Are plans to lift vehicle import ban truly wise?

By Dhananath Fernando

Originally appeared on the Morning

Many Sri Lankans, including myself, are products of a failed middle-class dream. We aspire to be doctors, lawyers, and accountants because that path seems to promise a reasonable house and a decent vehicle.

Yet, bad economics has turned us into a generation of frustrated, failed middle-class citizens. Among the middle class, one of the most debated topics is vehicle imports – a key symbol of socioeconomic aspirations – which has recently resurfaced as a contentious issue.

While the Government has not clarified its stance on vehicle imports, the economic consequences of restricting them are evident. A black market emerges and people are forced to pay exorbitantly high prices for second-hand vehicles that are 5-10 years old. The economic impact of such inflated vehicle prices often goes unrecognised.

When someone spends three times the vehicle’s actual value, they lose the ability to invest the same amount in other life priorities – building or expanding a home, starting a business, pursuing professional or children’s education, or supporting leisure and the arts. This ripple effect stifles personal aspirations and reduces income opportunities for micro, small, and medium-sized businesses.

While I strongly advocate for relaxing vehicle import restrictions (or any import restrictions), the reasoning often used to justify such relaxation is flawed. Many argue that importing vehicles would boost Government revenue through increased border taxes, especially given the International Monetary Fund’s (IMF) target of raising Sri Lanka’s revenue to 15% of GDP.

However, relying on border taxes for revenue sets a dangerous precedent, making our economy less competitive. This logic paves the way for protectionist measures like tariff hikes, a strategy that failed us during the 30-year war when high tariffs funded fiscal deficits but left our exports uncompetitive and fostered corruption.

Instead, the Government should focus on sunsetting unnecessary tax concessions, eliminating vehicle permit schemes for public servants, and broadening the tax net through investments in digitising the Inland Revenue Department.

The concerns: Currency depreciation and congestion

The two main arguments against vehicle imports are currency depreciation and increased congestion.

Currency depreciation

Currency depreciation is often wrongly attributed to imports. During the Covid-19 pandemic, Sri Lanka banned most imports, including essential medicines, yet the currency depreciated from Rs. 180 to Rs. 360. Before the ban, vehicle imports amounted to around $ 1 billion annually, while fuel imports, at $ 3 billion, should theoretically have had a greater impact on currency depreciation.

In reality, currency depreciation and reserve depletion occur when the Central Bank increases rupee supply by artificially lowering interest rates. When interest rates are kept low, borrowing becomes cheaper, prompting higher demand for credit – for vehicles, housing, and business expansion – which in turn drives up import demand. As a result, people demand more dollars from banks, leading to currency depreciation.

If the Central Bank refrains from artificially suppressing interest rates, banks will need to redirect credit for vehicle purchases from other sectors, naturally balancing the flow of rupees in the economy. Higher interest rates would curb excessive consumption, including vehicle purchases.

Unfortunately, the Central Bank has historically enabled excessive consumption by maintaining artificially low interest rates, which leads to higher import demand and ultimately depletes reserves as it attempts to defend the currency.

Thus, vehicle imports have little direct impact on currency depreciation or reserve depletion. Instead, the focus should be on managing interest rates to balance economic activity. That said, a phased approach to relaxing vehicle imports is advisable to avoid shocks to the economy. Notably, despite import relaxations, the Sri Lankan Rupee has appreciated by approximately 11%.

Congestion

Concerns about increased congestion due to vehicle imports are valid. However, the solution lies in improving public transportation. Significant investment in public transport infrastructure would reduce the demand for personal vehicles. Additionally, mechanisms for exporting used vehicles could help mitigate congestion.

Excessive taxes on vehicles will not develop public transport. On the contrary, such taxes exacerbate issues by suppressing aspirations, limiting personal choices, and further deteriorating the public transport system.

Developing public transport requires policy shifts, such as cancelling the restrictive route permit system, engaging the private sector, and relaxing price controls on bus fares. These reforms, not 300% vehicle taxes or outright bans, will address congestion effectively.

Way forward

Vehicle import restrictions and excessive taxes have far-reaching implications that go beyond economics, affecting aspirations and everyday lives.

