Trade and Investment Issues faced by our membership and probable solutions proposed by them.

First of all  we would like to thank the government for introducing a package of concessions by circular no 5 of Central Bank of Sri Lanka (dated 25 th of May 2021)

Federation of Chambers of Commerce and Industry Sri Lanka (FCCISL )is the  apex body of the Sri Lankan chamber movement giving the leadership to 64 business chambers  and associations across the country representing over  25,000 business entities starting from micro level up to extra-large category of business enterprises in the fields of manufacturing, Services, Agriculture and Trading.

We would like to submit key findings of the operational and policy issues faced by our members / Sri Lankan entrepreneurs together with their solutions for your kind attention.

(1)General Business Environment;

There has been a sharp decline of cash flow specially at the retail sectors such as grocery businesses , fish , vegetable, fruits due to less purchasing  power of the working class , loss of employment ,and sharp rise in  commodities,  Most of the SME are unable to  cover even  current  liabilities with their present income. Enterprises are compelled to work with minimum work force therefore there is a risk of increasing unemployment ratio in the country. Enterprises are unable to get any banking facility due to lack of co lateral either their assets have been already mortgaged to the banks or they do not have assets to offer for mortgage.

FCCISL also wish to request the government to seriously consider restructuring loss making State Owned Enterprises such as Ceylon Petroleum Corporation, Ceylon Electricity Board, Sri Lankan Airlines, Sri Lanka Railways, Sri Lanka transport board  with a view to reduce the  burden on treasury and financiers such as  banks and non-banking  institutions. Suitable Reforms  and productivity improvement in these loss making State Owned Enterprises will help to channel scarce resources for more intensive healthcare measures and modernizing education the much needed basis for future value creation and competitiveness in the economy.

Encouraging investments also featured below as the country moves towards a recovery and comments by respondents included encouraging Foreign Direct Investment, which will help strengthen the balance of payments. This is a good time for the country to attract investment from global multinationals looking to diversify their manufacturing bases; as well as to kick start large scale infrastructure projects that are on hold, by mobilizing private capital.

FCCISL also envisage that some form of wage support for the affected sectors until they regain their normal activity levels, would also be appropriate in order to avoid job cuts and heavy pay cuts. We have identified many common issues faced by industries and have listed out in the following manner.

( a) Issue – Most of the ( SME )  Sri Lankan enterprises are highly illiquid due to loss of sales and the delay in revival is likely to increase the unemployment  in the country.

Solution – We request

(1)The government to suspend COVID19 affected business loans for 3 years allowing businesses to recover and start paying at a concessionary rate of interest.

(2)The government to give a presidential decree to all banks to stop auctioning properties mortgaged by customers.

(3)The government to suspend the Parate Execution powers granted to Banks.

(4)To exclude the special clause in the letter of settlement agreement empowering the financial institution to enter and auction in case of failure to settle the facility by financier.

(5) The government to suspend past VAT and Income Tax for 3 years to give a breathing space to businesses.

(6)The government to expedite the establishment of credit guarantee scheme and seriously and consider providing free capital to selected enterprises directly connecting to main economic stream. E g food, agriculture, construction, Exporters, IT ,etc

(b) issue – Even though the new normal advise workers to work from home/remote  the legal frame work is not clear as to the workers compensation. There were instances when employers paid 50 % of the wages to their staff members during the pandemic ministry of labor gave a direction to pay the full payment.

Solution – (1)To take in to consideration the emerging work patterns  in the new normal and to introduce a proper legal frame by way of a legislation to facilitate work from home/remote work, part time work, contract employment and flexible hours.

(2) Its also recommended to do benchmarking against best practices elsewhere, Sri Lanka too could become more competitive, cost effective and responsive to challenges by having more flexible and modern labour laws.

(3) We request the government to do a national survey / scenario planning about the unemployment of human capital and the skills of this unemployment segment especially due to COVID19.This information is key to make use of very same skills in the transformation of economy to new normal.

(4)Develop a reskilling strategy for the workforce in the sectors where demand will be suppressed for the next 12-18 months. FCCISL is ready to call for a national consultation process with the support of the government.

(2)Issues of Food Industry –

(a)Importation of low quality / substandard fertilizers to Sri Lanka, lack of knowledge on the part of farmers to apply correct quantities,(Irrespective of the type of fertilizer, organic or inorganic,)Lack of knowledge regarding correct application method and correct time to full fill the nutrient requirement of the plant leading to health issues of the consumer.

Solution – we suggest introducing national standards for use of fertilizer having consulted the experts in the field.

(b)Effects of Sudden discontinuation of synthetic agro-chemicals: This would result in a significant yield reduction, affecting farmers’ income and their livelihood, and reducing agriculture-based export earnings. Even though government has categorically stated that Yield loss can be compensated impact of Climate change can offset this relief granted to farmers.

Solution -The government needs to identify an effective mechanism to evaluate and measure such losses, and an efficient system to pay compensation for the affected growers avoiding injustice that may occur in the process.

(C )Issues arising out of Green Socio-economic Model’ approach: FCCISL is fully aware of the need of such a concept and we welcome it .However any loss of food crop production to the levels less than the consumption requirement, especially the main staple rice, will lead to food imports until expected level of establishment of the ‘Green Socio-economic Model’ approach. , if the imported food items do not comply with the acceptable standards under the ‘Green Socio-economic Model’.

Solution - in such instances, any food items imported should be screened to assure compliance to food safety standards and the government needs to improve the infrastructure needed for such screening exercise.

( d) Generic issues arising out of  introduction and adoption of new technology; FCCISL fully support this move however its suitability and the impact on Eco system might be an issue

Solution – we need to identify the best practices used in the world related to ecological approaches in agriculture .The suitability in safeguarding our environment should be assessed through simple but well-designed experiments as a top priority, prior to their introduction and adoption. This is true for both imported and locally developed technologies.

(e)Sensitive issues related to introduction of any technology or input such as new bio-fertilizer (imported or locally developed) in a haphazard manner:  In case of introduction of  new bio-fertilizer  (imported or locally developed) to a specific crop situation hurriedly the impact to our agro-ecosystems / microbes -living organisms will have to be assessed since they behave differently even within the same  country but in different ecosystems. There is a possibility such a move would destroy our microorganisms and not become pathogenic as well. (Such repercussions are the same whether we use organic or chemical inputs)

Solution – (1) We propose to establish a Research and Development unit under department of agriculture to carry out sensitive studies such as impact on agro-ecosystems / microbes -living organisms.

(f)Lack of Sufficient infrastructure facilities (including accredited laboratories), trained manpower (including scientists, technicians, farmers, and other stakeholders to establish a strong monitoring and evaluation mechanism.

Solutions ; FCCISL request the government to

(1)  set up a national Training authority with due Accreditation to bridge the knowledge gap for the future and to set up the strong monitoring and evaluation mechanism.

(2) include Green Socio-economic Model to school curriculum preferably for the G.C.E. (O/L )

( g)Issues related to Wastage of Food from the farm to end consumer; Sri Lanka has a very high wastage of food items –somewhere around 50% due to lack of sufficient cold storage and improvised transportation system.

Solution – (1)Even though there are constructive steps taken in the recent past to construct cold storages the governments are yet to solve this problem satisfactorily. FCCISL suggest to the government to expand the cold storage facilities using solar energy and to grant a special tax benefits for investors.

(2)FCCISL also suggests the government to develop traditional and natural preservatives, which effectively reduce the wastage of food items.

(3) FCCISL encourages innovations to support supply chain and distribution stability, which featured as a high priority, points towards greater opportunities in technology usage by businesses and the state, e.g. strengthening agricultural value chains.

 (h)Lack of organic substitute to replace chemical pesticides: Apart from lack of availability of required quantity of organic fertilizer, the industry will also face an issue of as to how to replace the chemical pesticides by organic pesticides or non-chemical based pesticides or traditional methods.

Solution – This is a question without a short-term solution. FCCISL request the government to set up a research and development unit in collaboration with concerned universities to develop effective new technology and systems to answer this question and to conduct awareness programs for farming community. The ancient methods used in Sri Lanka such as using Sera leaves and Cinnamon leaves to protect rice from insects too need to be properly assessed. Sri Lanka also need to learn from best practices related to organic agriculture in the world.

(i) Lack of real time on line data related to Agriculture industry; this affects the industry  negatively in many ways (E g the efficiency and effectiveness of distribution of fertilizer (organic or chemical), the effect of climate change and adverse weather conditions on the crop and effective distribution of food (vegetables and fruits) for consumption.

Solution – FCCISL requests the government to set up a technologically  advanced real time on line data collection system for the purpose of  presentation and monitoring of the industry. This will be a major productivity improvement step. This may also address the issue of delays and alleged corruption related to distribution of fertilizer.

( j)Issue : Lack of technology for fruit and vegetable extraction technology for commercial purpose, ill equipped laboratory system to certify food standards or help innovation and new product development. 

Solution – we request the government to seriously consider to improve the capacity of our laboratories so that the proper advises can be given to innovators and new product developers.

