Borders & the Budget

Originally appeared on the Daily FT, Daily Mirror

By Daniel Alphonsus

Visa reform will boost tourism and reverse brain drain

Three million tourists are set to visit our shores next year. We will issue nearly as many online visas - millions too many. ETAs are a tourist's bane: rather than dreamy sun, sea and sand, the weary salaryman’s getaway begins with the tedium of forms. 

The tourist’s ayubowan to Sri Lanka begins with ferreting for flight details and credit cards. Warm-up complete, the ordeal begins in earnest: 20 clicks to navigate through the ETA form and countless key strokes to fill out the 27 form fields. Each question brings forth its own miseries, and sometimes mind-reading feats: “They’re asking me for my address in Sri Lanka. Hmm, does this mean my first address, my last address…but I haven’t even booked my hotel..dear, dear maybe I should book the Maldives instead. They’ve got a visa-on-arrival.” Followed, naturally, by web-pages reloading with unsaved data and vindictive payment gateways rejecting credit cards for arcane and esoteric reasons. Rather than a Small Miracle, they experience So Sri Lanka. 

This charade costs us millions of dollars every year. We are losing tens of thousands of tourists to our competitors.

Based on the three scenarios below, switching from ETA to visa-on-arrival à la the Maldives or Singapore should generate between $24 million to $145 million in additional tourism revenue.

The precise number is not especially relevant. The point is that these roughly right numbers are substantial enough to generate a robust prima facie case for experimenting with opening up visa-on-arrival and optimising the ETA experience

For workings click here.

Visas-on-arrival

Sri Lanka already operates visa-on-arrival for Singapore, Maldives and Seychelles citizens. In light of the tens of millions of dollars we’re losing in the absence of visas-on-arrival, very compelling reasons must be provided for not opening-up visa-on-arrival for citizens of our main tourism markets (such as the EU, China, Russia and UK). Plus those who have passed extensive checks in the process of traveling to other countries. For example, travelers holding multiple entry visas to the US can visit about 51 countries visa free. 

The burden of proof is therefore on those who say we ought not have a visa-on-arrival regime. All the more so because it appears that, even though not advertised, in a pinch, obtaining a visa-on-arrival is possible at BIA. Also note that airlines share passenger records with governments 24 hours before arrival. It takes seconds for our border agencies to check the relevant blacklists as they already have API integrations in place. The response time of an Interpol database query is half a second.

In addition, immigration department annual reports show that almost all rejections and deportations are from a handful of countries, mainly India. Other than a German and an Australian, no UK, EU, ASEAN or Australian national was rejected or deported in 2022. This suggests a risk-based, optimized approach is very much possible, and prudent.

Many of us have experienced this personally. We are more likely to tour Singapore because Sri Lankans enjoy visa-on-arrival. In fact, on average it only takes us 10 minsto enter Singapore. As shown in the picture above, for passport holders of 50+ countries, the experience is even more smooth. Using automated immigration gates, they clear border control in less than two minutes.

Optimize the ETA process

Some tourists may still prefer to secure an ETA before arrival. Therefore, we should do our best to ensure the application is seamless. Currently it is not. Of the 27 fields requested on the ETA, about 20 can be found in passenger record details airlines share with immigration authorities. They are redundant. Questions on the ETA should be limited to around seven fields. The amount of information gathered should be commensurate with the risk: those from high risk countries could be subject to additional questions.

Eliminate the ETA fee

Credit card payments are often an even greater source of friction. Tourists need to pay $20 via credit card for an ETA. This deters potential tourists; it's another step in the journey and credit card payments often fail. So much so, the our embassy in Germany issued the following notice:

“On Arrival Visa at the Port of Entry to Sri Lanka: submit visa application and payment at Colombo International Airport. A fee of USD 60 will be charged for this service. Please observe that this option of obtaining a visa is available only for German passport holders, who have tried to obtain a visa via the ETA-system www.eta.gov.lk, but failed due to not being able to pay the fees with credit card.” 

It's not only card friction that is the problem. Many Chinese citizens no longer own cards and use Alipay instead.

Wiser countries like Singapore understand that reducing friction encourages more tourists to arrive, and thereby spend more. Which is why they don’t charge tourists a fee.

*Note the ETA fee is $20 for SAARC and $50 for other nationalities. $40 is a rough weighted average. For workings click here.

Based on the rough estimates above, if the ETA fee or friction puts off even three percent of tourists, then Sri Lanka stands to unequivocally benefit from eliminating the ETA fee. The exchequer will be worse off for now. But the Treasury still recoups some of the lost visa fees by higher VAT revenue directly, and indirectly via higher income tax from tourism sector firms and employees. (1)

Brain Gain

Since Independence Sri Lanka has lost or chased away lakhs of skilled workers. Many middle class families can proudly count at least one doctor, accountant and engineer (among many other species of the middle bourgeoisie) among their relations overseas. Between 2005 and 2015, the BOI estimated that around 20% of STEM graduates left the country every year. With COVID and the economic crisis, emigration was particularly acute the last few years. But it's not new. Skilled emigration is a chronic problem we’ve faced for decades.

(2 ) This report offers a rigorous treatment of the topic from the 1970s.

We desperately need to reverse brain drain. Of course, the central challenge is building a Sri Lanka in which Sri Lankans want to stay. But that is beyond the scope of this article. Here we shall only discuss how we can make it easier for skilled talents to come, and contribute. 

Some readers may be perplexed that even a handful of skilled non-Sri Lankans want to live and work on our island. But we live in a nomadic, connected and occasionally romantic age. These rare souls exist. 

We must do everything in our power to welcome and encourage them. Above all, by simply removing barriers to them legally working here. For the path to prosperity is paved by productivity growth. Therefore, it makes absolutely no sense for us to create barriers for skilled migration. It is the opposite of what smart countries do - especially via human capital theft aka points-based migration. There are three main ways foreign talent raises Sri Lanka’s productivity, growth and thereby prosperity. Foreign talent:

1. Adds human capital: whenever someone who has higher productivity than the average Sri lankan worker moves to Sri Lanka, they raise Sri Lanka’s average productivity directly. We already have huge talent shortages in key sectors like IT. 

