Sugath Kulatunga

As a person associated with Export Development from 1975, in Sri Lanka and abroad, I am delighted to note the priority given to Export Development in the current Budget. I am also happy to see the restoration of the Export Development Council of Ministers and the proposal to formulate a National Export Development Plan.

An Export Development Plan is a statutory provision mandated by Article 12 of

Sri Lanka Export Development Act, no. 40 of 1979 vide:

12 (d) to formulate a national export development plan and program for approval by the Export Development Council of Ministers.

(e) to monitor the implementation of the national export plan and program and actively assist in the implementation of the plan.

Accordingly, the EDB formulated a comprehensive export plan on all relevant sectors of the economy with the participation of state agencies and the private sector. In the formulation of a new plan, it would be useful to look at the strategies and procedures followed in that successful operation.

In the following note the Budget proposals are given in Italics.

The Budget also proposes to support expansion of export-oriented investment, sector-specific zones, establishing eco-industrial parks….through Public Private

Partnership (PPPs) and privately run zones.”

Most effective way to promote investments is to make available well formulated feasibility studies on our potential. This too was a function provided for in the EDB ACT ref;

Article 12 (m) to carry out feasibility studies on export-oriented projects and to undertake any special projects on export development on a pilot basis.

In view of the absence of any other financial institution to provide funds for innovative investments involving some risk, the EDB Act provides for investments in selected export projects. In 1979 a special Division was created in the EDB to support the private sector formulate projects and evaluate them and serve as a Venture Capital window to invest in innovative pioneering projects. Through this facility a number of pioneering projects were established. But a subsequent Board of Management not only abandoned the concept of venture capital but disbanded the EDB division with its trained staff.

The Budget Speech states on Investment Promotion

Government will support expansion of export-oriented investment…

Budget Speech also stresses that

The development of small and medium enterprises and entrepreneurship is a key

objective of the Government.

A strategy followed with success by countries like India and Pakistan to induce investments and develop SMEs is to make freely available a comprehensive portfolio of feasibility studies on investment opportunities. Such professionally formulated investment proposals also obviate project failures.

A sample list of such feasibility studies/project reports are available on the following websites.

https://smeda.org/index.php/business-facilitation/smeda-downloads/pre-feasibility-studies;

https://smeda.org/index.php/business-facilitation/smeda-downloads/pre-feasibility-studies

NABARD Bankable Project Pdf Download

https://www.entrepreneurindia.co/project-and-profile

https://www.niir.org/project-reports/

These agencies not only provide feasibility/project reports but provide consultancy services.

It is strongly recommended that the EDB Projects Division be restored and strengthened with technically qualified staff.

In order to enable the EDB to serve as a venture capital provider, the export cess should be continued and the cess collection be remitted directly to the EDB Fund as required by the EDB ACT in which (Section 14 (1) for a CESS on imports and exports.

By Sub Section 14 (5) it is required that the proceeds of the cess recovered under this section shall be paid monthly by the Principal Collector of Customs to the credit of the EDB Fund.)

The 2025 Budget proposals to establish a function of a development bank through a new administrative structure will be established through the existing state bank mechanism.

Government of Sri Lanka had established the National Development Bank for the purpose of promotion of industrial, agricultural, commercial and other development of the economy of Sri Lanka having regard inter alia to the development of the rural sector. One of the objectives of the NDB was to undertake development projects, including pilot projects, in order to achieve the purposes of the Bank. Unfortunately, the NDB acted like any other commercial bank and was finally privatized by CBK who was on a selling spree. It is no more national but continues to call itself national. The other development bank, the DFCC was also privatized. They are now doing quite well as commercial banks.

In the 1980s the EDB promoted the creation of a subsidiary unit in the then NDB, with contributions from the EDB, NDB, BOC and People’s bank as a venture capital unit. But the experience was that this unit functioned as a normal commercial bank and was risk averse. A new development bank has to be ready to take informed risks and should serve as a venture capital facility and not tainted by collateral dependent commercial banks.

We observe that there are a number of research findings which have not been commercialized and utilized for the benefit of the economy, and reaping the investment opportunities. For this purpose, we propose to allocate Rs. 1,000 million to create an Innovation Invention Fund for commercialization of Research Findings.