While phasing out restrictions and ensuring fiscal discipline are essential, the Government must prioritise structural reforms and long-term solutions like public transport development and tax base expansion. Only then can we create an economy that balances growth, equity, and personal freedom.

Will India’s cobra bite Sri Lanka’s cattle?

Originally appeared on The Morning

By Dhananath Fernando

• A ban on cattle slaughter could create a herd of new problems

Not long ago, India had a serious issue with snakes. Many people died, as a result of being bitten by a specific species of cobras. As a remedy to this problem the government of the day, proposed a cash reward system. A bounty was made available for every dead cobra. It appeared to be a good solution at the initial stage but later on the government realised the cobra numbers are increasing though people redeem cobras. Later on the government realised that entrepreneurial Indians were now breeding cobras as an income stream and they maintain breeding houses of the same type of cobras. As a result the government suddenly stopped the cash incentive system. Then the breeders did not have any financial incentive to keep them at their breeding houses. As a result they just released the cobras to an open environment which rapidly increased the cobra population and the problem became worse than ever before. This is called the “cobra effect”, where you bring a solution with good intentions but the outcome is a series of negative consequences far worse than the original problem. This is a story all Sri Lankan policy-makers should keep in mind, especially the ones who keep proposing the banning of cattle slaughter. Every ban so far has backfired economically as well as politically. The only bans which haven’t backfired are the ones which haven’t been implemented.

The former president proposed a ban of carpentry sheds and chainsaws in a move to protect the environment which didn’t get implemented. Then a ban on glyphosate was proposed. Recently, in addition to many import bans, a ban on sachets and a ban on chemical fertiliser have been proposed. The impact of these bans have been like a boomerang, making colossal losses to our economy, the livelihoods of the people and the political capital of the government which could have been invested to implement much needed macroeconomic reforms.

The cattle slaughter ban is most likely going to bring similar consequences. The biggest impact being farmers having the burden to maintain animals past their productive prime. This will significantly impact the productivity of the dairy industry. In the very likes of the cobra effect in India. Undoubtedly the policy is implemented with good intentions but merely having good intentions isn’t sufficient to the harms and consequences of these actions. Our politicians cannot just run away from these bad consequences without taking responsibility, just because their intentions are good. Governing Sri Lanka is not like the high school prefects checking for the uncombed hair or the bags of fellow students. We are a democratic country where the actions of policies determine the well being of people’s lives. Just to mention “we did it with good intentions without realising the bad consequences” is not an acceptable excuse at all.

With the ban on cattle slaughter, and the topic gaining national attention, it is sufficient for milk farmers to accelerate the selling process of cattle for slaughter. This will be fueled by the fear that they will lose out by holding on to cows in future. In the meantime our dairy industry which is finding it difficult to manage even with very high tariff protection will find it further difficult to sustain. This will greatly affect national milk production and the livelihoods of dairy farmers.

In the liquid milk industry, the output of the cow depends on the feed, temperature and protection from infections. Better the feed and lower the temperature (which avoids sweating of the cow) increases the output. Sri Lankan dairy farmers are already finding it very difficult to provide better feed for cows. According to data, in 2019 Sri Lanka had about 323,490 milking cows but the average output is about four to five litres a day where the global average is about 28 litres per day. In countries like Israel the output per day is as high as 40 litres.

It is a clear indication of how difficult it is for our farmers to provide adequate water and food for milking cows. So after a certain period most farmers recover money by selling it for meat. Otherwise economically it doesn’t make sense to keep them at home just feeding. Another aspect that must be explored is the impact on natural forests. Most of Sri Lanka’s forest reserves are facing dangers by cattle farms, especially in villages bordering sanctuaries. Cattle farmers let the cows enter protected sanctuaries for feed which then affects the natural vegetation of herbivorous animals such as elephants. This too is one contributory factor for human-elephant conflict where elephants come out of forest areas looking for food as a result of depleting vegetation.

