In this weekly column on The Sunday Morning Business titled “The Coordination Problem”, the scholars and fellows associated with Advocata attempt to explore issues around economics, public policy, the institutions that govern them and their impact on our lives and society.
Originally appeared on The Morning
By Aneetha Warusavitarana
After a series of tax cuts and promises of expenditure tightening, the Government has now turned its focus onto export growth. It is perhaps about time this area was given some attention, especially as it presents the Government with an avenue from which much-needed foreign exchange can enter the economy.
Minister of Industrial Export and Investment Promotion, and Tourism and Civil Aviation Prasanna Ranatunga has emphasised on the Government’s target of $ 18.5 billion in export revenue. In a welcome move, and breaking precedence, the Government has decided to continue with the National Export Strategy (NES) created during the tenure of the previous Government, a step that bodes well for policy consistency in the country.
The export narrative presented in the Government’s manifesto was one that focused on boosting domestic production for exports and carrying out import substitution. It identified that high tariffs on the imported inputs to stifle domestic production and economic growth, and committed to reduce tariffs on raw materials and intermediate goods.
Achievable targets?
Even though the policy consistency is promising, we still need to meet this target of $ 18.5 billion in export revenue. The question that remains is whether the Government has taken the steps to make this target a reality. The NES has a clearly laid out plan of action for the six key focus areas identified. However, we cannot think of creating export growth without a holistic look at the country’s trade position. Our location is often the first thing that comes to mind when one thinks of international trade, but we have done little to reap any benefits from being the “Pearl of the Indian Ocean”. The recently released (human) Freedom in the World report tracks countries’ freedom to trade, among several other indicators. While Sri Lanka is still fairly low in overall rankings for human freedom, placing at 110/162, we perform poorly on the indicator “Freedom to Trade Internationally”, especially on the sub-indicators on tariffs and regulatory trade barriers, where we score 6.3 and 5.2 out of 10, respectively .
Some of the recent tax reforms have reduced taxes at the border as well, but Sri Lanka’s tariff system remains convoluted and opaque; even once this hurdle is cleared, the bureaucracy has to be contended with. Speaking of export growth is all well and good, but exports are simply one component of a strong international trade regime. If Sri Lanka does not have a foundation that supports and incentivises international trade, we are unlikely to witness export growth of this nature. Implementing some reforms mentioned in the Government’s manifesto, especially those on the lowering of tariffs, would be a strong first step.
A quick-fix solution?
While the NES has identified six focus areas for innovation and export diversification, it also places emphasis on easing regulations and improving Sri Lankan exporters’ ability to diversify, innovate, and comply with international standards. The Government would have to commit to creating a predictable and transparent environment for exporters, bringing down the costs of conducting business in Sri Lanka, improving the export competitiveness of domestic firms, and reforming some of our more archaic laws. Reform in the Customs Department is at the heart of this. There have been some preliminary steps in this direction, notably the launch of the Automated System for Customs Data (ASYCUDA), but there is much more to be done. Reforming the Customs Ordinance is vital; the NES states that a new Customs Act, which is in line with international standards for trade facilitation, has been drafted. However, it has not progressed beyond this stage.
These are not easy reforms to implement, and they are far from a quick-fix solution. They do, however, promise to create meaningful change that can translate into the export growth the Government is targeting.
Sri Lanka, left out of South Asia?
Apart from addressing these ground-level barriers to export growth, another avenue that can be explored is free trade agreements, and the Sri Lanka Export Development Board (SLEDB) has brought its attention here. Under the India-Sri Lanka Free Trade Agreement (FTA), we have seen the country reaping the benefits of international trade. Sri Lanka’s exports to India have grown faster than India’s exports to Sri Lanka, and Sri Lanka has experienced diversification in the goods it exports to India, with a shift from agricultural products like cloves and areca nuts to boats and ships.
The case is the same when considering the impact GSP+ (Generalised Scheme of Preferences) has created on the economy. Trade agreements are far from a “quick fix”, with trade negotiations being notoriously drawn out, and a source of strong opposition in Sri Lanka. The last agreement we signed was the first one in a decade, and the Government should take care to ensure a lapse of that length does not repeat itself.
Even though South Asia has been replaced by East Asia and the Pacific as the fastest-growing region in the world, the potential in this region is significant and should be leveraged for our benefit. While the world watches on as Brexit takes place, the Asian region is heading in a more promising direction. The Regional Comprehensive Economic Partnership (RCEP) has 15 participating countries in the Asia-Pacific region and includes almost one-third of the world’s population and global domestic product. This is an ambitious target, but we should at the very least explore bilateral trade agreements with our neighbours, and give our export industries easier access to these markets.