Sri Lanka’s agro-exports need radical re-strategising : MTI

MTI Consulting, as an integral part of its “Strategy Thought Leadership” series, has focused on the four main export crops of Sri Lanka - tea, rubber, coconut and cinnamon.

These are among the four most challenging crops to harvest, with very limited scope for mechanisation/ automation – given the terrain, quality implications, cost effectiveness. In terms of global production, Sri Lanka competes with some of the poorest countries/ regions within these countries. Their cost of production ( essentially labour costs) is lower than Sri Lanka and that gap is widening. For instance, a tea plucker in Bangladesh gets a daily wage that is almost 50 per cent of what Sri Lanka pays and that is excluding all the benefits provided in Sri Lanka which is not the case with most of these competing producers, MTI said in a news release.

Unlike Sri Lanka’s apparel industry which has been ‘forced’ to innovate to survive, these agro industries were a nature’s gift ( in terms of the soil, climate, natural irrigation, etc), with very little investment in R&D across the entire value chain. Not surprising, Sri Lanka continues to export low- value added commodities – assuming one doesn’t consider tea bags, crepe rubber and desiccated coconut as high value addition! With such low value-addition, there is a limit to what superficial branding/marketing can do – in a global market that is streets ahead in terms of cutting edge R& D, supply chain innovation, product development.

It is a vicious cycle that requires radical solutions, at least starting by asking the hard questions, such as:

Do we continue to grow these crops in the same proposition we do now? Is it the best use of our land and human resources currently dedicated for this?

Even if we are to continue to grow, is the current highly fragmented structure of the industry the most optimal for the country? For instance, tea generates an export income under US$1.5 billion. It sounds a lot but consider that this is shared by approximately 400,000 smallholder, 25 + RPCs, 700 tea factories, 400 tea exporters and eight brokers. The other three crops are as fragmented – all of which means low economies of scale, which means low R& D investment, which means low prices. Effective solutions to these challenges would have to be radical, with results only over the long term. To do so, requires political will, bold industry players ( like what MAS, Brandix and Hirdaramani are to apparel) and policy consistency.

Export policy decisions that Sri Lanka needs to confront:

Definition of exports: The EDB Act defines exports as products/commodities and services. However, neither has the EDB managed nor accounted for tourism and foreign employment, but continues to promote ICT, medical tourism and educational services. Therefore the export earnings that the EDB publishes include all commodities and only some services.

Measurement of exports: Sri Lanka’s measurement of exports is entirely based on revenue ( essentially topline) and thereby ignores the degree of value addition that would help determine export profitability to the country, as this is what Sri Lanka will eventually benefit from. Focusing on such a measure will help drive the country’s export policy and incentives, and subsequently aid the actions of exporters to the sectors which will optimise Sri Lankan export profitability. Partly related to the above is the fact that the current policy framework does not encourage import substitution of export-related inputs.

Definition of export earnings: As currently practiced, what is considered export earnings is the declared value of a good when it leaves a Sri Lankan port, with no consideration or interest in what happens beyond that point. While this encourages maximum value addition within Sri Lanka, it does not encourage Sri Lankan companies to become multinationals – which will require varying degrees of in-country value addition in export markets and even multi- country sourcing - provided that the Sri Lankan exporters earn higher profits and that these profits are repatriated to Sri Lanka.

Exportable resource optimiz ation: The cur re n t approach to exports is based on each sector attempting to maximize its export revenue. Given the limited size of the Sri Lankan supply chain ( natural and human resources) and the quantum increase in exports that is targeted (while ‘feeding’ the growing local demand), there is bound to be increasing competition for the country’s natural and human resources. Allowing this to be dictated entirely by the ‘invisible hand’ may not be in the long term strategic interest of the country and could also lead to socio- economic challenges. Therefore, a macro resource allocation model and policy is strongly recommended.

Multiple institutions in overlapping export promotion roles: Today the role of export promotion in the key sectors of apparel, tea and ICT ( constituting approximately 65 per cent of exports) is also being performed by their industry specific bodies, with access to a much bigger promotional budget than the EDB. This leads to overlaps and sub-optimal efforts from a macroeconomic perspective. Given that this involves multiple ministries, it is best addressed via the Export Development Council of Ministers