On the other hand the male cattle or bulls will have a very short life span as maintaining a bull without the ability to sell doesn’t make economic sense. So illegal cattle slaughtering will increase. Already Sri Lanka’s domestic liquid milk supply is about 373 million litres and the local demand is almost twice that, which is 700 million litres. So the milk powder imports will most likely go up and employment will be affected. According to the EDB (Export Development Board) data, there are about five large companies, 10 medium-scale companies, and more than 1,000 small enterprises and seven tanneries that produce 25 tonnes of leather daily which brings in about $ 550 million worth of foreign exchange annually. This decision to stop the slaughter of cattle will have a significant impact on these livelihoods and Sri Lanka’s foreign exchange revenue will take a hit, especially at a time where we are desperately in need of foreign exchange.

Keeping money matters aside, from an animal cruelty perspective, this regulation will discourage farmers to take care of their cattle and keep them well-fed. This decision will further distort the incentives to provide proper protection and shelter for cows due to a lack of financial incentives. This is best illustrated by the situation in India. A similar policy decision by the Indian government on banning the slaughter of cattle has been one factor leading to vehicle traffic, in some areas due to the overpopulation of cows and cows inhabiting roads. In some cases the government has had to spend extra resources, building cow care centres as many cows were being mistreated.

In policy decisions “good intentions” is not the litmus test to decide which policy should get the priority. It is the cost benefit analysis, causes consequences analysis and factual and evidence-based research that should decide the implementation of a policy. Intentions are important but bad consequences such as the “cobra effect” can only be avoided by sensible well thought economic thinking.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why Sri Lankans aim low

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 Dhananath Fernando

Over the years, a lot of weight has been put on building “aspirational Sri Lankans”. Different terminologies have been used to define them; however, the core group of the so-called aspirational Sri Lankans remains the same – “intellectuals”, “business professionals”, “young professionals”, and “members of professional movements”. The key question then is what makes aspirational Sri Lankans aspirational, and why have they been unsuccessful in placing Sri Lanka back on the map?

Where are our aspirations?

Many Sri Lankans aspire to build a house, buy a vehicle, and probably have a grand wedding and proceed on to provide a good education for their children. Achieving these aspirations continues throughout their lifecycle. Then, the next generation takes the baton and runs the same race. This is the constant marathon run by our “aspirational Sri Lankans” for decades.

The serious question we need to ask ourselves is why basic needs such as housing and transportation have become aspirations for the average Sri Lankan in the 21st Century. Moreover, attention should be given to the opportunity costs of obsessing over housing and transportation by these “aspirational Sri Lankans” – what could be achieved if this was not the case?

Why people consume capital by building a house

While it is true that the financial literacy of Sri Lankans is low and that we have failed at the formation of capital due to excessive consumption from our initial capital instead of investing, we also need to investigate the economic rationale behind such behaviour. The reason as to why basic needs such as housing have become a distant dream to the average Sri Lankan is deeply rooted in the distortion of prices in the housing market due to the implementation of misguided economic policies. Most of the construction material in Sri Lanka is far more expensive than the prices of the said material in the entire region. The total tax Sri Lankans pay for imported steel ranges between 19% and 64%.

The tax on imported tiles ranges between 19% and 93%, and at present, the Government has imposed a temporary import restriction on tiles and sanitaryware, driving the prices of local goods up. Anyone who has attempted to build a house would know how ridiculous the prices for light fittings, curtains, aluminium, and other material are. Sri Lanka also has a shortage of skilled labour, and finding a mason or a furniture craftsman is not only difficult but also expensive. They have become expensive on the basis of productivity. If you are wondering why Chinese labour has expanded beyond large-scale construction to small-scale residential construction, the answer is rooted in productivity. Chinese labourers are five times more productive (according to an in-depth interview conducted by the author with an apartment builder) than the Sri Lankan labourer.

High import tariffs and import bans have led to skyrocketing domestic prices, and now the simple transaction of buying or building a house has become a lifetime dream of the aspirational Sri Lankan. If you ask a banker for their reason for remaining in that job, they will tell you that it is the concessionary “housing loan’” and “vehicle loan” that attracted them. While a fortune will be spent on building a house, there will be limited funds to explore better education opportunities, hereby pushing the tertiary education of young professionals to the grave due to extra prices paid for inefficiencies in housing.

The existing land issues, the inability to transfer properties, and lack of property rights have made the situation worse. So in real terms, the “aspirational Sri Lankan’s” capital that they couldn’t invest for returns was not invested in their house, but rather in the extra price they paid for construction. More importantly, potential aspirational Sri Lankans are expending valuable energy in trying to overcome the consequences of these misguided economic policies.

