The problems faced by the export sector are mainly market related, says Ceylon Chamber of Commerce chairman Chandra Jayaratne who has been appointed by trade and industrial development minister Ronnie De Mel to lead a team ‘to review strategies to effectively manage the present and impending crisis in the export sector.’

In a letter to De Mel, Jayaratne says that the recession in the importing countries and the problems arising from terrorism and the war situation in Afghanistan, has resulted in a ‘severe’ drop in the consumption patterns of many of our export products.

Market demand has dropped and stocks overseas have built up and consequently there is a downward trend in prices. Competing economies have already reacted by helping their exporters with packages of assistance to counter the adverse market conditions.

In order to at least retain the market share of the Sri Lankan exporters in overseas markets, there is an urgent need to lower export prices without affecting the economic viability and long term growth of the exporters.

If prices are to be lowered, then costs have to be lowered, or alternatively, the losses arising from lower prices should be compensated in a rational and practical manner. Since each company sector would have these problems affecting them in different ways and in varying degrees, it is difficult to work out a system to help individual sectors or companies to quickly address this problem.

It is therefore necessary for the government to assist as far as possible in a global sense so that individual companies can be motivated to find their own way to strengthen their export competitiveness.

In an annexture titled ‘Crisis management incentive scheme to incentivise the enhancement of export growth,’ Jayaratne says that all exporters of goods and services to be entitled to export development grants to incentivise investments and expenditure connected with effectively managing the current crisis situation over a minimum period of 12 months from the beginning of the incentive scheme.

This scheme should support productivity and quality enhancement strategies, training and development of staff and working capital and resource management effectiveness support. The grant due to all exporters of goods and services be computed on the net foreign exchange earnings during a defined time frame and be applied as a rate on the FOB value of goods and services exported.

The rate applied in the first period of 12 months to be halved during the second period of the grant which will be for an additional period of 12 months. These grants administered via the Export Development Board (EDB) will be tax free and will be awarded through the government of Sri Lanka six year export development bonds issued by the Central Bank and will carry an annual tax free interest of 10%, with interest payable annually.

Under this scheme, the fiscal impact would be limited to the interest accruing on the bonds. The capital sums due on the redemption of the bonds will be raised through a levy charged on the exporters of all goods and services beginning from the twenty fifth month of the scheme, with the levy gradually increasing, starting from 0.5%, and annually thereafter to 1%, 2%, 2.5% and 3% per annum, computed on the FOB value.

The funds secured via the levy will be credited to a separate fund earning a yield on investments and be available to redeem the bonds. The levy will cease as soon as the fund has acquired the capital required to redeem the bonds.

The scheme will be administered by the EDB, similar to the EDISS facility implemented a few years ago but with the following changes: Extending the scheme to BOI companies and to the export of all goods and services, including garments and traditional exports and the release of the grants monthly.

These bonds to be listed in the stock market and be tradeable on the market, and therefore immediately realisable by any exporter of goods and services wishing to encash the bonds to meet immediate financial needs.

It is believed that the current crisis in the export sector affecting the export of goods and services, including garments and traditional exports, strengthened and managed over a critical two year period, will allow the sector to grow along with the growth and stablisation of the international markets and the Sri Lankan economy.

The sector will then be capable, after safeguarding the interests of all stakeholders during the critical period, of being self reliant (self funding) and possibly raise the funds originally committed to operate the scheme and redeem the liability on the bonds.

Under the old EDISS scheme, exporters received tax exempt payments at rates which were a percentage of the FOB value of their exports. The scheme applied to all exporters other than those exporting tea, rubber, coconut products, coffee, cloves in the primary form, gems and garments under quota.

In 1989, a total of Rs 366 million was paid by the EDB under EDISS and the corresponding figure for 1990 was Rs 698 million. Prior to 1988, to be eligible, the export earnings in SDR terms in the grant year, should have been higher than the average export earnings in the three previous years for exporters who have been exporting for at least three years and averages based on a shorter duration for exporters exporting for less than three years.

Exporters receiving over Rs 250,000 in EDISS payments were paid 25% of the amount in cash and the remaining 75% in non-interest bearing export development certificates (EDCs) issued by the EDB. Payments upto Rs 250,000 were paid in cash. EDCs were valid for a period of five years and were encashable only for investment in export projects approved by the EDB.

He also suggests that these proposals be validated by the EDB as to whether the concept is in line with national priorities and objectives, finance ministry to validate whether the financial impact on the budget and the acceptability of the suggested framework in terms of the government’s macro-economic guidelines.

Trade ministry to validate the acceptability of the scheme in terms of international conventions and WTO commitments, Board of Investment to validate the scheme with its policy guidelines framework and the Central bank to validate the probable macro-economic impact and compliance with commitments made to multilateral agencies.

Jayaratne in his letter points out that there is an urgent need to kick start the sector performance and motivate entrepreneurs and business managers of the export sector. The need to establish a level playing field in the support extended to small, medium and large scale exporters and different sectors of manufactured as well as other exports.

Necessity to link export promotion initiatives to national economic value creation, desirability of framing the incentives to be capable of transparent trickle down to independent contractors/suppliers/growers and small scale manufacturers supplying finished or semi-finished products to exporters.

Need to launch an operational scheme with the least time delay with the concurrence of all stakeholders, requirement to minimise the impact on the national budget already constrained by several external factors and the desirability of avoiding the need to make legislative amendments or major variations in government taxation and fiscal policy regimes in implementing the strategy.