The Ceylon National Chamber of Industries (CNCI) and the Ceylon Chamber of Commerce (CCC) recently signed a Memorandum of Understanding to work together on issues of common interest such as on interest rates and the exchange rate.

"We have entered into an agreement to work together on national issues of common interest such as the high interest rate environment and the exchange rate issue," the Chairman of CNCI, Newton Wickramasuriya told the Island Financial Review.

With the point-to-point change in inflation on decelerating trend the Central Bank has been able to relax its tight monetary policy stance.

While state-owned banks have responded by reducing their lending rates by two to three percent, many private commercial banks are yet to follow suit. The Sri Lanka Banks’ Association says commercial banks would revise their rates sometime in May.

The artificial exchange rate also worries the export sector as their returns are squeezed with high interest rates, inflation (the annual average rate is about 18 percent, still too high) and high utility rates.

With demand shrinking due to the global economic crisis, manufacturers have sought approval from the Commissioner of Labour to temporarily layoff workers and operate on a five day work week with an additional hour without overtime payments.

"If the government removes cesses and allows the exchange rate to be flexible, it will not help the export sector but also boost domestic industries competing with imports so that the government’s intentions of promoting the welfare of domestic industries will also be realized," Wickramasuriya said.

"There was a time when the slogan was ‘Export or Perish’ but now it seems to be ‘Export and Perish," he said summing up the predicament the country’s export sector is in.

But with a balance of payments crisis in our hands, economists have said a more realistic exchange rate will help the country in the long run by helping to build an export economy as there is a limit to the development an agriculture economy can bring.

They say a realistic exchange rate would help exporters survive the global economic crisis, generating foreign reserves and maintain employment. This is crucial given the limited fiscal space for government to come up with a substantial or adequate stimulus package.

"Domestic industries are going through a bad patch, especially the export sector. The construction sector too is at its lowest ebb. Overall, industries have seen their revenues drop by about 30 percent," Wickramasuriya said.

"There are several challenges we are facing. There is a pertinent delay in payments due from various government agencies, particularly to the construction sector, running into millions of rupees," he said.

He said the government agencies imposed various penalties if industries failed to meet delivery deadlines but "when it came to paying, there is a long delay. Some have to wait for as long as six months."

High borrowing costs, a complex tax regime and the dual EPF and ETF transfers are the other problems industries face.

"The SME sector is badly hurt by the prevailing economic environment and we hope the government would extend temporary relief, deferring loans and interest payments, at least till the end of the year so that SMEs can remain in business," he said.

"We have been clamouring for a simplified tax regime for a long time. If the tax regime is simplified people will be more inclined to pay their taxes. At present, we have to maintain a large staff just to unravel the complex tax regime," Wickramasuriya said.

The government in its budget for 2009 said that measures would be taken to simplify the tax regime, but analysts and businesses are skeptical. The Nation Building Tax is to be increased to 3 percent next month, least welcome at this point in time.

"Unfortunately there is no clear industrial policy. Everybody is trying to compete in this small market and contrary to popular belief, competition is not benefiting the consumer because industries tend to compete in price and therefore the result is low quality products and services," Wickramasuriya said.

He suggests the Industrial Development Board should conduct a survey to find out how saturated industries are so that new investments can be channeled to other areas.

While many economists and business chambers point out the need to enhance intra-regional economic ties in a bid to improve the economies of the countries in South Asia, the CNCI remains a strong critic of a Comprehensive Economic Partnership Agreement with India.

A recent forum which brought together economists of the South Asian region highlighted the importance of establishing bilateral agreements in light of the ineffectiveness of the South Asia Free Trade Agreement (SAFTA). They said bilateral agreements would eventually lead to a regional network.

Wickramasuriya said many enterprises have adopted several strategies to deal with economic crisis.

"Traditional New Year bonuses have not been paid. Some employees have volunteered not to take their salary increments while fuel allowances to executives have been reduced. There is freeze on recruiting new workers.

The CNCI welcomes the Labour Commissioners decision to look at temporary layoffs and the five day work-week on a case by case basis.

"Times are difficult and as a responsible chamber we would like to enhance and retain employment levels. These are temporary measures that would help us through these times without losing all, lock stock and barrel," Wickramasuriya said.