Where is the capital for the vehicle?

It is no secret that Sri Lanka’s vehicle market is one of the most distorted markets. Based on the usage of the vehicle, the value increases, and we pay exorbitant amounts of tax at the point of importing a vehicle. Making things worse is the vehicle permit system that is only available to VVIPS and few professions.

So what is the incentive to be an aspirational Sri Lankan? Is it to take the risk of investing the capital and trying to consume from the yield, allowing the capital to multiply, while lobby groups and politically connected pressure groups not only get a vehicle permit but also the legal blessing to sell despite tax losses to the government?

The permit culture is not only in buying vehicles, but it is also in the public transportation system where route permits for public transportation are more expensive than the bus itself, even though the cost of a bus is multiplied several times over when you factor in the tax.

Yet again in the real world, the aspirational hardworking Sri Lankan’s capital, which they never invested (which they did not have the knowledge to invest), gets gobbled down in distorted markets that are protected from competition. 

Even when looking at leisure and recreation, the cost of recovering capital invested in the construction of a hotel is passed on as room rates at prices that are higher than those of similar destinations in the region, because of our high cost of construction. At weddings, the costs of the food they serve, electrical appliances, storage, and prices of cutlery, liquor, etc. are added to the final cost of a plate at a wedding. Hence, there is no alternative but to eat away at the capital that belongs to the average aspirational Sri Lankan. 

It is true many Sri Lankans get into this trap by trying to live beyond their means, spending lavishly at weddings, building bigger houses than they require, and buying vehicles due to a lack of financial literacy. But the reasons why artificial value has been created for basics such as housing and commuting is misguided economic policies.

What young entrepreneurs chase as aspirations are not the real aspirations that could put Sri Lanka back on the map. The very reason for this is that our prices do not indicate the true value of the product or service and the real value it offers. The concept of “price” is of paramount importance. It is the single indicator of value, resource scarcity, productivity, supply, demand, and so many variables that are all encapsulated in that single number called “price”.

When governments and policies intervene in demarcating prices, the price set is a result of people chasing the wrong things and the entirety of society has to bear the cost and loss of it.

What we need is to set a culture of hard work and free exchange where young entrepreneurs are provided with a level playing field, right incentive structures, and motivation to be productive and innovative – that is the real expectation of the aspirational Sri Lankan which has now been shadowed by glittery basics such as housing and buying a vehicle. Until we work towards that, we will not be able to see a new Sri Lanka nor will aspirational Sri Lankans ever prosper.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Why ‘banning culture’ is no solution

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 Dhananath Fernando

Last week, the Government proposed a ban on sachet packets as a measure to protect the environment. And now, another proposal has been tabled – banning the slaughter of cattle. This is not the first time such strict measures have been imposed by consecutive governments, but it is paramount that we understand the economics and unintended consequences behind “banning”.

Before we jump to any conclusions, let’s just take a look at the results of similar policies adopted in the past, to get a taste of this “banning strategy”.

Previously, we saw a proposal to ban polythene below 20 microns in thickness to protect the environment and it was not too long ago when the former President announced a ban on chainsaws and carpentry sheds. A simple visit to the market is sufficient to demonstrate the extent these banning mechanisms have been productive.

Earlier this year, the Government learned a bitter lesson on imposing “price controls” (which is sort of a ban on selling at high prices) on tin fish and dhal. The price controls had to be revoked due to obvious market disruptions. Prices shot up, and there were shortages in the market, which was the complete opposite of what the Government intended.

A common belief is that the “banning strategy” often fails or is less effective due to poor implementation. This is far from the truth. There is very much a market and an economic dimension that show the concept in itself is flawed, which we often fail to understand.

Emotional policymakers often get the art of public policy drastically wrong. They view it through an accounting lens due to a lack of knowledge on human behavioural economics and the presence of the concept called “markets”. As a result, all good intentions result in far worse consequences.

Ban on sachets

The concept of sachets was introduced by FMCG (fast-moving consumer goods) market players on the basis of affordability and as a measure of resource allocation. Someone who cannot afford a full bottle of shampoo or any other equivalent product can use a sachet as a one-time useable product, based on the requirement. This is easy on customers’ wallets and provides value for money.