Summery – FCCISL understands the government efforts to strengthen the livelihood of the farming community, which is the need of the hour. We have seen fruitful results in increasing production with the government initiatives to ban imports and produce what we can produce in Sri Lanka. Turmeric and mung bean are excellent examples. However, we sincerely hope that the government will strike a balance in having benefits to both farmers and consumers. We recommend this strongly as declining yields by immediate shifting from conventional systems to organic systems is a reality. Therefore, there is a likely chance that many food products would not be accessible due to less availability and less affordable due to higher prices, to a larger community in Sri Lanka. Therefore, we propose a systematic transition as the only option to achieve the overall objectives of this effort.

(3)Tea Industry;

Issues- According to expert opinions the introduction of organic fertilizer to Tea Industry may affect the   Sri Lanka’s Tea industry in many ways.

E g –(a) .Drastic reduction of average annual tea production of 300 Mn Kg by 50 % ,Inability to product quality black tea. both due to use of organic fertilizer which can not provide minerals such as Nitrogen, posperous, potassium and magnesium sufficiently and  according to the life cycle of the tea plant and frequency of tea plucking ( 7-10 ) days.

(b)Less leaves per plant would force tea estate workers to pluck less quantities compelling them to disqualify to their incentives. ( the minimum quantity to be plucked for incentives  is around 22- kg-25 kg )If organic fertilizer is used even  plucking  tea leaves up to 15kg -18 kg  will be a challenge.

Solutions – (1) To replace irregular and excessive use of out dated chemical fertilizer by using quality and more ecofriendly  chemical fertilizer of  3 rd generation now used in many countries.

(2)To gradually reduce the use of low quality chemical fertilizers and start granting a subsidiary    to GAP (Good Agriculture Practices) at agriculture lands.

(3) Initially at the introductory level to have a mix of fertilizer (50 % chemical and 50% organic)

(4)To introduce new soil preservation systems during the transition period.

(5) To introduce organic fertilizer in the following order

( Rice , Vegetable /Fruit and then Tea, Rubber and Coconut )

(4) Construction Industry;

(a)Issues over use of a common and standard letter of contract for all types of contracts with un supportive clauses to solve real issues faced by contractors.  . E G No contract form to cater for SME sector, No contract forms for Lump Sum, No provision for Cost Reimbursement. The very same letter of contract is  used for Management Contracts, Construction Management, Turn Key projects. Etc.

Solutions – Recommended to revisit the  letter of contracts and to introduce project specific  letter of contract to Sri Lankan construction industry.

(b) Lack of flexibility in the contract to accommodate  Changes in construction Cost.

A sizeable amount of contracts were entered into between the parties (the Contractor and any state agency as the Employer) without operative provision for price fluctuations or in the form of Fixed Price Contracts. Since we are operating in a volatile business  environment where drastic  price changes are a reality some times due to exchange rate fluctuations the absence of such a provision permitting the contractors to redress the undesirable financial effects of escalation of cost of construction. . It is also noted that in some instances, certain items subject to high cost escalations are not covered in the CIDA formula qualifying for price adjustment.

Solution -.To include provisions in the Standard letter of contract to accommodate price increase of raw materials or any other ingredients  above a particular percentage in consultation with the Industry experts.

( c ) Addressing of  issues due to consequences of outbreak of COVID - 19 pandemic and Travel restrictions.

Naturally, project delays occurred due to lockdowns and other impacts associated with COVID-19 thereby prolonging and protracting the material procurement schedules. Because of extension of procurement schedules and delay caused to ordering and purchasing lead to price escalations and finally to on time delivery of the project back to owners. Further All contracts, without exception, contain a Liquidated Damages provision. In the absence of Extension of Time, this entitles the Employer to recover such liquidated sums from the contractor in the event the contractor fails to complete the Works by the Time for Completion stated in the contract. In this connection, we notice that the granting of formal extension of time has become a time consuming process predominantly by reason of complex contractual and technical process and internal approval processes of the government. In this context  the contractors are genuinely not entitled to Extension of Time grants and thereby exposed to Liquidate Damages in full or in part depending upon the liability for the delay.

Solution – FCCISL requests the government to include a provision in the letter of agreement to waive off Liquidated Damages.Government need to issue a presidential decree to all government agencies not to claim bank guarantees leaving room for private sector constructors and banks to negotiate for an Extension to bonds and guarantees and not to charge liquidated damages.

( 5) Issues in the Rubber industry -

(a)Permission to allow importation of rubber for BOI registered companies  from foreign countries due to higher production cost of Sri Lankan rubber industry. This move affects the local rubber prices.

Solution : (1) If B.O.I industries are allowed to import raw material FCCISL propose to   impose a levy to match the difference between  global and local prices.When  the Local market price is higher government can wave off cess charge

(2)An introduction of Real time on line data for monitoring local and international prices ,production ,climate changes ,productivity , world industrial demand for rubber

( b) Issues over environment protection;

Solution - To fix rubber waste water plants to existing treatment plants  or to fix same  in  every industrial zones.

( c)I Lack of growth of rubber trees : In sri lanka there is no substantial  interest to grow up rubber trees to replace the  the old trees being uprooted annually.

Solutions –To grant subsidiaries for the industry to grow up new treas.

(D ) Lack of  Tappers :the demand for rubber is growing but finding enough labor is an acute issue. Reluctance of the younger generation to join the industry have caused added issues to the labour issue

Solution – (1)Rubber research Institute ( R.R.I ) can recruit tappers and provide a training course and then to get them a practical training sessions at J.E.D.B and  other plantations. That will encourage the school leavers to  learn through  awareness programmes to tap even on rainy days and how to use rain guards to protect the milk.

(2)Its also important to make  small and medium rubber growers aware of latest trends related to rubber prices.

( e ) low Productivity – Sri Lanka’s productivity  related to rubber industry in comparison to Thailand and Vietnam is rather low and finally affect the competitiveness in the world market.

Solutions- FCCISL recommend to  form a tappers force , recognition for workers, and Improved quality of life for workers such as introduction of digital technology with REAL TIME ON LINE DATA to improve the efficiency and to make the industry attractive for younger generation.

( 6) Fish Industry –

Issues :(a) Complex system to import raw materials by BOI companies.

Solution - BOI Companies with Processing Factories should be given a very simplified system to import raw material for exporting Seafood products.

(b) No rational selection of categories of Fisheries & seafood production and exports needed to the country.

Solution – To allow Industry to decide which categories of Fisheries & seafood production and exports needed for the country; To Identify the geo- social features and the economic situation of the country (Sri Lanka) and allow Industry to decide which categories of Fisheries & seafood production and exports needed in the country and support such industry for aggressive promotion and marketing.

(c) Lack of a national fisheries and seafood strategy

Solution - Formulating a National Fisheries and Seafood Strategy and export plan and a road map is the first and foremost step the government (Ministry of policy Planning, Ministry of Fisheries, BOI and EDB) has to undertake. Digitalization of the industry and sustainable fishing methods must be incorporated in to the national plan.

 ( d) lack of focus on efficiency and quality affecting the productivity.

Solutions ;

( 1)The bigger boats over 40 to 55 feet to be upgraded to have RSW system (refrigerated sea water). Since the bigger boats are travelling for more days to catch the fish, their catch needs to be stored properly to maintain its quality. The system ensures better quality than conventional icing of fish.

(2)Introduction of Collector vessels (trans-shipment) to sustain the long line Tune fishing:.Sri Lanka has a fleet of 3000 smaller boats designed to travel up to 100 km ‘s . However these vessels travel up to 700 kms to catch fish and then  bringing  the harvest to the harbor without any freezing facility. This kind of unsafe method does  allow only 50% of the harvest to export and nearly 50 % will not be in exportable condition. In this context we need to follow the strategy adopted by other countries.Thats to introduce collector vessels. We request the Sri Lankan government to take a policy decision to implement this concept. If implement 100 % of the fish harvest will be exportable and will give a big push for Tuna exports.

(3)Encouraging the establishment of Aquaculture farms at Industrial level; we request the government to fully support this move and to encourage the private sector investments by granting low cost funding, tax incentive and other facilities such as suitable sea areas for farming. ( In Sri Lanka  Aquaculture contribution to Fishery industry is around 1% whereas the  rest of the world has gone far beyond 60 %)

 ( 7) Ornamental fish :

(a) Issues – Sri Lankan Guppies have a big  global demand but due to lack of supply we can not meet the expectations of the buyers.

Solution – FCCISL request the government provide financial, technology and training for the industry to grow. Developing more Breeders ( SME) as a cottage industry -knowledge can be given by ( NAQDA )ideal for cooperative farming advanced technology

(b)Issues : Competitors from Singapore, Thailand, and Malaysia can provide fish at a cheaper price.

Solutions – Request the government to improve productivity through new technology, systems etc.

(c )Issues : Competitors from Singapore, Thailand, and Malaysia can provide fish at a cheaper price.

Solutions – Request the government to improve productivity through new technology, systems etc.

(8) Knitting industry:

(a)Issue ; Unfair competition posed to Sri Lankan knitting industry by fabric importers, who only pay Rs 100 per  a kg as CESS which was decided a long time ago. This is a big discouraging factor for the local manufacturers.

Solution: (1) We request the government to increase this CESS to 300 rupees per KG or between 1 usd to 1.5usd per KG so that local manufacturers can compete with imported fabrics.

