SME sector and opportunities for trade

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