2. Upgrades existing human capital: foreign talent, directly or by osmosis, teaches their skills to others.  

3. Increases existing human capital productivity: the whole is often greater than the sum of its parts. Skilled talent enables others to be more productive. For example, having access to a pediatric neurosurgeon makes all pediatricians more productive as knowledge is shared from expert to generalist. Alternatively, having a Japanese team-member makes the whole team more effective when working with Japanese clients. 

Per capita GDP is a good proxy for average worker productivity. Therefore, if someone from a richer country moves to a poorer country, then the average productivity of the poorer country will improve. How do we do this? The Harvard Centre for International Development has some ideas from which I borrow liberally. 

The fastest way for Sri Lanka to have brain gain to compensate for some of the brain drain is to:

Offer a two-year visa-on-arrival for those from countries that are 4x richer than Sri Lanka

1. Offer a two-year renewable visa-on-arrival for citizens or permanent residents of countries which have per capita incomes at least four times that of Sri Lanka. (3)

2. Amend the Citizenship Act such that any person who has at least two Sri Lankan grandparents is eligible for citizenship. ()4 

3. Regularize employment of all foreign spouses of Sri Lankan nationals, including a path to permanent residency and citizenship. (5) 

The first of these measures can be implemented by the stroke of the minister’s pen.(6) Sri Lanka’s immigration act provides for broad ministerial discretion. The minister is empowered to make entry regulations for visas upto five years in length. He or she can implement Point A above without requiring primary legislation.

We have little to lose, and all to gain. Try these measures for a year, try them for a few countries. Then roll-back or amend accordingly. Sri Lanka has a long history of policy-instability, but we should not confuse the many cases of foolish equivocation with genuine experimentation. That is what this budget should propose: bold measures to breakthrough our malaise and initiate the process of transitioning from stabilisation to recovery.

(1) As this article is solely on matters related to the immigration act, I’m not going to discuss this in detail. But it's worth noting that levying a flat (dis)embarkation levy is also a deterrent against short-haul traffic. Instead, the airports authority should price the levy based on the distance between Sri Lanka and the origin/destination airport.

 (2) Diaspora remittances do little to compensate: Sri Lankans remit more from the Maldives than Australia.

(3) For those that ask why a per capita GDP based criterion rather than points-based criteria, my answer is simple. A points-based system inherently involves discretion, and in the context of our state (in)capacity and corruption, will result in friction (countless people will not bother applying with all the documents that will be required), many false positives (as the assessors of points, e.g. a degree certificate’s legitimacy, will be corrupt) and false negatives (because those with skills we want may not have the right paper to demonstrate it). Considering this range of incentive problems and Type I/II errors, a very conservative threshold like the 4x per capita GDP one suggested is most optimal.

(4) For further details on this point and the next point, see page 14 of this study on Sri Lanka’s immigration framework.

(5) Reaching consensus in Parliament on this point should be easy. Sajith Premadasa’s manifesto promises dual citizenship after three years of residence for foreign spouses of Sri Lankans. See page 39.

 (6) Soon, one hopes, his or her digital signature. In fact, the President should announce that he will only sign documents via a digital signature from 31 December 2023 onward.

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.

On the 75th Independence, time to re-plug to the world economy

Originally appeared on the Daily FT

By Anuka Rathnayake & Thilini Banadara

As Sri Lanka is inaugurating its political independence of 75 years on 4 February, the burning issue the public is struggling to grapple with, in the recent past, is the worst economic slump. Many factors have contributed to the current economic crisis but protectionism and trade barriers are main elements that have further depleted the economy, shaping it as uncompetitive and inward-looking.

Even though Sri Lanka was known as a fairly open economy, the dynamics of trade has changed since 2004. The planned reduction of tariffs into a single band had been abandoned by the end of 1990s.  Since about 2005, Sri Lankan trade policy has been characterised by a protectionist approach. 

The Government was involved in economic decision making and policies related to import substitution were much more prominent. As highlighted in the Trade Policy Review of Sri Lanka by the World Trade Organisation in 2010, the average tariff protection increased . In fact, it can be noted as frequent and ad hoc changes in tariff structure. The trend in protectionist policies resulted in a fall of exports as depicted by the ratio of exports to GDP . 

In 2009, by the time peace was restored, Sri Lanka had nine para tariffs applicable for imports  in addition to the standard customs duties, of which , five were ‘para-tariffs’: taxes which are only applied to imports and there is no domestic equivalent. Adding  to whatever protection is provided to domestic production by customs duties, with such para tariffs being in place, the protectionism became even more complicated. 

A systematic comparison of Sri Lanka’s tariff structure at November 2002, January 2004, 2009 and January 2011 suggests that the total protection rate notably increased between 2004 and 2009 . 

The ensuing years were followed by many ad hoc and duty exceptions and case-by-case adjustment of duties on many imports which directly compete with domestic production. By 2015, the average effective rate of protection for manufacturing production had increased by 16%.

This trend is well depicted through the Trade Openness indicator as given in Figure 1. The degree of openness is measured by the actual size of registered imports and exports of an economy. In other words, it suggests how free or restricted a country is in its relations with the rest of the world. 

Since 2004 onwards there has been a decline in the trade openness of Sri Lanka and this trend continued up until 2010. By 2015 with an increased rate of protection, the trade openness deteriorated to 36.6%. 

Since 2019, Sri Lanka has been pushing many import controls creating disruptions in the market. This tendency resulted in further decline of trade openness 32.2% in 2020. It is similar to the trade openness during 1970 - 1976 when the liberalisation policies were reversed and the economy had high regulations. The trade policy was more aligned towards import substitution.

Trade restrictions 

Sri Lankan businesses face a variety of trade restrictions exacerbated by the economic crisis. Accordingly, such conditions that impact the price, quality, quantity, or timeliness of product delivery but are outside the direct control of the exporter or importer. 

Both the importing country’s border and the border of the exporting country have been parallelly imposed with restrictions. Even though a number of Free Trade Agreements have reduced external trade barriers and expanded access to markets, Sri Lanka has kept its borders closed by enacting internal trade restrictions.

