Has the bubble burst?
Over the weekend I met up with a cross section of business people, which gave me view of the current climate that exists in corporate world of Sri Lanka.
One said that their production plant was closed last week as the cost of production was higher than the selling price given the devaluation of the rupee and the price control that is in play in the sector.
Another said that the import cost increasing has eroded into the profit on the contracts that they have signed into, which are backed by performance bonds which blocks anyone moving out of the agreement.
A leading exporter commented that with the devaluation came extra profits, which makes them want to ramp up production with step up investments but the board/industry advice was to wait till things stabilise before making any landmark business decisions. The comments made me wonder if the bubble has burst.
Just like in business, where a strategy is selected to drive growth, when running an economy, a strategy is selected to drive economic growth. In the last two years what we saw was that whilst many countries devalued their currency based on the dynamism of their economy, Sri Lanka defended the rupee to the extent that some reports mention a number as much as two billion dollars. This is equal to the IMF loan, is what economic experts report.
Whilst some can say it’s a prudent decision to spruce up the overall economic engine given the cessation of hostilities, another view can be that it created an artificial economic environment that led to a expansion of the private sector credit as much as 35% to almost Rs. 515 billion and now, with the free market mechanism of the exchange rate coming into play, the overall economic climate has taken a different turn.
Maybe the sentiments that were expressed by the cross section of business people over the weekend give a vibe of this deeper problem that has emerged in the economy. How we as a nation face this new dynamic, I guess time will tell, but I feel it’s a new skill we will need to equip ourselves that the West has already experienced.
On a global front we see one of the key export markets, the UK, crashing with de-growth for the second quarter running, which means it’s a recessionary environment.
The point that amazes me is that when a country is hosting a global project like the Olympics that spruces any economy in the short-term, we see the reverse in UK. Maybe the recession would have been greater if not for the Games pepping up the construction industry as well as the logistics sector of the country.
The good news is that the US economy is holding ground, which to my mind is the power of the American spirit and some good thinking by Bernanke.
But the sanctions on Iran can take the world on a spin with spiralling oil prices and more importantly the contraction of economic activity based on preferential supply. The latter is a point that can hurt China and India, which can have serious ramifications for global economic health.
Whilst the tourism industry can boom due to the value-for-money destination proposition becoming stronger, the tea industry is in further chaos as Iran consumes almost 30 million kilograms of Ceylon Tea annually but is now in a state of uncertainty.
This ramification has serious consequences as the tea industry is already in the red where the cost of manufacture is higher than the selling price on some segments of the tea industry. On the demand side the Middle Eastern spring has already created a dent in the industry due to logistical issues.
Sri Lanka now has no option but to re-look at new business models of working if we are to survive, but the question is, what is this magic business ethos that we have not tried so far?
One can go the route of renegotiating the wage of Rs. 515, but with the price spiral-driven inflation post the increasing of petrol, diesel and kerosene prices, this route becomes a no go decision.
May the global advertising campaign can be one way to drive Ceylon Tea prices up, but the point is that we are already out-priced in the market place and the only way out is value addition with branding and marketing, which are more long-term strategies than quick wins.
Whilst Sri Lanka is grappling with internal challenges, we see a new trend emerging globally that is also posing a new challenge to the Sri Lankan business world – the use of new communication tools.
Latest research reveals that the use of iPads in work situations has increased by 40% in the user category 25-34 years. The interesting point is that the almost 91% of key decision makers who use a iPad also have a iPhone or are in the process of purchasing one, which means that a new work culture is setting into Sri Lanka.
With this wave taking form in the world, what we see is that new interfaces come into play for communicating in the world of business, further adding pressure on the business executive of tomorrow.
Stepping into the world of Facebook, what we see in Sri Lanka is that most men folk add a new friend for business reasons and networking, whilst in the case of females FB is used more as a creative outlet.
But the strange phenomenon in Sri Lanka is that almost 82% of those who connect on FB do so due to real life relationships extending to the digital media rather than meeting totally new friends. This amplifies the importance of trust in Sri Lankan culture.
A point to note is that almost 55% of people removed a FB friend due to an offensive comment, which is also cultural in my view that negative messages are not palatable, whilst in the West one is direct irrespective of the message being positive or negative.
1.The private sector must engage the key policymakers at the line ministry end or at Central Government level to share the ramifications of the new exchange rate policy.
2.Work towards a somewhat consistent policy which is sector specific that can be formulated. This can help key business decisions that need to taken.
3.Do not follow a ‘wait and see’ approach but proactively ramp up production to drive exports.
4.Evaluate the options of doing business on key economic partnerships like CEPA, PFTA with Brazil and working via Australia (yes, across Australia in the event of an unforeseen global event).
(The author is actively involved in the growth agenda of the country and the above is part of his doctoral study program that he engages in with a top university in Asia. He is an Alumni of Harvard University, Boston.)