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At the FACETS Exhibition held recently Pic by Chandana Wijesinghe

A $1bn revenue target is spearheading Sri Lanka’s efforts to solidify its place as a key source market for gemstones and jewellery, although flat global sales of luxury goods, coupled with labour shortages, risk hindering the country’s efforts.

Sri Lanka is home to 70 of the world’s 200 varieties of coloured stones, including its best-known export, the Ceylon sapphire. Estimates suggest that 80-90% of the country’s rock formations could hold gem deposits.

However, with growing regional competition in gem and jewellery trading, Sri Lanka will have to dig deep to win back its status as an industry hub.

Market conditions

Operators will be hoping that positive trends in Sri Lanka’s tourism sector provide a welcome boost in jewellery trade. Tourism growth reached double digits in the first nine months of 2015, according to figures released by the Tourism Development Authority, with arrivals passing the 1.3m mark in September.

Yet traders face a difficult operating environment industry wide, weighed down by the broader economic slump and weaker currencies in several key purchasing markets.

In China, for example – Sri Lanka’s fastest-growing source market for tourist arrivals – the 2% devaluation of the yuan in August was the largest one-day move for the currency in a decade. Luxury goods retailers fear the weaker purchasing power of Chinese consumers could impact the lucrative tourism segment, as Chinese tourists spent a record $500bn worldwide last year, according to research service China Confidential.

“Gems are the first to be affected by a crisis and the last to recover, though there is always a niche market,” Ahsan Refai, managing director of retailer Zam Gems, told OBG.

Despite the concerns, a strong turnout at Facets Sri Lanka 2015, an annual international gem and jewellery show that which brought over 100 buyer delegations to Colombo in early September, sent out welcome positive signals for industry growth this year, after a more than 14% drop in exports in 2014.

Informal trading

Sri Lanka’s gem industry also faces considerable domestic challenges, which include a smuggling problem, staff shortages and exploration constraints.

While gem, diamond and jewellery exports stood at $381.2m last year, according to the Central Bank of Sri Lanka, operators estimate that the figure could be significantly higher, augmented by unofficial business, smuggling and undervaluing.

“There is a need for a freer movement of goods,” Chanaka Ellawala, former chairman of the Sri Lanka Gem & Jewellery Association and director at Ellawala Exporters, told OBG. “The tax on gem exports drives people to undervalue their goods.”

Building industry volumes and carving a niche as a trading hub also presented challenges, Ellawala added, “It is also very difficult to bring rough gems into the country, which could otherwise help build industry volumes and make the country more of a trading hub.”

Fine-tuning for the future

The past decades have been marked by turbulence for Sri Lanka’s stonecutting and polishing operations, with much of the country’s manufacturing going to regional competitors.

While Sri Lanka has fought hard during the last 15 years to re-establish its gem manufacturing industry, operational challenges remain, led by a shortage of qualified workers.

Industry players believe recruitment shortfalls are due in part to a broader shift away from labour-intensive lines of work, although Ellawala is confident that these hurdles could be overcome with the necessary resources and training.

Sri Lanka’s Export Development Board estimates that the industry provides employment for more than 600,000 people, including cutters, polishers, miners and marketers.

“For Sri Lanka to become a gem and jewellery trading hub and achieve higher export targets through value-added products, the lapidary industry and jewellery craftsmen need to be developed further,” Akram Cassim, CEO of Colombo Jewellery Stores, told OBG.

With many retailers today still importing designs, the industry also offers plenty of potential for value added, according to Ellawala.

“Only a small portion of the gems exported through formal markets are actually jewellery, so there is enormous potential to add further value,” Ellawala told OBG. “This could easily double export volumes.”

Upstream hurdles

Exploration also presents additional hurdles for the industry. Sri Lanka remains opposed to industrial-scale mining or foreign participation in the trade, meaning that most gemstones are acquired from pit mines dug by smallholders.

Stakeholders have long called for geological information mapping (GIM) to help with exploration, as most producers do not have the resources to conduct independent exploration.

With the country’s Geological Survey and Mines Bureau legally confined to exploration of minerals other than gems, the National Gem and Jewellery Authority of Sri Lanka would likely be responsible for any future GIM efforts, though no official steps in this direction have been announced.

(Oxford Business Group)