Internal trade restrictions can be identified in terms of broader categories such as; 

1. Monetary and regulatory barriers, 

2. Procedural barriers, 

3. Service barriers,

4. Technical barriers and 

5. Market barriers 

Currently a number of monetary and regulatory barriers exert pressure on Sri Lankan businesses, while lowering the country’s competitiveness on international trade. Such barriers include complex tariff structures, quotas, import restrictions, excessive duties or levies and export and import licenses. 

Both exporters and importers encounter ineffective, unpredictable, and less transparent procedures throughout the entire trade process. This is mostly the result of poor coordination between agencies and excessive bureaucracy (red tape) among Government employees.

Additionally, the distribution and financial services channels are two areas where existing enterprises face significant service obstacles, which slows down the final stage of clearance.  Shedding further light on the obstacles placed, the technological obstacles  have a negative impact on the export competitiveness of local enterprises because of their limited technical and financial resources. Besides the market constraints like price controls are a significant obstacle because they are unrealistic in a setting of shifting global markets and fluctuating currencies.

Impact of trade restrictions

Over the years, the country has experienced a number of adverse effects due to trade restrictions. Net economic losses in the wider economy have increased as this restricts competition. Shrinking volumes of exports and imports have negatively affected domestic production. Consumers are left with limited choice of products while they experience increased prices. 

Trade restrictions impact the macroeconomy with a fall in employment opportunities mainly due to the deterrents on domestic and foreign investment. Limitations on land, labour and capital have disincentivised investors from competitive export industries to protected industries and inefficient import substitution. Reduction in economic activity has increased the economic woes among people.  

Restrictions on trade have put a significant number of businesses in a precarious position.  Starting with street vendors, small and medium scale enterprises who depended on imported raw materials to the larger apparel and construction industries; all the businesses are finding it a challenge to continue their business. 

Way towards trade freedom

The way to greater freedom of trade is to reformulate the existing monetary policies and laws in order to enhance trade freedom and provide more opportunities for local enterprises to engage in trade. Also in the current context, easing import restrictions and reducing taxes or levies on imports and exports would be crucial.  Additionally, it is important to remove unnecessary Government red tape or bureaucracy wherever possible to make customs processes more simple, effective, clear, predictable and timely. This will help to cut down on processing times at the border and make the movement of goods cheaper, faster and more efficient.

Paving way to greater freedom to Trade - the ability to exchange goods and services openly, creates greater opportunities for Sri Lankans to achieve greater economic prosperity. It opens many avenues towards competition, innovation and economies of scale. The beneficiaries of open trade are the Sri Lankan citizens and businesses who will benefit from lower prices and greater choice.  

Freedom to trade will ensure the economic freedom by which the fundamental rights of an individual to make their economic decisions will enhance. The true meaning of independence will only be assured through greater economic freedom. 

Source : Central Bank of Sri Lanka 

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.

Import controls: Didn’t work in 2020, won’t work in 2022

Originally appeared on The Morning

By Dhananath Fernando

When I was a university student in my final year, I did an internship at one of the leading garment companies in Sri Lanka. My internship stipend was Rs. 5,500 per month, and I worked in Nittambuwa. 

On the weekly payday, it was a tradition that I would bring a small, affordable treat home. Of course, in those days the value of Rs. 5,500 and the purchasing power of the rupee was better than it is today. When my bus reached Pettah station (my interchange for the next bus to my home in Moratuwa), I would walk through the local market. What I could afford to buy from my stipend were fruits like apples, oranges, and grapes that were sold on the market sidewalks, and I would purchase a few of each variety. 

I recalled those days when I heard that the Government would be imposing licensing requirements for the import of 367 products, including apples and oranges. It occurred to me that many of the small traders who used to sell me those fruits would probably go out of business. Furthermore, the consumers who enjoyed affordable sources of fruit may lose access too.

There appears to be a widespread misconception that fruits like apples and oranges are only consumed by the wealthy elite. If they were only consumed by wealthy people, they of course would not be sold on the Pettah pavements and at central bus stands in Colombo and across the country.

The fundamental logic that is important to understand is that we cannot categorise any product as ‘essential’ or ‘non-essential’ in the first place. Different products are essential to different people based on a multitude of factors. 

A particular type of fruit like apples may not be essential to me, as I prefer to eat mangoes instead of apples. But from the perspective of an entrepreneur who was making apple juice or apple vinegar in Sri Lanka, apples cannot be substituted with mangoes. It is very likely that they will go out of business. 

Licensing process

According to the new regulations, the importers of 367 product categories have to obtain a licence for importation. Imposing such a licensing process will undoubtedly lead to corruption.  This move will ultimately only allow people in well-connected elite circles with contacts amongst Customs officers and politicians to obtain the import licences. The small-scale importer will be hit the hardest.

All big industries that require a licence have been taken over by politically-connected individuals. For example, private buses require a licence or a route permit. As the route permit is more expensive than the vehicle itself, buses tend to be poorly maintained, which puts passengers and other road users at risk.

The need for a licence to sell liquor is another example: most of the liquor licences of any given electorate tend to be owned by ruling and Opposition MPs, their family members, or allies.

Similarly, licences for Ceylon Petroleum Corporation-owned filling stations and State-owned LP gas distribution (and many other industries that require licences) have been completely overtaken by politically-connected individuals and most areas have minimal competition as a result.

Even obtaining the licence or approval that is required for basic house construction is a very cumbersome process and is greatly influenced by bribery and corruption.

Furthermore, the prices of many of the newly-affected products will go up. The few people who have the licence will have controlling power over the pricing and will effectively monopolise the industry. 

Imports are not the problem

To think that imports are the cause of the present USD shortage is a completely inaccurate diagnosis of Sri Lanka’s economic situation. 

As the Advocata Institute has explained many times, higher rates of imports have been caused by a reckless monetary policy, including quantitative easing and low-interest rates. Our imports have been declining as a percentage of GDP for the last 30 years, as have our exports. Therefore, thinking that imports are the fundamental problem is a complete misconception.