A good reason why sachets are predominantly available in general trade and mom-and-pop shops as opposed to modern trade is its easy access and affordability for the poor. On the other hand, from the manufacturer’s end, sachets help to allocate raw materials effectively and allow them to reach the market.

According to a recent article by Dr. Rohantha Athukorala, a Neilson Survey revealed that people have reduced the usage of baby soap by 18% and adult soap consumption by 17%. This indicates how people who find it difficult to manage their finances resort to eliminating basic hygiene products like adult and baby soap due to unaffordability. Cutting down on baby soap indicates a booming cost of living problem which goes beyond soap usage.

The ban on sachets will be a double whammy for most vulnerable people in society who are voiceless. All FMCG companies spend an enormous amount of money before they launch any SKU (stock-keeping unit), and we need to understand this was a market demand.

A sudden decision without prior engagement with the industry and relevant stakeholders will push manufactures to an extremely difficult situation, which will demand them to realign their manufacturing and marketing strategies in an already challenged Covid-19 economic environment. We have often forgotten that polythene is a wonderful innovation, and where its hydrocarbons are recycled to produce electronic chips and fabric.

MAS Holdings manufactured a special fabric for our cricket World Cup team with marine plastic waste which received global recognition. This can be utilised as an effective example to understand that the prime need is for setting up proper recycling methods coupled with incentives and disincentives.

Already, the discussion is heated on serious environmental concerns such as that of the Anawilundawa Wetland Sanctuary and many other places across the island, as highlighted through this column last week. The Government has to keep an eye on more macro issues pertaining to environmental protection rather than obsessively focusing on micro issues. These “banning strategies” will dilute the Government’s well-earned political capital, which will make hard reforms difficult in the coming years.

Import controls

Import controls are another form of ban on a temporary basis. The Government’s urgent need to manage its Balance of Payment (BoP) crisis is understandable. However, this requires a series of different actions coupled with temporary solutions such as bailout programmes from the IMF (International Monetary Fund) and clear policy decisions to help make our exports competitive.

Import controls hurt exports as the prices of import substitutes rise, especially where the goods are used as an input for the production of exports. In addition, import substitutes become more profitable to produce than exports.

The result of the current import ban is highly likely to affect our existing exports, as we have indicated in this column multiple times. Already, people are struggling to buy phone chargers, repair washing machines, and purchase goods which are required on a daily basis. We are running on existing stocks which will expire soon and prices have already started going up.

On the other hand, in our import bill, the big-ticket item is fuel and essentials such as pharmaceuticals, which are very difficult to control. The General Hospital has already announced a shortage of 70 essential drugs. These drugs are used to treat diseases such as Thalassemia and heart-related conditions.

However, trying to cut corners of other imports carry the potential to distort various other markets, businesses, and value chains horizontally, vertically, upstream, and downstream due to price hikes.

Prices of vehicle tyres and spare parts have shot up, which will have an impact on all goods and services with a transportation cost component. At one point, the collective effect of the rising cost of multiple consumable goods and intermediary goods may go beyond people’s affordability.

Releasing import controls at this point would be too late, given the situation of our currency. The higher cost of living will impact labour prices and most of our value addition in exports which are in the form of labour will be uncompetitive over a period, which will affect our main exports such as apparels, tea, and rubber products. In economics, the need is to take a look at the market from a holistic perspective. Otherwise, similar issues will arise over and over again.

The best example is higher prices requested by the poultry industry and the bakery industry. Sri Lanka’s maize production is not at all sufficient for domestic consumption, which is the main source of food for poultry. As a result of higher prices of maize, the prices of poultry products have shot up, which will have an impact on the bakery industry. Now you have a happy maize farmer but an unhappy poultry farmer and a baker. Eventually, this will translate to an unhappy consumer and a very unhappy voter.

Ban on slaughtering cattle

Adding to the banning spree, the proposed ban on slaughtering cattle is the latest. This may cause more damage rather than being helpful for the protection of cattle in Sri Lanka. However, the Cabinet Spokesperson mentioned the proposal was postponed by one month so as to allow for discussions with the relevant stakeholders.