(2) We also request the government to calculate the CESS based on the weight of the Bill of Lading as opposed to invoice value, which can sometimes be manipulated or subsidized by exporting country.

(b)Issue : increase of production cost is limiting factories to expand and fully meet the local demand
Solution : We request the government to provide the following basic needs as an encouragement to expand the local production capacity.

- suitable Land from industrial estates

- Clean water for dyeing charged on usage

- post treatment (discharge water) at cost

- Steam charge  on usage

- 3phase power

Points 1 to 3 require a lot of capital investment depending on production capacity.

(c )Issue ; Lack of consistent government policies with regard to importation of fabrics discourage more investment by local manufacturers.

Solution -  if the government policies remain consistent for a particular period of time the local manufactures will set up new factories and plants to improve the capacity to cater to the growing demand  of the consumers. Srilanka has the knowledge and capability to produce high quality fabrics to suit the expectations of the Sri Lankan consumers.

( 9) FCCISL’s proposals to encourage investments within  the country.

( a) Granting tax amnesty for cash and cash equivalents for 1 year  with a view to strengthen the cash flow in the business environment.
(b-1) Special tax concessions can be considered to these investors for the investments related to the agriculture/food security, fishery and who are investing to support the National Export Strategy.
( c) The major barriers which prevents more exports from Sri Lanka to the world is high production cost and lack of productivity in many industries.(  at present the Sri Lankan  energy cost in the region is very high. This affects production cost and also the pricing for exports and export prospects ) In this context as a tactical move it is recommended to grant a subsidies to Sri Lankan exports and export prospects for a period of 2 years followed by a major productivity drive across all major industries to offset inefficiencies of production processes making Sri Lankan products are more competitive in overseas markets. (on successful completion of the productivity drive the export subsidy can be later withdrawn).

(d)To introduce a special loan scheme and grants to promote sectors identified by national export strategy ( e g Tea, Rubber Gem and jewelry, spices, wellness spa , Electrical,electronic, IT related products ,assembling of vehicles and boat and shipbuilding and other important domestic sectors such as Health ,dairy farming, agriculture, fishing ,transport etc .

( e) New Products for Export basket; In view of COVID19 Sri Lanka needs to encourage its exports and related activities on following sectors such as pharma, waste management, packaging, processed food, telecommunication and high tech products which will have a better demand in the world.

( f) In order to support SME’s the banking system Its recommended to  introduce a grant scheme at least upto Rs 2.0 Mn without a collateral from those who cannot provide acceptable tangible securities. The total amount of such loan, in order to protect the banking system may have a cap of the total loan outstanding of the bank etc.

( g) In order to improve capital market the dividend income from listed companies should be exempted from income tax for at least 3 years.

(h) To establish loan risk  compensation funds and make appropriate compensation to financial institutions for the non-performing loans issued to small and micro businesses.

(i) We encourage government to issue small and micro financial bonds and construction bonds to collect funds needed to finance SME and construction industry.

(j)In view of the new emerging concepts such as Work From Home and social
distancing our labor laws should be revisited and amended in line with global
competitive environment.

( k) To allow bringing foreign skilled workers  for selected sectors such as
mechanical, electrical and electronic to work in free trade zones for 1-2 years.

(l) Providing free lands without rent fee for 10 years for cultivation and agro business purpose backed by sound business proposals etc.

( m)To extend the time limit for recovery of businesses sector wise and according to the epidemic situation, and financial institutions to write off the trade and finance losses according to the provisions if the conditions for write-off are met.

( 10) Issues over attracting Foreign Direct investments,

 (a)Lack of clear guidelines to investors

Solution – The Total investment portfolio stack of the country ( E g Infrastructure development Projects/ Treasury Bonds /Debt and equity need of Private Sector ) need to be prepared under one unit  and same has to be up dated regularly explaining the projects coming under each sector in the country. This should include the brief description of the nature pf project, unique competitive advantage etc .

(b)No clear guidelines on the Risk and Return to Investors

Solution – There need to be a clear analysis on each project on the risk and return trade off to be in line with the appetite of the investor community.

( c) Mode of funding is not clear ;

Solution – This is where the mode of funding need to be explained whether it is equity, debt or hybrid. This exit route for the investor need to be clearly spelled out.

( d) Lack of clarity on the government policy on Risk management.

Solution; The unique risk factors of investing in each project and how to mitigate these risks need to be  explained using how favorable the government policies are.( e g consistent tax structure for 5 years )

( e)Non-availability of wide range of financial instruments, which are available in other countries.

Solutions; Sri Lanka need to introduce financial instruments such as FRB ( Floating Rate Bonds     ),RUFs ( Revolving Underwriting Facilities),SPNs(Secured  Premium Notes with Detachable Warrants ) and  NCDs( Non-Convertible Debentures with detachable equity warrants.    )

( f ) Further extension of amnesty granted to foreign remittances, and foreigners who invest in Sri Lanka over USD 500,000/ to grant resident visa up to -10 years. We request the government to consider Tax concessions to encourage large scale investments - eg. five year tax holiday for investments with a value of over USD 5 mn. All export oriented businesses to be tax free for a period of 5 years, irrespective of the industry or size. This is a good time for the country to attract investment from global multinationals looking to diversify their manufacturing bases; as well as to kick start large scale infrastructure projects that are on hold, by mobilising private capital.

( g ) land issues : Government to sort out the issues over lack of suitable lands with electricity and water for foreign investors and to upgrade the facilities at existing 14 free zones.
(h ) Efficient approval process; The Government agencies should be serious about granting various approvals in a shortest possible time and improve the efficiency of the authorization bodies. ( To follow the Ease of doing business guide lines )

(11) On the long term FCCISL wish to suggest following measures to support the
sustainability of the new normal economy.

( a)Development and Venture Capital Banks : FCCISL request government of Sri
Lanka to seriously focus on setting up of development and venture capital banks
under public private partnership to support innovation and digital trade facilitation including E commerce to support new normal economy.

 (b)Vocational training institute under BOI :To set up a vocational training institute under BOI to produce skilled labor categories to cater to mechanical, electrical and electronic industries.
( c) Rationalization of HS codes ; Sri lanka’ s HS code are very complex by nature so identification of products using H S codes is very difficult. When this situation exists,Sri Lanka is at a disadvantage at trade negotiations and the threat of agreeing to undesirable tariff lines remain high. In this context as a matter of national priority, we have to  rationalize the HS codes before negotiating any trade agreement. This measure would also help the country to comply with WTO requirements.

(d) R & D expenditure :when incurred within Sri Lanka in product development
(excluding marketing) should be given triple deduction for income tax computation (This was allowed before 2018)

(e)National Lean Management authority: Recommend to set up a national Lean
management authority with expressive authority under H E president to implement an aggressive productivity improvement plan across the major industries in the public and private sector to provide the leading edge for Export competitiveness of Sri Lankan products.

(f)National Single Window :   Recommend to speed up the establishment of the
national single window proposed by EU trade related assistance to lodge information, and documents with a single-entry point to full fill all import, export and transit related regulatory requirements to reduce the inter agency human interaction that would mitigate the COVID9 due to no  human contacts and this system would also reduce the transaction cost for exporters /importers.
(g)National Trade Policy (NTP) : we request the government to formulate a progressive National Trade Policy (NTP) based on national interest, transparency, real economic benefits for the purpose of monitoring and reviewing of trade agreements now in place and to give a strategic direction to future trade agreements. NTP is also expected to safeguard the offensive and defensive interest of Sri Lanka.
(h)Training institute for foreign trade: FCCISL suggest setting up of a training institute for foreign trade to study the global and regional trade and investment trends and engage in Economic modelling and scenario planning at trade negotiations.
(i)Appointment of productivity commission: Government needs to appoint  capable and experience members who knows about the productivity and the productivity improvement. This unit should be used as the advisory body to improve the micro economic policy of the government.

(j) Recommends to establish SME development authority (something similar to that of urban development authority) under H E president with expressive authority to give a proper strategic direction to develop and nurture SME;s in the country. Then all SME supportive government agencies can be grouped under this authority.

(k)Introduction of National Housing Pricing (NHP) Index: FCCISL recommends to introduce NHP which indicate the health of the market and the price trends nationally and regionally. It would also tell if the market is weighted towards buyers or sellers indicating the benefits for them. A rational NHP will support and reflect in repayment terms, insurance products to hedge lenders risks. Finally, NHP will avoid sharp artificial price escalations by developers. This would also develop rational mortgage market in Sri Lanka.

(l) Raising Capital through private equity for loss making State Owned Enterprises (SOE);FCCISL recommends even 10 % of the enterprise listing at the Colombo Stock Exchange. That would attract international funding agencies and pension funds.

 ( m)  Economic use of sea area: Finally FCCISL looks beyond it horizons and seriously think that Sri Lanka has come to a point of no return where any further compromising cannot be made between the economic development and the environment. Perhaps any further encroachments in to land may endanger the stability of the whole eco system now based on a thin forest cover around 20% in the country. FCCISL in search of post COVID-19 economic order wish to request the government to explore the possibility of extensively using so far commercially untapped vast sea territory in a sustainable manner. We observe the sea economy in terms of future economic potential may exceed the output of land based (65k km2) economy. Sri Lanka has a sea belt (21 km2) and also has an exclusive economy zone at sea not exceeding 200 nautical miles (altogether 510,000 km2) and with a right to go up to 1,200,000 km2). Certainly the way forward for Sri Lanka is a blend of land based development done so far and future sea based economy, both giving great opportunities for global and local businesses.