However, the Government and the Central Bank have recently been taking measures which are steps in the right direction. Increasing interest rates and floating the currency are appropriate in the current context, given the balance of payment crisis the country is undergoing. 

Ideally, interest rates have to be low and the currency has to be strong, but both can happen with time by allowing market forces to work. It is clear that the value of the currency cannot be maintained by forceful intervention. 

However, currency depreciation and higher interest rates will affect citizens in multiple ways. Depreciating the currency will cause inflation rates, which is about 14.2% (CPI, January 2022), and prices of most essentials and non-essentials to spike dramatically. 

Increasing interest rates will encourage people to save more than they spend, so the cost of capital will be high and the economy will be slowed down. Hence, growth will be low. It’s a choice between two equally-difficult options.

Our policymakers should understand that imports are not the problem. The real problem is that we haven’t carried out any reforms to improve the productivity and efficiency of the economy. Until the Government identifies the existence of a problem and takes the necessary actions to rectify it, we will not be able to overcome this crisis.

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.

Fuelling reform

Originally appeared on The Morning

By Dhananath Fernando

Fuel shortages have become abundant. The implications of these shortages need no lengthy explanations. They will affect all of us: from a multinational company to the average man on the street, every action we take in life will be disturbed. The electrical grid is already experiencing multi-hour, island-wide blackouts and the situation could escalate to include water supply and many other utilities, for which the knock-on effect will be very severe. 

There were serious discussions in Parliament about the possibility of revising fuel prices. In fact, the CBSL Governor himself has requested that prices be increased. When fuel prices are increased, it may (to an extent) reduce the demand for fuel. But fuel is such an essential commodity that even when prices are increased, the drop in demand may be low. But when fuel prices are increased, people will have to spend more money on fuel and related products, hence there will be less money being spent on non-fuel imports. As the non-fuel imports come down, the balance of payments will come closer to equilibrium, reducing the extent of that crisis. Ultimately, that’s the fundamental feature of a market system.

Fuel price revisions have never been popular in Sri Lanka, as historically, revisions have always led to price increases. When the former Finance Minister late Mangala Samaraweera announced the price formula along with his team including the present Finance Ministry Secretary Dr. S.R. Attygalle, many people did not see the fuel pricing formula positively. 

In my opinion, the optics and launching the formula were also quite bad in the context of a political economy. The formula was introduced at a time when global crude oil prices were increasing, so many people thought the price formula was just an attempt – or an excuse – to increase the price rather than the proper market mechanism. At launch the officials were laughing and it was launched as V1+V2+V3 = V4 and it was captured in the media and popular rhetoric that policymakers were having fun by increasing the burden on poor people. So while the decision to implement the formula was appropriate, the marketing and getting the public on board with market-based pricing could have been better. Later on, with elections getting closer, adherence to the price formula was not maintained. But market-based pricing of fuel is definitely a need for the ailing Sri Lankan economy. 

It is crystal clear that we are unable to sell fuel at lower prices than the cost of production and distribution without incurring heavy losses and debts. The Ceylon Petroleum Corporation (CPC) makes a loss of Rs. 46.80 per for every litre of diesel even after receiving a duty waiver of Rs. 25. For petrol following a duty waiver of Rs. 45 the CPC makes a loss of about Rs. 18. 37. 

After the fuel shortage became prevalent, the common excuse trotted out by policymakers is that they don’t have dollars to buy fuel. In my view, this is misleading. While it is true that we do not have dollars to buy fuel at the soft-peg rate of approximately Rs. 200 per USD, we may have USD to buy fuel at the market rate of about Rs. 250-260 per dollar. Interestingly, we do not need the assistance of the International Monetary Fund (IMF) to make these little changes with a big impact. Increasing domestic fuel prices may reduce the losses of CPC, but it will not solve the underlying problems causing shortages. Currently our Government makes two main losses on every litre of petrol or diesel: first, it suffers an operational loss on subsidised fuel and secondly, it suffers an exchange rate loss.

While the main reason for the current crisis is shortage of USD, it should be noted that the energy market dynamics are also very weak. It’s a duopoly market with over 80% share for the State-owned CPC, one of the biggest loss-making State-owned enterprises in the nation. As per sales for 2020 of diesel, because of the duty waiver alone, the Government is losing out on about Rs. 30 billion in revenue for petrol and about Rs. 98 billion for diesel. 

It is simply not worth making such losses, making life inconvenient for consumers while also losing political capital at the same time. There is no winner when the State tries to keep fuel prices low. Claiming that our prices are low doesn’t really matter when we have no fuel available at all! So although it is not a popular decision, the right and rational decision is to determine the price based on market forces. Also, the entry barriers have to be reduced or eliminated to allow other players to enter the market. Singapore, a smaller country with a population less than a quarter of Sri Lanka’s, has more fuel and energy suppliers, ensuring price and supply stability.

Rather than merely providing excuses as to why we do not have USD to buy fuel, the Government can identify the price at which it can make the USD available for our fuel imports. Long-term reforms are the only solution for this problem. Emerging from our economic strife is determined by when we start our reforms programme. It’s better for everyone that we start sooner than later. 

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.

Price controls worsen drug shortage

Originally appeared on The Morning

By Dhananath Fernando

Shortages have now become abundant and the new normal. We all know the reason: the foreign exchange shortage that is causing shortages of many essential and non-essential goods. Shortages have even affected our basic essentials, such as fuel and electricity.

We all know the solutions for the problems as well. Unfortunately, we have a shortage of policymakers who have the courage to enact the reforms to rescue our people from the commodity shortages. 

There are many contributing factors to potential shortages: supply chain disruptions, natural disasters, and many other externalities. However, in the Sri Lankan context, it is primarily price controls that are causing shortages. 

When there were price controls on tinned fish, there was a shortage of tinned fish. We had a controlled price for dhal, and dhal disappeared from the market. Cement prices were controlled and we experienced a cement shortage. The same has happened for US Dollars (USD). The Government controlled the price of USD, and the country has a shortage of USD. However, the USD problem is somewhat more complicated as price controls are just one of the reasons for the shortage. Controlling the price of the dollar has the worst effects of all the price controls as it has repercussions on all imports and exports.