The proposed venture capital facility can serve the proposed Innovation Invention Fund for commercialization of Research Findings.

The neglect of this concern has already cost the country money as well as essential inputs into agriculture. One such example is the non-commercialization of a patent on Nano urea. Sri Lanka failed to take advantage of the nano urea patented by SLINTEC 12 years back. It is claimed that the local product is superior to the imported product as it has a 38-40 percent loading of nitrogen.

The irony is that the SLINTEC patent was sold to an Indian firm for 3 million US dollars in 2013 and later in 2021 the cabinet approved the purchase from India nano urea for 52 million US dollars for the maha season only. Our loss was a huge gain for India.

Industrial Development

The industrial sector in Sri Lanka plays a crucial role in its economy

predominantly in providing employment opportunities, increasing income,

fostering innovation, and driving exports.

The neglect of industrialization by our policy makers despite having the experience of a number of basic industries like ceramics, paper, plywood, leather and glass established during the days of World War II was inexcusable. This was due to the politicization of economic decisions which continued for the last seventy-five years of independence. The curse of the original sin of ignoring industrialization continues to plague the development of the country. A land with a potential economic miracle and a paradise has been made into a miserable failed nation. Leaders who achieved political independence of the county also made the country economically dependent on continuity.

The world is now in the fourth industrial revolution. The lack of vision of our politicians and policy makers have left us at least half a century behind in technology and industrialization. We may still have a leapfrog advantage to graduate from elementary technology into emerging high technology. For this the present education system has to be completely overhauled. Patch work measures will be unproductive.

Industrialization does not fall from heaven and not from radical statements. It  depends on the skills and basic technological knowledge of the manpower in the country. They go a long way to attract foreign investment which accelerates industrialization. In countries in East Asia which achieved rapid economic development, the triad of education,technology and industrialization functioned in unison.

In the near future we should have an industrial policy which is supported with a technology policy which in turn feeds into education policy.

Now on the more controversial subject of exchange control. One wonders why the repeal of the Exchange Control Act is not indicated in the Budget Speech.

According to a Global Integrity Report d during the last 22 years export proceeds that should have been repatriated back to the country but not sent back was USD 53.5 billion. The Central Bank and the Ministry of Finance of Ranil have been evasive on why no action is being taken to ensure that this vast sum is more than the total amount of our foreign debt of 36 billion USD.

The real reason why it will not happen is with the covenant the government has agreed with the IMF. These conditions are in the Attachment I. to the Letter of Intent dated March 6,2023 signed by both President Wickremesinghe and the Governor of the Central Bank Nandalal Weerasinghe in the Memorandum of Economic and Financial Policies.  At Page 98 of the IMF Staff Report 23/116, it is stipulated in Article 21:

21. We will phase out the administrative measures imposed to support the balance of payments, including those introduced on an emergency basis, once conditions allow. These measures include import restrictions, exchange restrictions, multiple currency practices (MCPs), and capital flow management (CFM) measures.

While the mentioned import restrictions, exchange restrictions, MCPs and CFMs could help mitigate FX shortages in the near term, we believe they should not be a substitute for the comprehensive policy package and ongoing macroeconomic adjustment. We are committed to phasing these measures out as the balance of payments stabilizes. To this end, by June 2023, we will prepare a plan for the phased removal of these measures during the program period as we make progress with achieving macroeconomic stability, particularly with respect to the exchange rate, debt sustainability, and financial stability, improved market access.

Reference footnote 36 the main CFM measures introduced or tightened in 2020-2022 and currently in force include: (i) a repatriation requirement for exports of goods and services; (ii) a surrender requirement for exporters on proceeds from exports of goods; (iii) a surrender requirement for banks on purchases of export proceeds; (iv) a surrender requirement for banks on purchases of inward worker remittances; (v) suspension of outward remittances on capital transactions; (vi) restrictions on purchases of Sri Lankan ISBs by local bank”.

These exports were generated with precious of foreign exchange released for imported inputs.  It is  proposed that this exchange control offence is brought under the proposed Proceeds of Crime legislation and this huge amount of funds criminally hoarded abroad is recovered urgently.