FCCISL  would like to meet you for  a  discussion over the matters stated above and sincerely request you to  grant us an early date / time convenient for you.

Your’s truly

Shirley Jayawardena

President

CC – Hon Mahinda Rajapaksa – Prime Minster of Sri Lanka

         Hon Basil Rajapaksa –The Chair of Presidential Task Force on Economic Revival and Poverty

         Eradication.

         Dr P B Jayasundera - Secretary To the H E president

         Prof W D Lakshman Governor of the Central Bank

By Forbes and Walker Tea Brokers

Overview

2020 will no doubt go down in history as one of the most challenging years with the Covid-19 pandemic changing the world in many ways. The Sri Lankan tea industry was no exception as its world-famous outcry system of auctioning tea having a 137-year-old history was changed to a digital system virtually overnight.

Once again, the tea industry showed its resilience by rising to the occasion in digitalising the auction in a very short period of time, which facilitated the uninterrupted sale of tea.

This initiative was spearheaded by the Colombo Tea Traders’ Association (CTTA) and supported by the Colombo Brokers’ Association (CBA) and its technical partner CICRA Holdings.

Concurrently, many other auction centers around the world too adopted and changed to the methodology of selling tea digitally, transforming the character of the ‘Tea Men.’ The Corona virus outbreak left the global economy looking bleak, with likely recessions in many developed economies across the world.

Whilst there was some hope of recovery in the 2nd half of the year, the continuation of the pandemic shattered all hopes, which meant the uncertainty continued. Consequently, lower fiscal revenues and higher public expenditure placed many countries in a slump.

Notwithstanding the gloom and doom – tea, with its wellness properties and considered to be a cheap beverage, gathered widespread interest globally which helped the wheels of the tea industry to keep turning.

Consequent to the lower volumes that were harvested from around the latter part of 2019, prices were edging up on the previous year’s levels, which was propelled quite sharply following the pandemic, where consumers around the world went on a panic buying spree of food items, of which, tea was no exception. Consequently, many importers remained desperate for urgent shipments, which led to strong buying at the Colombo Tea Auctions.

Post Covid-19 impact is amply demonstrated in the following graph.

Global tea production fell in 2020 after a continuous increase for many years as weather conditions have been mixed and in many major tea producing countries. Kenya would be the only exception where production has increased quite significantly and largely reflects a cyclical recovery after a drought induced decline in 2019.

Indian production was badly impacted by the Corona virus pandemic with restrictions on tea plucking during the shutdown of economic activity in March-April and thereafter the heavy rain, resulting in flooding in most parts of Northern India contributed to an estimated 15% fall in production in 2020. This could be quite significant particularly considering that almost 80% of India’s production is absorbed by its domestic demand.

Quarterly Update – 2020

FIRST QUARTER 2020

Production

Sri Lankan tea production declined to a 53.1 M/Kgs from a 73.4 M/Kgs during the corresponding period in 2019 (a decline of 27%).

Auction Averages/Prices

Total auction average of Rs. 594.81 showed an increase of Rs. 9.51 compared to Rs. 585.30 recorded during the 1st quarter in 2019. Mid Growns appreciated Rs. 9.86 quarter on quarter, whilst Low Growns showed a gain of Rs. 19.51. However, High Growns recorded a decline of Rs. 19.61.

Exports

Tea Exports totalled 59.5 M/Kgs, recording a decline of 14.1 M/Kgs vis-à-vis 73.6 M/Kgs during the corresponding quarter in 2019. Earnings from tea exports of Rs. 49.2 billion records a deficit of Rs. 13.2 billion vis-à-vis Rs. 62.4 billion during January-March 2019. Overall FOB values too declined to Rs. 826.39 in 2020 from Rs. 847.57 in 2019.

SECOND QUARTER 2020

Production

Total tea production of 75.3 M/Kgs recorded a deficit of 10.1 M/Kgs vis-à-vis 85.4 M/Kgs during April-June 2019. During this period, Low Growns showed the steepest negative variance of 7.2 M/Kgs followed by negative variances of 1.5 M/Kgs and 0.6 M/Kgs from the High and Medium Grown regions respectively.

Auction Averages/Prices

All elevations recorded a sharp increase in the auction prices following the panic buying spree post Covid-19. In the second quarter of 2019/2020, Low Growns gained Rs. 136.38 followed by High Growns Rs. 109.93, Medium Growns Rs. 108.99 and the total Colombo auction average by Rs. 120.93. Furthermore, a significant appreciation on prices quarter on quarter – High Growns Rs. 54.43, Medium Growns Rs. 57.89, Low Growns Rs. 76.38 and the overall average by Rs. 62.98.

Exports

Tea exports totalled 64.5 M/Kgs, recording a deficit of 7.0 M/Kgs vis-à-vis 71.5 M/Kgs during the corresponding quarter in 2019. Export earnings totalled Rs. 56.8 billion, recording a decline in earnings of Rs. 2.6 billion compared to Rs. 59.4 billion in 2019. FOB value of Rs. 831.11 recorded an increase of Rs. 50.17 vis-à-vis Rs. 881.28 in corresponding quarter in 2019.

THIRD QUARTER 2020

Production

Total production showed some recovery and totalled 72.0 M/Kgs during the quarter under review, with a marginal deficit of 2.0 M/Kgs when compared to the 74.0 M/Kgs harvested during the corresponding quarter in 2019. End 3 rd quarter deficit 31.0 M/Kgs (13%).

Auction Averages/Prices

Consequent to greater stability and availability, both in Sri Lanka and globally, auction prices began to take a correction commencing around end May and well into the 3rd quarter. Therefore, whilst auction prices continued to reflect a significant increase over its corresponding prices in 2019, 3rd quarter auction averages showed a fairly significant decline on the 2nd quarter auction averages.

Exports

Tea exports totalled 74.2 M/Kgs marginally behind 75.9 M/Kgs in 2019. Export earnings Rs. 64.4 billion vis-à-vis Rs. 60.6 billion in 2019. End 3rd quarter 2020, tea exports totalled 198.2 M/Kgs vis-à-vis 221.0 M/Kgs in 2019, a deficit of 22.8 M/Kgs. Export earnings totalled Rs. 170.5 billion vis-à-vis Rs. 182.5 billion, which records a deficit of Rs. 12.0 billion in earnings.

FOURTH QUARTER 2020 -INTERIM

(At the time of compiling this report, industry data pertaining to the period under review remains incomplete.)

Production

October/November production totalled 48.2 M/Kgs, recording an increase of approximately 3 M/Kgs. Whilst this would be the only quarter to show a positive variance in production and if December production would equal the 21.8 M/Kgs achieved in 2019, annual production for the year 2020 would be marginally above a 270 M/Kgs. This would record approximately 30 M/Kgs (10%) shortfall when compared to 2019.

Auction Averages/Prices

Tea prices in the 4th quarter shows an improvement on the 3rd quarter. Total auction average of Rs. 643.15 records an increase of Rs. 27.35 from Rs. 615.80 in the previous quarter. High Growns Rs. 622.09 vs. Rs. 528.70 in 2019, a quarter-on-quarter gain of Rs. 93.39. Mid Growns Rs. 577.10 vs. Rs. 535.16 in 2019, a quarter-on-quarter gain of Rs. 41.94. Low Growns Rs. 677.84 vs. Rs. 644.07 in 2019, a quarter-on-quarter gain of Rs. 13.77.

Total auction average of Rs. 643.15 showed an increase of Rs. 89.44 compared to Rs. 553.71 recorded during the 4 th quarter in 2019. All elevations have shown significant appreciation in prices. High Growns Rs. 107.22, Mid Growns Rs. 107.12 and Low Growns Rs. 78.65.

Exports

Here again, the available data would be for the period October/November which totals 43.3 M/Kgs vis-à-vis 47.8 M/Kgs during the corresponding period in 2019. This records a deficit of 4.5 M/Kgs increasing the to date deficit up to end November to 27.3 M/Kgs. Export earnings totalled Rs. 38.4 billion vis-à-vis Rs. 38.9 billion, marginally behind the 2019 earnings and bringing the to date deficit in earnings up to end November to Rs. 12.5 billion.

2020 Projected Tea Industry Performance in Summary

• Production down by approximately 30 M/Kgs (10%) year-on-year.
• Tea exports volume down by approximately 27 M/Kgs.
• Tea exports earnings are likely to show a deficit of Rs. 10-12 billion.
• Auction averages/prices – National average for 2020 Rs. 628.21 – highest ever! Interestingly, whilst the rupee average shows a gain of Rs. 10.07 vis-à-vis the previous annual all-time high of Rs. 618.14 achieved in 2017, in USD terms records a negative variance of USD (0.69) vis-à-vis the all-time high of USD 4.11 in 2017. A detailed analysis is set out below.