As a result of the deteriorating situation, the Government removed price controls on most items which is commendable. It was clearly the right thing to do. Cement, milk powder, and many other commodities removed their price controls. But controls remained in a few very important categories: most significantly, USD and pharmaceuticals. The dollar shortage is worsening the shortages in all other industries and pharmaceutical shortages are creating a nightmare for many patients and their families. Even shortages of basic medicines such as the painkiller paracetamol have been reported. Although it was reported that the demand has increased by more than 200% due to Covid and Dengue, in a market system paracetamol cannot suffer shortages unless there is an economic issue (1).

One of my relatives has a rare type of pneumonia, and only one drug brand is effective in treating it. Since the disease is rare, only a small quantity of that particular drug was imported. Now with dollar shortages and delays in opening Letters of Credit (LCs), that particular drug is of less priority to the drug importer, as the same dollars could have been utilised to import more profitable drugs. 

On the other hand, there are price controls on some drugs and pharmaceuticals. As a result, when the prices have increased, no businesses would have the incentive to import them, as they would be engaging in a business where the cost is higher than the selling price (or where the profit margins are so razor-thin that investment is not justified).

Additionally, pharmaceutical prices and some active pharmaceutical ingredient prices have increased due to the pandemic and resulting supply chain interruptions. Simply maintaining rigid price controls doesn’t make economic sense and it only causes shortages in the market. It even makes the situation worse for local manufacturers, who find it difficult to source raw materials/ingredients. The State Pharmaceutical Corporation (SPC) can survive, because it’s a government institute, and it will receive preferential treatment from the State banks in opening LCs and will receive subsidies from the taxpayer. 

In the case of private companies, the importation of drugs and active pharmaceutical agents are conducted through long-term contracts. If LCs cannot be honoured or opened, both their professional business relationships and the reliability of supply will be affected. Sometimes with changes in credit periods, cost factors will change. This will occur particularly when there are doubts in the market on the exchange rate. In today’s Sri Lanka, where the kerb/black market rate is 20-30% higher than the rate offered by banks, the cost of imports is obviously going to be higher. 

Price controls on pharma are going to create shortages of the drugs that we depend on, as we have already experienced with products including tinned fish, dhal, milk powder, and cement. 

Due to shortages of USD and difficulties in opening LCs, even without price controls it will be difficult to avoid shortages. The main reason is that 2022’s entire global economy is connected through the dollar alone. In such a context, price controls are just going to make the problem worse. 

It is understandable from the Government’s point of view that allowing a sudden price increase of pharma products may not be politically feasible. But it may have a more significant political impact if the products are simply not available on the market. As with oil products, we could have aligned the prices slowly at regular intervals so that the price hikes would be more digestible for the average citizen and therefore less politically damaging. If we had enacted price revisions that aligned with global market prices we may not be where we are today. That is why the market system depends on the price mechanism – it is the thermometer which balances supply and demand. 

For a market system, competition comes before regulation. Imports and exports must work together at full capacity for prices to come down. Therefore, the regulatory framework has to be managed in a way that allows market forces to work. 

When the Board of Investment was positioned as a ‘One Stop Shop,’ there was a joke among the business community that “It’s one more stop” would be more apt. Similarly, the National Medicines Regulatory Authority (NMRA) – supposed to be the regulator of prices and quality of medicines and medical equipment – has simply added a severe burden to the process rather than making it easier. 

References:

• https://ceylontoday.lk/index.php/news/paracetamol-demand-up-275

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.

Government must resign itself to reforms – now

Originally appeared on The Morning

By Dhananath Fernando

My school Advanced Level biology teacher used to tell me how to study for exams. Her main advice was that the first step was to ‘make a decision to study’. I would think to myself, ‘Haven’t we all decided that we need to study?’ 

But she would explain the power of decision making, which applied everytime we make a decision – be it consciously or unconsciously – and mention life every time we had to make a decision: “Not making a decision is a decision. Thinking to ourselves to study later is also a decision. Studying now is a decision. Not studying is also a decision.” 

I realised that it’s all about the thousands of decisions that we make everyday. All of our destinations will be determined by such small decisions. What we are today is based on the decisions that we made in the past; what we will be tomorrow is based on decisions we make today.

The same lesson applies to our economic policy as well. It appears that our policymakers have made a decision to not make any decisions on the public policy front. Since the initial stages of Covid-19, multiple reports have been submitted by experts and the Government has even called for multiple reports on the current economic situation. There was an initial report by the Pathfinder Foundation which focused solely on the pandemic. Then a ‘Road Map for Economic Recovery’ was launched by the Advocata Institute. 

In fact, the President called for a deregulation report, which was chaired by Krishan Balendran and Lalith Weeratunga. Suggestions were handed over by the Delegation of German Industry and Commerce (1) to the Deregulation Committee. There were many other suggestions and ideas by many other stakeholders, including the Chamber of Commerce, on the brewing economic crisis. It was recently reported that the Pathfinder Foundation submitted another report to the Minister of Finance based on the findings of a tripartite discussion between experts from Sri Lanka, Japan, and India. 

After all these suggestions, the decision to delay reforms may have multiple reasons, of which which we can only guess. But keeping assumptions aside, the more we delay, the closer we get pinned to the wall with limited choices to escape from the crisis.

Economic reforms must always be looked at in a political context. Whether the present political power balance supports the reforms is a key question. While many are of the view that with a two-thirds majority reforms can be done, it seems otherwise. Reforms are going to be quite painful so it seems that policymakers are reluctant to push hard reforms, as they are scared that the citizens’ frustration during the reform period may dilute the political capital they enjoy.  Further, this may even cause them to lose the super-majority. 

Even the Minister of Finance has admitted that the State sector and State-Owned Enterprises (SOEs) are a massive burden to Government coffers; yet no State sector reform programme is even on the table. Politics is obviously the concern of the Government and State sector employees and their families are a massive voter bloc. Some of them would lose their jobs or would be pushed into mandatory retirement which would not help politics at the ground level. So reforms are put on the back burner and the Government continues to procrastinate. 