Though the proposal may have been put forward with good intentions in terms of animal cruelty, India is a good example of how such policies don’t work. Cattle owners in India are left with no option other than to resort to the creation of illegal and unsanitary slaughtering houses and illegal markets.

Keeping aside the logical fallacy of placing a ban only on the slaughter of cattle and not the entirety of the poultry and meat industry, and the justification of leaving domestic demand to only be met through the importation of beef, the matter goes far beyond that.

The beef industry does not exist in isolation; our leather industry, dairy industry, and leather exports are also dependent on it. According to the Export Development Board (EDB), in 2016, about 1% of total merchandise exports consisted of footwear and leather products, which has now dropped to 0.6% of our merchandise exports.

According to the EDB, there are about five large companies, 10 medium-scale companies, and more than 1,000 small enterprises and seven tanneries that produce 25 tonnes of leather every day.

If passed by Parliament, this proposed ban on cattle slaughter will prevail at the expense of 1,000 small enterprises and exports worth $ 550 million. While animal cruelty is of grave importance, sometimes in life we have to keep some markets for the greater good and to avoid much greater negative impacts.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

The import ban will kill the aspirational Sri Lankan

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 Dhananath Fernando

A friend of mine in his mid-40s had a heart attack. I mean a real one. He was a dynamic rugby player and a national-level athlete in school. Everyone was dumbfounded at how a person with such a high level of physical fitness could possibly have a heart attack. I asked him: “When did you last hit the gym or go for a walk to burn calories?” He replied: “After I left school, I did not do any exercises.” He has also been constantly eating greasy and unhealthy food. That being said, are we still surprised at why a dynamic school athlete, who probably was the envy of some of his classmates at that time, suffered from a heart attack?

Past glories

We always reminisce at what a blissful nation we were during King Parakramabahu’s reign and how our state coffers were full when our colonial masters – the British – left us. It’s a distant memory, even surreal now; how strong the exchange rate was and how we were only second to Japan, which is now the third-largest economy in the world, just a shade over seven decades ago in 1948.

While all that is undoubtedly true, the world has evolved. And alas, we have been under the shade of a coconut tree with a kurumba (local king coconut) in hand dreaming of our past glory, while Japan, despite getting nuked no less than two times, forged ahead as an economic superpower.

It all comes down to choice. Japan as a nation could have withered away dreaming about their past glory, being the first nation to launch a purpose-built aircraft carrier, the IJN (Imperial Japanese Navy) Hosho, and later, to rule the seas (at least for short while) with – to date – the largest battleship ever built, the IJN Yamato.

Japan lost the Pacific theatre and ultimately the war, comprehensively. They arrived at a crossroads and decided not to simply fade away. As I said earlier, it simply comes down to choice, the choice Japan made. We all know what that was and so can comprehend why the West calls Japan the Land of the Rising Sun.

Japan is just like us, in that it doesn’t have much in natural resources, despite churning out cars and electronics to be exported by the shipload.

Returning to the Pearl of the Indian Ocean, the quagmire we face raises the question: Have we been engaging in our daily 20-minute exercise to be in the game or at least in the park, to keep pace with the world?

Definitely not. And as a result, we have blocked our arteries and are staring down the barrel of an impending economic heart attack as a result.

No more new cars

At the time of writing, the Government announced a complete halt on the import of vehicles and luxury goods for the next five years.

I want to get this off my chest – the Government’s or Finance Minister Dr. Bandula Gunawardana’s definition of a luxury good differs from mine. Maybe even your – the reader’s – definition of a luxury good greatly differs from mine.

A pertinent question is: How can a luxury good be defined? And can imports be stopped in this day and age without actually doing the opposite of what was intended; hurting the economy? A high-end Mercedes, Lexus, Range Rover, or BMW, even with the present exorbitant taxes, might be needed for the tourism industry. Luxury goods send the right signals to investors and tourists, of a vibrant economy. The economy also becomes a lot less scary. No one wants to go for a holiday to Kim Jong-un’s land. It’s just too boring…and scary.