SRI LANKA MACROECONOMIC UPDATE – 2020

The year 2020 will perhaps be known globally as the year of the Corona virus. Many developed countries are impacted significantly by the Covid-19 pandemic and the latest projection by the World Bank is that the global economy will contract by 5.2% in 2020. Sri Lanka was no exception and consequent to the economically crippling lockdown for over 2 months, wiping out economic activity from late March was predicted by the Asian Development Bank to post a negative growth of 5.5% for 2020. The World Bank was more positive, projecting a contraction of 3.2% for the year. At the time of compiling this report, the economy had contracted by 5.3% by the end of the 3rd quarter. The country debt default risk was also seen as high by all major rating agencies with Fitch, S&P and Moody’s downgrading the country’s bonds. However, the resilience of the country cannot and should not be underestimated. This is clearly seen with the quarter-on-quarter growth figures reported below.

(We report below the key indicators of the economy updated as at the time of reporting)

Economic Growth The overall annual growth levels of the country have been slipping over the past five years and now recording a negative growth by the third quarter of 2020. However, the Covid-19 affected second quarter appears to be the main cause for the decline this year.

The analysis of the quarterly results show the problems of the country were deep rooted and the negative growth in the largely Covid-19 unaffected first quarter is a reflection of the issue. Both agriculture and industry sectors were showing large negative growth figures in the first quarter.

Exports: The export sector of the country has grown only 8% over the past 5 years, with an annual average growth rate of only 1.6%. The agriculture sector has performed the worst, showing negative growth in all but one year in the past 5 years.

Production: The first 10 months saw a decline in agricultural production although the industrial sector saw marginal growth.

Inflation: Inflation as measured by the movement in the National Consumer Price Index (NCPI) was 5.5% in October 2020 (5.6% in October 2019) with the annual average as at the end October 2020 being 6.2% (2.8% in 2019). It is observed that inflation in 2019 which began at 1.6% in January 2019 ended the year at over 6%, while in 2020 the trend was reversed where the inflation declined from 7.6% in January to 5.5% by October.

The NCPI was updated with 2013 kept as the base year and we have now seen a cumulative 39.1% increase in prices. It is to be noted that years 2017 & 2019 are the highest contributors to this increase.

Interest Rates: All interest rates declined in 2020 against 2019. The benchmark AWPLR declined significantly over the past 12 months to virtually unprecedented levels. The AWPLR declined further in December and the weekly rate hovers around 5.66% at the time of writing.

Exchange Rates: The Sri Lankan Rupee (LKR) depreciated against most currencies during the year. However, it appreciated against the Russian Rouble, Turkish Lira and Ukrainian Hryvnia, which was not good news for the tea trade.

MARKET OUTLOOK FOR 2021

( In projecting a possible market scenario, the following needs due consideration)

▪ As many tea producer countries continue to promote ‘tea drinking,’ the percentage of tea retained in producer countries have increased quite significantly over the last decade, resulting in a declining availability for exports.

▪ Tea consumption continues to be dominated by Asian countries, particularly India and China, which together is estimated to be 55% and more of global demand.

▪ Out of home consumption, which was adversely impacted due to Covid-19 is likely recover to some extent in 2021, particularly as the year progresses.

▪ Weak market outlook from European countries following the economic downturn, which is unlikely to impact tea prices in a significant manner.

▪ Uncertainty about US trade policy towards China poses a risk to tea sales. It is hoped that US policy will become less combative with the political change.

▪ Oil prices moved higher during the first two weeks of December based on stronger Asian demand, effective OPEC+ supply management and positive news on the vaccine front, whilst Brent oil crossed USD 50 for the first time since March.

▪ From a Sri Lankan perspective, it is most likely that the Sri Lankan Rupee would weaken once the imports on non-essential items are relaxed and in such circumstances, would augur well for Rupee tea prices considering that some of the key importer country currencies too have depreciated post the Covid-19 pandemic.

▪ Sri Lankan tea output although is likely to recover in 2021, is unlikely to achieve the highs registered from 2010 to 2015. Therefore, the supply situation would continue to remain tight.

From a global perspective, tea production in 2020 is likely to record a deficit reflecting the crop shortfall primarily from India and Sri Lanka. Kenya, on the other hand, has recorded a fairly significant increase year-on-year, perhaps reflecting a cyclical recovery after a drought induced decline in 2019. Further, black tea production growth over a period of time has essentially been from the African Region, consisting mainly of CTC teas. From an Orthodox perspective, Sri Lanka as a prime supplier together with India and Vietnam have experienced a crop shortfall in recent times.

In the absence of a global measure of tea stocks, predicting tea prices becomes a near impossibility. Therefore, if the supply and demand equation would be a deciding factor, it would be reasonable to assume that prices in respect of Large Leaf Orthodox teas would sustain at these levels, perhaps even as a worse case scenario. However, prices for Orthodox Rotovane (Small Leaf liquoring teas) would largely weigh on the recovery of tea production in North India, which is unlikely to be regularised during the 1 st quarter of 2021 as almost all producer countries experience dry weather conditions and often is a lean cropping period.

In these circumstances, tea prices are unlikely to show a dramatic change from its current levels up until end 1st quarter 2021 and perhaps on a cautiously optimistic note, we could expect these levels to remain till around mid2021. Tea prices thereafter would largely depend on the supply scenarios that unfold during the 1st quarter of 2021.

Amidst the optimistic outlook for prices, the industry continues to be challenged with constant wage increases and lower rates of mechanisation, which would continue to undermine the competitiveness due to higher average production costs than other large producer/exporter countries.

The tea estates of Sri Lanka’s leading plantations company, Hayleys Plantations achieved another unprecedented milestone after the company’s estates secured all of the Top 10 positions for highest Gross Sales Average (GSA) at the auction for Western High Grown tea in September 2020.

Six estates of Talawakelle Tea Estates (TTEL), three estates of Kelani Valley Plantations (KVPL) and one estate of Horana Plantations (HPL) made up the Top 10 estates in September, marking another first in the industry by a plantations company.

“Hayley Plantations strives to always deliver the very best in quality. This is accomplished through an unwavering commitment to excellence across every single aspect of production. This includes ensuring best practices in environmental, agricultural and factory management are maintained, as well as an unmatched commitment to empowering our workers so that they are in turn motivated and enthusiastic to put their best foot forward.

Especially in recent months, we have seen stiff competition domestically, with some really great varieties of tea being produced from all sectors of our industry. Therefore, it is indeed a true honour to be consistently recognised and rewarded for our quality, which was possible due to the dedication of the staff to craft some of the finest tea that Sri Lanka has to offer,” Hayleys Plantations Managing Director, Dr. Roshan Rajadurai said.

Notably, the Hayleys Plantations estates have occupied nine of the Top 10 rankings from January through September, in addition to bagging the 11th slot. Five other estates of the company also occupied slots in the next 10, solidifying the rankings by occupying 15 of the Top 20 rankings through the year.

Ranked by the Ceylon Tea Traders Association each month, the sales performances recorded at the Auction offer vital insights into the quality produce offered by each estate towards export markets. Estates achieving the highest prices at the Auction are ranked each month, along with cumulative and annual rankings also being compiled at the end of each year.

In 2019, the Hayleys Plantations’ estates occupied 11 slots in the Top 20 rankings, with five occupying positions in the Top 10. In 2018, 12 of the 15 Top slots were occupied by the company estates. Hayleys Plantations are renowned for producing the finest quality Ceylon tea, with the company’s estates dominating the Top 20 rankings over the last few years.

In fact, the Mattakelle Estate of Talawakelle Tea Estates PLC was ranked number one in the Western High Grown rankings nine times in the last 11 years.

The Hayleys Plantations Sector is comprised of KVPL, TTEL and HPL, with all three companies having consistently maintained top ranks among Sri Lanka’s regional plantation companies in rubber and tea respectively. The sector manages 60 tea and rubber estates, and over 26,137 hectares of land while accounting for 4.5% and 2.5% of Sri Lanka’s tea and rubber production respectively.

Notably, TTEL is Sri Lanka’s first plantations company to secure the ISO 50001:2018 for Energy Management System, ISO 14064:2018 for Greenhouse Gases (GHG) Inventory Verification and ISO 14001:2015 for Environment Management Systems (EMS). Similarly, KVPL is also renowned for having become the first company to secure the Organic Rubber Certification.

Photo Caption: Hayleys Plantations Managing Director, Dr. Roshan Rajadurai

Image: Somerset Tea Factory    

Image: Pedro Tea Factory 

Tea industry can demonstrate its ability to withstand the pressure mounted by the COVID-19 pandemic, Sri Lanka Tea Board Chairman Jayampathy Molligoda said.

"We have already identified about 12 countries and we are aggressively going ahead with the tea promotional campaign. Hence,  I’m confident that the tea industry can demonstrate its ability to withstand the pressure and get more foreign exchange in to the country that will have a trickle-down effect right up to the small holders," he said whilst speaking  exclusively to Ada Derana first at 9.

Speaking further he also expressed the following;

"It is not unusual during the month of April for the tea prices to go up. However, this particular year there have been an unprecedented price increase. The tea prices have gone up by Rs.120 to Rs.150. Specially the low grown tea prices have gone up by Rs.150."