On the other front, the more that we delay reforms, the more the people get frustrated with disturbances to their regular day-to-day activities and businesses, including shortages of essentials such as LP gas, fuel, milk powder, cement, etc. The Government is stuck between a rock and a hard place – whether it carries out reforms or not, its popular support and political capital will be diluted either way. Therefore, my view is that it is better to bite the bullet and carry out reforms, as procrastination is just going to make things worse in the long run.

Another reason that reforms are delayed could be that the energy and focus of policymakers and politicians is spent mainly on fire-fighting day-to-day micro-problems. The situation is such that everyday has become a challenge for the Government to find US Dollars for importing basics and debt repayments.

Weather conditions impacting hydropower generation and global crude oil prices reaching nearly $ 100 a barrel are making our crisis worse. So far our policymakers’ strategy has been to completely depend on swaps. 

Over the last few weeks, India provided us with swaps and credit lines worth $ 1.5 billion and China with another Yuan 10 billion (approximately $ 1.5 b), of which basic information such as interest rates and payment conditionality has yet to be published. Interestingly, the total amount of swaps and credit lines are equivalent to six times the value of the MCC Grant, which created an extensive social discussion on the attached binding conditions which caused the President to appoint a committee to evaluate the grant agreement.

But our economic crisis is such that we are extremely desperate for foreign exchange. We had a presidential commission for a mere $ 480 million grant at a time when people had a deeper sensitivity to the potential conditions, whereas now we have decided to borrow six times more than that without any political party, media, or public figure having voiced their concerns. 

The decisions available at hand for all political parties are limited and difficult. It has come down to simply having the courage to implement reforms. Politics or party lines have become irrelevant as the prescription will not change regardless of the person in the driver’s seat.

Since 1977 and 1990 there has been no effort for any hard economic reforms, so many policymakers think that hard reforms will dilute their popularity. As a result, procrastination on reforms has become the norm. At the same time, the practice and knowhow of driving reforms have not been common. But the truth is that reforms will have less damage on political capital, while not undertaking reforms will have far more serious consequences. Stagnation won’t take us anywhere, but reforms will. 

References

1 https://srilanka.ahk.de/aktuelles/news-details/handover-of-report-on-the-simplification-of-existing-laws-and-regulations-in-sri-lanka

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 danger of being anchored in anti-competitive safety

Originally appeared on The Morning

By Dhananath Fernando

The ‘what not to do’ guide for Sri Lanka’s economy from its shipping sector

Once I met a businessman in one of the world’s largest waterproofing corporations, based in the United States. He spoke to me about his humble beginnings. I asked him what his secret for success was. He replied “market system and competition” with confidence. 

He explained that an average person like him was able to create such a large business and social impact which provides employment for thousands of people in just one generation solely because of the market system and competition. “The market system made me an innovative, hard working and a progressive person. I didn’t care about my background. Without competition I could have been the same person as I was 20 years ago,” he said.

In life, hard work and commitment are the basic requirements of prosperity. What we need is a system that rewards hard work and free exchange, so the market system can create progression and prosperity. In any sector when competition is restricted, stagnation is unavoidable. That is one of the main reasons why, in any advanced market system, institutions are built to promote competition and restrict anti-competitive practises such as monopolisation. 

In Sri Lanka our total factor productivity is very low compared to our regional players, due to lack of competition and anti-competitive business practises. Sri Lanka is ranked at 84th in the Global Competitiveness Index (out of 140 economies) while we were ranked 52 in the same index in 2012; clearly, the situation is only becoming more dire.

The shipping industry is just one prominent example of how the lack of competition and anti-competitive trade practises have made Sri Lankan industry stagnant over the decades. While Sri Lanka boasts of its strategic location, our growth has been far below potential for many decades now. We have not only failed at capitalising on our naturally-gifted location but we are mired in debate and friction due to anti-competitive trade practises and attempts to monopolise the shipping industry and supporting services.

Most protected industries and cartels practise  anti-competitive behaviour after a certain period of time, due to stagnation and poor productivity. In a competitive environment, businesses focus more on future opportunities and productivity improvement, than on defending their own interests even if it means resorting to anti-competitive practises. As the American sporting legend Tom Brady famously said: “While the winners are focused on winning, the losers focus on the winners.”

Sri Lanka is quite unfortunate as even shipping, a main sector where we have the opportunity to open up for competition, has fallen victim to protectionist and anti-competitive practises. Minister Vasudeva Nanayakkara filed a public litigation case on the monopolisation of the shipping industry when he was a member of the Joint Opposition during the last regime. However, the lack of regulation to avoid anti-competitive practises will provide very limited space for ordinary citizens to become aware of the extent of the problem. 

Attempts to eliminate minimum investment requirements on shipping industry and freight forwarding with the objective of bringing more competition has failed over the years due to industry resistance. 

The result is shown in the numbers: Sri Lanka has about 750 local shipping, freight forwarding, and clearing agents, whereas Singapore has about 5,000 – despite commencing on its journey to becoming a maritime hub several years after us. Even in the case of the X-Press Pearl environmental disaster, we really did not have the basic ecosystem in place to combat an emergency because of our anti-competitive, inward-looking approach. 

Of course, shipping is not the only industry closed for competition, with anti-competitive behaviour. The acquisition of two of the largest tile manufacturers in Sri Lanka, which operate in an industry that is already highly protected (at one point with 107% total tariff protection), has also been a concern. The result has been the continuous suffering of consumers and the construction industry over the years, with basic housing becoming almost a dream for aspirational Sri Lankans. 

According to the current regulation, the Consumer Affairs Authority (CAA) Act No. 09 of 2003 (which was brought after repealing the Fair Trading Commision [FTC] Act of 1987) is expected to promote competition. Unfortunately, the Act only sets price controls on selected consumer goods instead of truly promoting competition. They raid small mom-and-pop shops for selling goods at rates higher than the set prices, and cast a blind eye on all other anti-competitive behaviour. It should be noted, however, that the CAA is hindered by its limited purview on the Investigation of existence of monopolies, mergers and acquisitions, and anti-competitive practises. 