Similar to imposing price controls, the Government may have drifted towards this move with the good intention to manage our limited foreign currency reserves. Put simply, we have about Rs. 16 billion in debt payments that need to be fulfilled in the next two to four years. To put things in perspective, this is a colossal amount, equivalent to 16 times the debt-to-equity swap we transacted for the Hambantota Port. Regardless of good intentions, this will follow a deadly sequence of unintended consequences. Leaving aside the revenue losses to the Government and the impact on the retail sector and bank credit, the biggest impact would be for “Aspirational Sri Lankans”.

In any country, aspirations and aspirational people drive the economy. They need a dangling carrot to entice and motivate them to reach higher.

Let me give you a few examples. In the midst of the Covid-19 battle, the GMOA (Government Medical Officers’ Association) requested tax relief on duty-free vehicle permits from the Government; this received significant criticism online and offline.

Though I have my own opinion, keeping that aside, a question we should ask ourselves is: Why, in the heat of a pandemic, is a leading trade union requesting duty-free concessions on vehicles, out of all the consumable goods?

Although I see their request as unfair, the reality is doctors are aspirational Sri Lankans, and vehicles are an element of an aspirational Sri Lankan; I would even dare to stay, a status symbol. If you look at the life cycle of a doctor, you observe that they study very hard to get into medical college, study even harder for about five to six years at that medical college, and undergo training at an obscure hospital thereafter. After burning so much midnight oil, is it unfair for them to buy a vehicle from the market? (I refer to the general right for a doctor to buy a vehicle, not a duty-free vehicle; whether to utilise one’s aspirations at a cost of a pandemic, is a different discussion altogether).

This fate seems to be shared by not only doctors but by everyone who dreams big and is really committed to contributing back to the world. Young, middle-class professionals work very hard to accomplish the aspirations that drive them. While writing this article, I recalled a TV advert by a finance company or bank, of a young couple on a motorcycle stuck on the roadside, seeking shade during a thunderstorm. They want to move up in life to be able to afford a vehicle. It’s the same situation; everyone wants to live a good life because they have all made enough sacrifices. What is wrong with that and why should they have to pay for the cock-ups since 1948?

Money isn’t everything, but…

Aspirational people drive the entire economy. They are business people who take on the risk of starting a business, pay salaries to employees, and invest their money on research development and technology.

If you ask students at a university or any young graduate during their job interview, what they hope to achieve in five years, their most likely response would be: “Build a house, buy a vehicle, and travel the world.” These are the three things that top the list. Why are banking jobs and even jobs at the Central Bank very high in demand? Simply because of the so-called 4% interest rate for housing and vehicles extended to staff.

Many alternative arguments have come into the limelight; that we have to measure happiness instead of our living standards; some say the material world is not the entire world. That may be true, but for a country which has continuously missed opportunities over and over again, and which is at the edge of another brewing economic crisis, this is not a time to conduct any social experiments and kill the aspirations and hopes of young Sri Lankans.

Of course, I am a true believer that money’s not everything, but there is a cycle that you come to realise and your aspirational motives are what brings you there.

Most of our tariff lines on housing materials are above 60% and the fate is the same for many consumables for middle-class people. How can we justify asking the middle class to sacrifice their living standards by downgrading them at the cost of import controls for someone else’s sins? They have paid their taxes, they have worked hard, and they have done their job. The private sector hasn’t been given any vehicle permits nor have they used any government relief packages. Instead, every corporation has been taxed heavily, even on profits earned over the prior years when the previous Government was in power.

From a different perspective, Sri Lankans who work abroad and send foreign remittances from the Middle East, Europe, and Asia, do so to upgrade the living standards of their families, who consume goods like vehicles and electronics. You can observe how fellow Sri Lankans buy TVs and washing machines from duty-free shops at the airport. Do you think it is fair to ask them to cut their usage of electronics to cover up the failures of our incompetent politicians who ruled the country for the last seven decades?

Solution

We hope the import controls imposed are a temporary move and the Government will reconsider this decision. In this column, we have highlighted multiple times, backed by facts, that import control is not the way to defend our currency nor is it the path to economic prosperity.

In 1972, this experiment failed comprehensively. At the same time, too many controls mean too many regulations, and this may contradict His Excellency, the President’s inaugural Independence Day speech where he hit the nail on the head on why Sri Lanka failed to succeed, speaking of how badly its people were treated with over-regulation. In unprecedented times, it is understood that we need to take hard calls, but the cure cannot be worse than the disease.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.