"The president has given us a clear direction to continue with the auction system as well as the production and the manufacture. Thanks to the private sectors, the farmers, the manufactures and the brokers and in particular the exporters who come and buy tea. Because of them we have been able to maintain the tea industry uninterrupted. In my view the future is very positive," he added.

Sri Lanka’s tea prices at Colombo tea auction rose sharply during 2020 Q1, whilst Sri Lanka’s tea production declined by nearly 30% Q/Q for the same period, according to a report released by  ICRA Sri Lanka, a subsidiary of Moody’s Investor Services.

The rise in tea prices was largely attributable to the global supply shock from unfavorable weather conditions in most black tea exporting nations, it said.

In April, the Colombo auction prices rose sharply as global tea supply continued to tumble due to labor deployment issues  as a result of COVID-19 pandemic and adverse weather. Weaker local currency, demand induced by the perceived health benefits of black tea and higher tea consumption amidst lockdowns have also helped the Ceylon tea prices to stay buoyant for the said period. Current, higher prices have to a larger extent compensated for the impact on financial performance of tea producers from the lower production levels.

However, with the oil prices plummeting to historical lows, ICRA stated that it will continue to monitor the sustainability of the current price levels as there is a relatively strong correlation between oil prices and  Sri Lankan tea prices.

The Tea Trade is anxiously  waiting for the next tea auction on the Digital platform scheduled for 16^th , 17^th and 18^th April after successful completion of the first ever tea sale on a  Digital platform last week.  The Tea exporters despite the current situation came forward to support the digital auction with minimum user training to help the producers including Plantation Companies (RPC) and the Tea Small Holder farmers of over 650,000 to generate the required revenue to pay the New Year wages and also help the Government to earn the much needed foreign exchange for the country.

The exporters were concerned of the global situation at the time of commencement of the sale. However, despite the impact of COVID 19 that affected almost all countries in the world, the buyers of Ceylon Tea in Russia, Turkey, Ukraine, EU, Middle East helped to keep the last tea auction buoyant and the depreciation of the Rupee by about 8 % against the US Dollar compared to the rate prevailed during the manual tea auction held on 18^th & 19^th March 2020 also contributed to a significant gain in prices. Since the Digital platform auction was held after a gap of two weeks, there was a higher demand for the limited supply of 4.5 million kg available for sale which also helped to increase the average prices by Rs. 74/ per kg. Since tea is considered a food item, there were no import restrictions and the foreign buyers treated it as a priority product of imports.

The lock down situation in India that has temporarily shut down the tea production and exports from the country also prompted foreign buyers to turn towards Colombo Tea auction. Unfortunately for India, due to the shutdown, the North Indian season for quality teas too will get affected severely. It’s imperative that the Sri Lanka tea producers continue to manufacture good quality teas to capture this market opportunity and keep the market buoyant.

The next two sales have been combined as the volume of two sales is approx. 6.7 million kg. The severe drought condition that prevailed in many tea growing districts in the country was the main cause for the decline in local tea production. The auction under normal circumstances would have had an average volume of six million kg of tea every week. We may once again see a strong demand as inquiries have started coming from Iran after lifting of restrictions imposed due to Coronavirus issue.

However, the strong demand from Iran can be expected until India resumes their exports. Once the Indian suppliers commence tea exports to Iran under the special trading arrangements, Sri Lanka may witness decline in Iran business. The implementation of proposed scheme for supply of tea to Iran in settlement of USD 250 million due to them by Ceylon Petroleum Corporation has come to a standstill with temporary suspension of work over COVID 19 issue. Sri Lanka Tea Board, Ministry of Plantation Industries and Ministry of Power and Energy should look at this matter for urgent implementation. The government may talk to USA to obtain the necessary consensus for supply of tea which falls under supply of food and humanitarian goods that is permitted under prevailing sanctions. The implementation of the Iran payment mechanism will be a huge boost to the local tea market.

In view of the tight global supply situation , Tea Exporters Association (TEA)  is of the opinion that there will be a strong demand for Ceylon Tea in the short term and the prices will remain strong at the next tea auctions running up to end of  May/ early June  2020. It is reported the tea production in South India will decline by about 20 million kg in the first half of 2020. The Indian tea industry expects a drop of between 6-8% in her tea exports in 2020 due to decline in tea production. The demand could slowly come down from early June depending on supply situation as we are entering in to the summer season. However, there could be an increase in home consumption of tea while out of home tea consumption remain low as people will continue to restrict their movements or travelling to other countries.

The tea exporters are concerned of the non-availability of tea packaging materials even for bulk tea shipments. The export of value added tea also has been affected due to shortage of labour as well as tea bagging and packaging materials. Although TEA has taken up this issue with relevant authorities, the suppliers remain closed as packaging industries are not listed as an Essential Service. If the packaging materials are not available in the market, the exporters may not be able to continue purchasing teas at the future auctions.

The tea exporters face many challenges; some of them are listed below, while doing their best to keep tea exports moving.

• Require enhanced working capital as the tea prices have gone up significantly while export remittances coming at a slow pace.
• Getting payments on time from EU, USA and Middle East is an issue as they are virtually under lock down situation resulting in an increase in finance cost.
• Lower overhead cost absorption as daily operations are at 25% capacity due to unavailability of adequate man power.
• Additional costs being incurred for staff and labour transport, meals and other health and safety measures activities.
• Limited service offered by Banks.
• The hazel of getting passes and certifications from relevant state and private sector support agencies due to restricted working hours / dispatching documents etc. also worries the tea exporters. If the situation continues, most buyers may purchase teas only for their urgent requirements.

The Tea Exporters Association has requested the Tea Board to suspend the collection of Tea    Promotion Levy (Rs.3.50/kg) to support the cash flow position of the exporters and await a favorable response from the Board.

The strategy experts suggest that, Sri Lanka tea industry should consider adopting the blue ocean strategy for it’s profitably and sustainability. The comments were made at a seminar organized by Tea Exporters Association recently under the theme of “Inventing New Horizons for Ceylon Tea” with the objective of finding new strategies for the development of tea industry which is currently at cross roads due to a number of internal and external factors. Dr. Ravi Fernando, a well-known corporate strategy expert, Dr. Chandra Embuldeniya, first Vice Chancellor of Uva Wellasssa University and Dr. Udaya Indraratne, former advisor to Dubai and Abu Dhabi governments, were the three eminent speakers at the event which was attended by Secretary, Ministry of Plantation Industries and Agriculture Exports, Chairman, Sri Lanka Tea Board and many other senior government officials and tea industry stakeholder members.

Welcoming the participants Mr. Sanjaya Herath, Chairman of Tea Exporters Association assured that, TEA is ready to do its best to uplift the tea industry and work together with other stakeholders. Tea is one industry and belongs to all stakeholders and everybody should come out from their water tight compartments to understand each other’s problems. The industry should be run by the stakeholders and therefore joining hands with each other is necessary to take the industry forward.  

Mr. Jayampathy Molligoda, Chairman of SLTB addressing the participants stated that, Ministry of Plantation Industries and Colombo Tea Traders Association are currently working on two strategy documents, one looking at the industry issues from grower level up to the end consumer and the other one looking from the international demand for Ceylon Tea down to the tea small holder grower. In Sri Lanka’s context what is important is to have a strategy plan that is implementable as many studies done in the past have ended up in the respective organizations without taking any action. Tea industry is the most organized agriculture sector in the country which has survived for the last 152 years and SLTB is committed to guide the industry to make a bigger contribution to the national economy. One drawback in implementing strategies is lack of funding and the government is looking at possibilities of obtaining equity through multinational agencies to revive the tea industry. Any misunderstandings among the stakeholders should be addressed through dialogue to uplift the status of tea industry. It should have a proper value addition at each stakeholder level and if not no one will be interested in investing in the tea industry.

Dr. Ravi Fernando spoke on the theme of “Creating Blue Oceans for Sri Lanka Tea Industry”. The essence of blue ocean strategy is to open up new market opportunities and create new demand where competition will be irrelevant. It is about creating and capturing uncontested market opportunities where competition does not exists. In the blue ocean strategy, the demand is created rather than fought over with other competitors. The strategy focuses on identifying opportunities for rapid growth and profitability. The competition is rather irrelevant as the company is targeting at unexplored market space. The strategy also speaks on “Red Ocean” or current market space where the boundaries or the limits and competition are known. The companies who are in red ocean try to out-perform the competitors to get a share of the current demand. Dr. Fernando identified four factors that will influence any initiative to take the tea industry forward.

• Team performance – all stakeholders to  work  as a team
• Tea is a beverage – Ceylon Tea has to be relevant to tomorrows consumers and not to the past
• Tea is an agro based industry – climate change impact is already set in on the agriculture sector. Any strategy should take this fact in to consideration.
• Create value in consumer mind / at consumer end to get better prices for Ceylon Tea.

He opined that currently Sri Lanka tea industry is in the red ocean trap due to following factors.

• The mistake of expecting consumers to be loyal to Ceylon Tea forever.
• Expecting new generation to make and drink Ceylon Tea in the same way without paying much attention to demand for convenience and changing consumer habits.
• Country can manure with standards and quality of tea and expect world consumers to accept it.
• Innovation in all sectors is not needed.
• No urgency for having Ceylon Tea GI and facilities for testing tea locally.