The previous FTC Act of 1987 had a broader purview to investigate anti-competitive trade practises (compared to current CAA) including agreements to limit production, refusal to prevent  predatory pricing, vertical agreements, and cartels. But the Fair Trade Commision Act lacked implementation guidelines and specific distinction between public and private sectors (1). Anti-competitive practises need to always be analysed with State-Owned Enterprises (SOEs) as most monopolies and anti-competitive practises are SOE driven.

Additionally, the provisions for the appointment and removal of members to the FTC, as well as the way the Act was implemented, raised concerns of the departure from competitive policy at the FTC (2).

A good example of the shortcomings of the FTC is the merger of Glaxo-Wellcome and SmithKline Beecham. FTC considered that it was beyond their purview as it was an international merger. In relation to unfair trade practises, the oft-cited case is that of Ceylon Oxygen Ltd. Ceylon Oxygen had held a dominant market position since 1936 in Sri Lanka. When a new firm named Industrial Gases (Pvt) Ltd. entered the market in 1993, it was alleged that Ceylon Oxygen behaved in predatory manner by reducing the deposit fee on canisters and decreasing maintenance charges, and made discriminatory discounts as well as discriminatory rebates. 

FTC identified  three anti-competitive practices of Ceylon Oxygen, namely, predatory pricing, discriminatory rebates, and excluding dealing. However, when the case went up to the Appeals Court, it was held that the FTC had no jurisdiction to investigate such practises over the case and therefore did not recognise these practises as preventing competition.

Though the FTC had its own shortcomings, the subsequent CAA Act has a far more limited purview. Simply put, Sri Lanka’s business environment and ecosystem are  set on all fronts to avoid competition and promote anti-competitive behaviour, while our prosperity completely depends on the opposite. 

Competition is very important to Micro-, Small- and Medium-Sized Enterprises. They are the first to adapt and grow due to flexibility and agility in a competitive environment. That is the reason the world-class waterproofing businessman whom I had met thanked competition and the market system for his success and the success of his business. 

If Sri Lanka is serious about achieving the status of a high income country, we can only get there by improving our productivity (total factor productivity) and certainly not through debt accumulation. Trade and competition policies play a pivotal role in this journey of reform and our policymakers should focus on implementing high-impact policies to promote competition and avoid anti-competitive behaviours. Unfortunately, the current focus has been on prices and market intervention.

Sri Lanka has a large number of talented young people who could become as successful as the waterproofing businessman I met. If we establish a market system and a competitive environment, then nothing will stand in the way of our youth reaching the top and Sri Lanka will become a far better and more prosperous nation than it is today.

References:

(1)  ​​Trade and Competition Policies: Their implications for productivity Growth in Sri Lanka by Dr.Sarath Rajapathirana

(2)  Thurairtnam (2006), Malathi Knight Jones (2002)

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.

Repay Foreign Debt or Finance Essential Imports

Originally appeared on Daily FT, Lanka Business Online and Groundviews

By Dr Roshan Perera and Dr. Sarath Rajapatirana

The available foreign reserves of the country can be used to either repay foreign creditors or to finance imports of essential goods and services required by its citizens. This is the dilemma facing Sri Lanka today. Repaying the full value of the bond using the limited foreign reserves available would provide a windfall gain to those currently holding these bonds. But it will be at great cost to the citizens of the country who will face shortages of essentials like food, medicine, and fuel. 

In these circumstances, it is in the best interest of all its citizens, for the government to defer payment of the US dollar 500 million International Sovereign Bond (ISB) coming due on 18 January 2022, until the economy can fully recover and rebuild. 

Just as an individual with co-morbidities is more vulnerable to develop severe illness if infected with COVID-19 and more to likely require hospitalisation and even treatment in an ICU, Sri Lanka was vulnerable to economic shocks long before COVID-19 struck. The country was already facing several macroeconomic challenges. Muted economic growth. An untenable fiscal position. Although a tough consolidation programme was put in place to bring government finances to a more sustainable path, sweeping tax changes implemented at the end of 2019 reversed this process, with adverse consequences to government revenue collection. Weak external sector due to high foreign debt repayments and inadequate foreign reserves to service these debts. COVID-19 only exacerbated these macroeconomic challenges. And like a patient who gets over the worst of COVID-19 has a long road to recovery; the economy of Sri Lanka faces many challenges to get back on track. 

The onset of COVID-19 in early 2020, only worsened an already grim macroeconomic situation. The country lost the confidence of international markets, and the ability of the sovereign to rollover its external debt became difficult if not impossible. In these circumstances, there was a solid argument for a sovereign debt restructuring. But the response from the government and the Central Bank of Sri Lanka (CBSL) was a firm “No”. The argument was that Sri Lanka never defaulted on its debt and it was not going to do so now. The official position was also that the government had a ‘plan’ to repay its debt and hence there was no reason to engage in a debt restructuring exercise. However, Sri Lanka faced high debt sustainability risks: the debt to GDP ratio at 110% was one of the highest historically and interest payments to government revenue at over 70% was one of the highest in the world. 

Table 1: Summary of External Sector Performance Q1 – 2017 to 2021 ($mn)

Therefore, it is in the best interest of the country and its citizens for the government to defer payment on its debt and use its limited foreign reserves to ensure uninterrupted supply of essential imports. But this requires a plan. To minimise the cost to the economy, the government must immediately engage its creditors in a debt restructuring exercise. This will require a debt sustainability analysis (DSA) by a credible agency to identify the resources required for debt relief and the economic adjustment needed to put the country back on a sustainable path. This will be critical to bring creditors to the negotiating table and provide them comfort that the country is able and willing to repay its debt obligations in the future. 

The cost of not restructuring is much higher. A non-negotiated default (if and when the country runs out of options to service its debt) would lead to a greater loss of output, loss of access to financing or high cost of future borrowing for the sovereign. It could even spill over to the domestic banking sector, triggering a banking or financial crisis. 

The consequences are clear. What will we choose?

Dr. Roshan Perera, Senior Research Fellow, Advocata Institute and former Director, Central Bank of Sri Lanka.