Sri Lankan tea exporters should explore new markets where opportunities and profits are. The existing markets for Ceylon Tea should be sustained as the industry has invested heavily to capture these markets but if the value of tea exports to be enhanced getting in to new markets is important. The exporters are facing more competition in existing markets and profitability from these markets appears to be low. The Sri Lankan tea industry should also look at developing new products to be more competitive in the world tea market. The world consumers may have been loyal to Ceylon Tea for the last 150 years but there is no guarantee that the new generation will be loyal to Ceylon Tea as consumer taste, habits etc have changed. The competition from other beverages that have innovated with the change of time could attract tea consumers to their products and hence having a unique product that can appeal to the younger generation is vital for sustainability of the industry.      

He further stated that, the taste bud of future consumers should be the parameter for deciding consumer liking of Ceylon Tea and not the taste buds of tea tasters of individual tea companies. The convenient factor, ethics, tea and health aspects, sustainability of industry, innovation to suite the future demand are necessary to enhance the demand for Ceylon Tea and profitability of the industry. He also stressed that stakeholders should pay attention to the following market changes as well.

• Consumers who drink tea now  could move away to other beverages in the future- loss of market opportunities
• Unexplored non tea consumers-  that may provide a new opportunity as they may want to drink tea now
• Those who refusing to drink tea – haven’t drunk tea before but  may want to drink tea now- an opportunity

Today the consumers decide the future of a product. The competition in existing markets or red ocean will eat in to profits of companies. Therefore, creating new opportunities without delay with exploring new markets with new products would be the key to profitability and sustainability in the tea industry.

Dr. Chandra Embuldeniya also stressed the fact that Sri Lanka tea industry should move away from red ocean trap and embrace the blue ocean strategy for its sustainability. Tea as we are selling today will not add value and it can be unsustainable soon. He explained that Sri Lanka should think beyond the primary level production of tea for its profitability and sustainability. Even if the country spends the entire amount of tea promotion fund on promotion of Ceylon Tea with the same model in our traditional markets, it will not be able to enhance the export revenue beyond USD 1.6 billion unless the whole model of the industry is changed. Presenting his views on the theme of “USD 4 billion of tea export revenue in 5 years – reality or hype”, Dr. Embuldeniya stated the country would not be able to achieve this target even after 10 years unless industry players understand the changing global tea market requirements and adjust the domestic structure to cater to it.  As per available data, over 75% of Sri Lanka tea exports are absorbed by 15 importing countries, most of them are high risk markets due to political and economic factors, but this has not changed significantly in the last few decades leaving Sri Lanka in the red ocean trap. Commenting on the tea auction prices, he mentioned that, though the Colombo Tea Auction prices are above the prices of all other tea auction centers, the gap is gradually coming down with decline in demand for Ceylon Tea or due to heavy reliance on high risk markets that are unable to pay high prices.

Dr. Embuldeniya highlighted the need to change at the right time. Quoting examples of KODACK and SEARS super market chain in USA that collapsed due to their failure to change with the time, he advised the stakeholders to change with the demand and habits of global tea consumers. Ceylon Tea has not changed enough during the last 150 years. It is clear that, government cannot financially support the industry any longer. It is necessary that all stakeholders adopt changes now before it can be too late. He also highlighted the importance of having a balance sheet for the entire tea industry. Though individual companies in the tea industry have their own balance sheets no study has been done to determine the profitability of the entire industry. It is necessary to develop a tea industry cash flow statement for the last few years to know where we stand.

Sri Lanka tea land productivity compared to other countries is very low and soon the industry may not be sustainable. At present, the world is going through the forth industrial revolution and some of the key factors of current revolution are disappearing of physical, digital and bio-logical boundaries. We are still in the first and second industrial revolution era that prevents or delay the change in the model of production and marketing of Ceylon Tea. The problems in the tea industry are related to entrepreneurship, end of life circle for many tea plantations, low yield etc. His suggestion was to add value through use of new technology as many areas of the tea industry are still not using the new technology including the sale of tea at the Colombo Tea Auction. The technology should be used both in tea manufacture and marketing. The strategy for the tea sector should include a consolidated account for entire tea industry for the last 10 years, plan for next 10 – 25 years and value creation through non tea products. Some of the tea based products may not be in the same domain where we are currently in. 

In his opinion, tea is not only a beverage. Research teams should work on creating value through new products, finding markets and also new marketing channels for Ceylon Tea. The value of tea as a beverage is slowly declining and other tea based products in cosmetic and pharmaceutical sectors are gradually emerging as value creators for the tea industry. The Sri Lankan tea industry should work on identifying research lab facilities with food technology, capacity to develop health, wellness and beauty products etc. The research team should share and transfer the knowledge to the tea industry and then setting up public and private sector partnership for commercials scale production. Research on consumer preferences and value addition to different products are also important in this exercise.

Dr. Udaya Indraratne, who spoke on “Building resilience through strategic approach for competitive advantage for Sri Lanka Tea Industry” emphasized the importance of creating competitive leaders to guide the industry. The owners or CEOs of tea companies should build up knowledge based leadership qualities to face the challenges post by the world competition. The economic maturity, ability to enhance the production to feed the consumers and ability to identify & face global competition are some of the major characters required for a good leader who can drive the tea industry through the rough water.

Sri Lanka is a low value addition country not only in tea but in many other sectors as well and the exception could be in the apparel sector. Sri Lanka’s export per capita is USD 543 compared to USD 1,619 for Vietnam, USD 3,530 for Thailand and USD 50,299 for Singapore. The value addition to tea takes place outside Sri Lanka and country should have a strategy to retain it locally. The export basket of tea has not changed for many years, another reason for low value addition in the tea sector.  A good leader will identify the gaps and determine where the company or industry currently stands and the way forward to achieve the final objectives. A good leader identifies the strength and weakness of the company and the industry and then plans a suitable strategy with wisdom and knowledge. The industry faces challenges as small holder growers do not follow good agricultural practices (GAP), low application of technology, unethical competition, low quality and productivity etc. The large plantation companies also lack innovation and value addition in their sector. Even the exporters lack innovation for use of more technology in creating new products and value.

In his opinion, a paradigm shift in all sectors of the industry is required to overcome the current issues. The industry should set up clusters under each sector and each cluster should analyze its internal and external environment, resources, vision and mission, develop options, do rational selection, and find strategies for way forward for implementation.  Analyzing market based environment to find a strategic route forward is a key factor in this regard. Developing academic type economic models will not help to address the tea industry issues. According to available information only about 3 % of farmers in agriculture sector in Sri Lanka are skilled farmers. The same scenario may apply to tea cultivation by small holder growers also though the percentages may be different. The skill development in tea cultivation is necessary as the product is manufactured for export market.

He advised the tea companies to consider Singapore formula of MPH for running their business. The basics of MPH module are, right people should be appointed to run the organization (meritocracy). The application of solution without being boarded with any ideology or fixed ideas (pragmatism) is also necessary. Having honest people in the organization and industry is also a key to the success of implementing strategies for the betterment of the Sri Lanka tea industry.

The value of a currency depends on number of factors that affect the economy of a country such as balance of payment, government debt, foreign exchange reserves, foreign investment, trade deficit, economic growth rate, inflation, macro-economic policies etc. The general belief is that, a strong currency would make imports cheaper and exports uncompetitive while a weak currency could make imports expensive and exports more competitive.

The price of an export commodity such as tea is influenced by both internal and external factors that would include quality and uniqueness of the product, world supply and demand, the value of currencies of importing countries, tariff and non tariff barriers etc. According to principles of economics, short supply of a product could move the prices up and excess of supply would lead to lowering the prices if all other factors remain constant. Since over 90% of the Sri Lanka tea production is meant for exports, the price of tea at the Colombo Tea Auction is also subject to influence of number of external factors in addition to the domestic issues of tea quality, standards etc.

When the value of the currency of an importing country depreciates it will have a negative impact on the purchasing power of the buyer / consumer and hence the importer may not be able to pay the same price as before or could reduce the volume of purchase depending on the necessity of the product to the end consumer. Also when the supply is more than the demand the buyers have more options to choose and possibility of moving from high cost suppliers to low cost suppliers is greater unless a producing country offers a unique product that cannot be matched by the others.

The tariff and non tariff barrier issues will also have an impact on the demand and the price of an exportable commodity irrespective of the exchange rate movements. The recent MRL issue that affected Sri Lanka tea exports to Japan, Germany and Taiwan is a good example of non tariff barriers that negatively affected the demand and prices of Ceylon Tea. In a highly competitive market the quality of the product also plays a vital role in maintaining prices as better quality products can fetch good prices. The international sanctions on Iran, civil war in Libya and Syria are some other issues that influence the tea prices.

The purpose of this article is to examine how the movement of Sri Lanka Rupee in the recent past has influenced the average tea auction prices and average FOB prices of bulk tea. It does not examine whether Sri Lanka has gained or lost any markets due to exchange rate fluctuation. Theoretically the depreciation of the rupee should have positively impacted on the Colombo Tea Auction prices at the same or similar ratio of the depreciation. However, in realty this theory has not worked in the same manner due to the influence of above mentioned internal and external factors.

Movement of the Rupee

An analysis of the movement of Sri Lanka rupee from 2011 – 2019 periods reveals that the local currency has continuously depreciated against the US dollar during the last eight years. From point to point, the average value of the rupee depreciated from Rs. 110.56 in 2011 to Rs. 178.77 per dollar in 2019 registering depreciation of Rs. 68.21 or by 55.73% to the dollar. During this period the average tea auction prices went up from Rs. 359.89 in 2011 to Rs. 544.54 per kg in 2019, an increase of Rs. 184.65 per kg or 51.30% and average FOB price of bulk tea (excluding 10kg packages) moved up from Rs. 495.86 in 2011 to Rs. 715.74 per kg in 2019, an increase of Rs. 219.88 per kg or by 44.34%. These point to point analyses has revealed that tea auction prices have gone up by almost a similar margin of depreciation of the local currency while average FOB prices of bulk tea exports have gone up by a lower margin against the level of depreciation of the rupee. However, an in depth analysis of the movement of average tea auction prices and average FOB prices of bulk tea against the movement of value of the local currency on an annual basis from 2012 to 2019 shows somewhat different picture as the influence of both internal and external factors are captured in the annual  prices. (Table 1)

In 2012, the average value of the rupee depreciated from Rs. 110.56 to Rs. 127.60 against the dollar, a reduction of 15.41% but the average tea auction prices increased only by 8.82% while average FOB price of bulk tea moved up by about 11.60%. In 2013, the rupee further depreciated by 1.18% but the average tea auction prices increased by 12.96% and average FOB price of bulk tea went up by 12.59%, in a much higher proportionate than the depreciation of the local currency. In 2015, the rupee depreciated by 4.11% over 2014 and contrary to the general belief that depreciation makes price of tea more attractive to the buyers, the average tea auction prices came down by 12.93% and average FOB price of bulk tea also came down by 10.93%. This scenario changed dramatically in 2016 when rupee depreciated by 7.11% against the USD and largely due to the crop shortage, the average tea prices at the Colombo Tea Auction went up by 16.52%, more than double the ratio of depreciation of the rupee but average FOB price of bulk tea was unable to maintained the same momentum due to external factors and the average FOB price of bulk tea went up by 6.94% only. It is observed that, a large portion of increase in auction price of tea was born by the exporter as they were unable to pass the price increase over to foreign buyers. In 2017, the rupee depreciated by 4.70% over 2016 but the average tea auction price went up by 31.90% while average FOB price of bulk tea too went up by 33.43%.

The general acceptance that, depreciation would make local tea products more competitive was proved wrong in 2018 and 2019 when average tea prices failed to gain despite the depreciation of the local currency. In 2018, the rupee depreciated by 6.62% and further depreciation of 9.98% was registered in 2019. Despite the depreciation of local currency the average prices at the Colombo Tea Auction came down by 5.86% and 6.42% respectively in 2018 and 2019 due to sluggish demand from foreign buyers with over supply of tea in the world market. However the average FOB prices of bulk tea exports in the two years came down by 0.16 % and 2.78 % only. It appears that, there is no strong co-relation between the depreciation of the local currency and price of tea as the price is always influenced by a number of internal and external factors. Further, it is also evident that the average FOB prices of bulk tea behave differently to the movement of tea auction prices due to addition of export taxes, blending cost, export packing and different trading terms used by the exporters.

Exchange Rates of Major Tea Buyers 

A review of movement of exchange rates of top twelve buyers of Ceylon Tea during the last six years has revealed that except the value of Euro and UAE Dirham, all the other currencies have depreciated against the US Dollar (Table 2).

Over 50% of average depreciation of the currency is recorded from Iran, Turkey, Russia, Syria and Azerbaijan while China and Chile have registered depreciations of their currencies by more than 10% during 2014 – 2019 periods. Since Iran tea buyers use the open market rate of the dollar for tea imports, the fluctuation of the Iran Rial is more than the depreciation of the official rate by 62.3%. Although the UAE currency remains unchanged it did not help the Colombo tea auction prices as its imports from Sri Lanka reduced during the last five years as a result of lower demand from her major re-export markets such as Iran, Iraq, and CIS etc. Since the export of Ceylon Tea to EU markets accounts for less than 10% of the total tea export volume of Sri Lanka, the stable Euro also failed to make a significant impact on the tea prices. It is observed that, the buying power of major importing countries of Ceylon Tea has significantly reduced in the last six year period that may have negated the benefit of depreciation of the local currency to the local tea trade.

World Production and Exports

The world supply of black tea has gone up from 3,543,268 MT to 3,932,338 MT over 2014 – 2018 periods. This reflects a growth of 389,070 MT or 10.98% during the last 5 year period. However, Sri Lanka has experienced a setback with her black tea production coming down from 334,837 MT to 301,405 MT during the same period registering a decline of 9.9%. The international tea committee statistics reveal that world tea exports reached 1.469 million MT in 2018 against the volume of 1.484 million MT in 2014 registering a marginal decline of 1.01% in the last five years while Sri Lanka black tea exports declined by almost 15.2% during the same period. In terms of volume Sri Lanka has lost 47 million kg of tea of its exports during the same period. Since the global black tea production has gone up by a significant volume and exports have come down by only 1% in the last five years, the foreign buyers who were patronizing Sri Lanka could have moved to other destinations for procurement of their black tea requirements which could have also negatively impacted on the tea prices at Colombo Auction despite the depreciation of the local currency (Table 3).

The recent World Bank commodity outlook report has stated that, the global tea prices declined by 1% in the 3^rd quarter of 2019 against the previous quarters and remained 6% below the same period of 2018. The tea prices at auction centers in India and Kenya also came down in 2019 due to excess supply situation in the world market especially the CTC tea varieties. As per available data the average tea prices at Mombasa auction in Kenya came down from USD 2.81 per kg in 2017 to USD 2.43 per kg in 2018 and USD 2.22 per kg in 2019. The average Indian tea prices remained almost same at Indian Rupees 140.26 per kg in 2018 and Indian Rupees 141.17 per kg in 2019 thanks to the large domestic consumer base.

The EU and US sanctions imposed on Russia since 2014, tightening of USA financial sanctions on Iran in May 2018, civil war in Libya, Syria, Iraq etc, MRL issue with Japan, EU and Taiwan and the failure to maintain the tea quality standards could have also affected the tea prices at the Colombo Auction in the recent past. When there is huge competition in the world tea market the depreciation of the local currency alone cannot push the tea prices up.

Conclusion

Although the averages may not show the complete picture of tea price variances in relation to exchange rate fluctuations it is evident that there is no single factor responsible for the movement of prices of agricultural commodities including tea, but rather a set of factors. The general beliefs that, the depreciation of local currency will always leads to enhance the prices of tea or export commodities is subject to fulfillment of various internal and external factors. Since external factors are beyond the control of Sri Lanka tea trade members what is necessary is to address the domestic issues affecting the tea prices. A consorted effort by all stakeholders is necessary to overcome the domestic issues to attract more foreign buyers towards Ceylon Tea. Sri Lanka’s position as the leading supplier of orthodox tea to the world market is challenged by other countries due to the decline in tea production volume and the standard of tea. Unless these issues are addressed immediately country may not be able to command higher prices for its tea. Finding new markets and development of more strong Sri Lanka tea brands could be the long term solution to enhance the tea prices at Colombo Tea Auction.

Tea Small Holder Factories PLC, a fully owned subsidiary of John Keells Holdings was recently recognized as the best CTC (Crush Tear and Curl) Tea Manufacturer Island wide. The award presented by the Tea Exporters Association was won by the Hingalgoda Tea Factory on the 6th of September 2019. The award was presented following an assessment by a special selection committee appointed by the Tea Exporters Association. The selection criteria included the consistency in maintaining tea quality, compliance with tea grade nomenclature and no claims on quality and moisture. Hingalgoda Tea Factory has been producing Top standard CTC teas over the years and have been consistently obtaining Top prices at the weekly tea auctions. The selling broker of Hingalgoda CTC Teas at the Colombo Tea Auctions is John Keells PLC.

Tea Smallholder Factories PLC operates seven tea factories in the low grown region of Sri Lanka and is located in the region / areas of Galle, Ratnapura and Ginigathhena. The principal business activity of the Company is processing green leaf procured from suppliers comprising of tea small holders and green leaf collectors, and sale of processed black tea through the Colombo Tea Auction. The Company employs a workforce of over five hundred and caters to a green leaf supplier base of over seventeen thousand six hundred (17,600), which is approximately 5.8 percent of the total tea small holders registered in the low grown region of Sri Lanka.

Tea Small Holder Factories PLC is a subsidiary of John Keells Holdings PLC (JKH), Sri Lanka's largest listed conglomerate in the Colombo Stock Exchange operating over 70 companies in 7 diverse industry sectors. JKH provides employment to over 13,000 persons and has been ranked as Sri Lanka's 'Most Respected Entity' for 13 years. Whilst being a full member of the World Economic Forum and a Member of the UN Global Compact, JKH drives its vision of "empowering the nation for tomorrow," through the John Keells Foundation."