Dr. Sarath Rajapatirana, Chair, Academic Programme, Advocata Institute and former Economic Adviser at the World Bank. He was the Director and the main author of the 1987 World Development Report on Trade and Industrialisation.

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.

National Single Window: Paving the way for paperless trade

Originally appeared on Daily FT, The Morning, the Island, and Lanka Business Online

By Mithara Fonseka and Kavishka Indraratna

In 2016, Sri Lanka ratified its Trade Facilitation Agreement (TFA) with the WTO and in 2017 a Secretariat was established for the National Trade Facilitation Committee to drive much needed trade reforms in the country. Currently, the rate of Sri Lanka’s implementation commitments under TFA stands at 34.9% with a timeframe ranging from 2017-2030. Reforms include the Trade Information Portal, streamlining customs processes and revamping the systems for post-clearance audit. However, progress of one of the key reforms, the National Single Window (NSW), has been stalled. Deviating from the initial time frame of completing the Single Window in December 2022, the target date has been delayed to 2030. The NSW, a globally recognised trading portal, acts as a one-stop shop for exporters and importers where customs documents, permits, registrations and other information can be submitted online at once. The definition of a Single Window, as provided by the UN/CEFACT Recommendation No. 33, is as follows: “A Single Window is defined as a facility that allows parties involved in trade and transport to lodge standardized information and documents with a single entry point to fulfil all import, export, and transit-related regulatory requirements. If information is electronic, then individual data elements should only be submitted once”. Putting such a reform on the back-burner will only delay Sri Lanka’s transition to a system of streamlined, paperless trade processes and therefore acts as an impediment to local and foreign investment.

Why should Sri Lanka implement a NSW?
Sri Lanka has been underperforming in global trade rankings, where we sometimes rank in the bottom 50 countries. According to the Ease of Doing Business in 2020, in the trading across borders pillar, Sri Lanka ranks 96 out of 190 economies. While several of Sri Lanka’s indicators perform better than the South Asian average, there is significant room for improvement. When comparing with OECD standards, Sri Lanka takes 72 hours for border compliance regarding imports and 48 hours for export documentary compliance whereas the OECD average stands at 8.5 and 2.3 hours respectively. Lengthy customs procedures and multiple inspections impede efficiency. Meanwhile, we ranked 94 out of 160 countries under World’s Bank 2018 Logistics Performance index and 103 out of 136 for the World Economic Forum’s 2016 Enabling Trade index. Notably, one of the indicators from the Enabling Trade Index, the customs services index, which considers factors such as clearance of shipments via electronic data interchange and the separation of physical release of goods from fiscal control, we rank 116 out of 117 countries. A lack of transparency, inter-agency coordination and lengthy cumbersome processes contribute to Sri Lanka’s poor trade environment. An average trade transaction can involve over 30 different agencies and upto 200 data elements, a lot of which have to be repeated. There is thus an evident need to streamline trade processes through digitisation, creating a business friendly environment that supports small businesses as well as foreign investors.

A Background into the National Single Window

In 1989, the Government of Singapore introduced the world’s first NSW, known as Tradenet. It took two years for the model to become operational and has now become one of the most advanced models in the world. Since then, many countries have adopted similar models and a NSW has become a critical tool in facilitating efficient and paperless trade. The annual survey conducted by The United Nations on trade facilitation identified that almost 74% of countries surveyed in the Asia Pacific region have to some extent engaged in creating a NSW (this includes countries which are only in the pilot stage). While a NSW is universally known for promoting the transition from paper-based to electronic customs processing, each window developed by a country is unique and varies according to the context of the country. For example, in Chile and Malaysia, the NSW enables traders to submit their export and import declarations, manifests and their trade-related documents to customs authorities electronically. In Korea and Hong Kong, private sector participants including banks, customs brokers, insurance companies and freight forwarders are also connected through the portal.

Single entry, single submission, standardized documents and data, sharing of information (information dissemination), centralised risk management, coordination of agencies and stakeholders, analytical capability and electronic payment facilities are some of the key functions included in a Single Window. In Sri Lanka, the World Bank did several studies on the NSW, identifying different operational models, best practices and a final blueprint document was given to the government and Sri Lanka Customs (SLC) in July 2019. However, since then, there has been no news of progress. While many countries including Sri Lanka are keen to emulate Singapore’s pioneering model, a lack of clear targets and timelines deteriorate the chances of implementing such a system.

The Mutual Benefits of a NSW

Businesses in countries without an integrated trade system find it difficult to compete in the international arena given the time and money spent to simply get clearance. Streamlining the entire process from start to finish in a manner that’s comprehensive and transparent, sans bureaucracy has a number of positive effects for traders. It was estimated that Singapore’s TradeNet saved its traders around US$1 billion per year. Korea’s uTradeHub allowed its business community to save approximately US$ 818.9 million. These were savings from the use of e-documents, automated administrative work and information storage and retrieval with the use of ICT. A Single Window automatically simplifies the compliance requirements traders face. In Mozambique traders benefited from faster clearance times, where through the NSW, the time was reduced from 3 days to a few hours. Meanwhile, Thailand’s NSW transformed the customs clearance turnaround time (measured as per declaration) to 95% in 5 minutes. Using a single portal has enabled traders to avoid visiting multiple agencies and simply submit an application at their convenience from any location. NSW has supported businesses through the removal of unnecessary costs, time and red tape, factors which tend to act as key deterrents to small businesses as well as foreign enterprises. 

The NSW system has similarly provided noteworthy cost-savings for government entities involved in trade. Singapore Customs, has claimed that for every US$1 earned in customs revenue, it only spends 1 cent, implying a profit margin of 9,900%.  In Hong Kong, trade facilitation measures have provided them with HK$1.3 billion in annual savings. The NSW has also reduced revenue leakages which may arise through transit. For example, Mozambique is a transit country to Swaziland, South Africa, Zimbabwe, Zambia and Malawi. By expanding their NSW to include value added services such as GPS tracking of consignments in transit, automatic detection of breaches in consignment and deviation from assigned transit corridors the NSW prevents revenue leakages and the opportunity for corruption, maximising revenue collection. The NSW has further led to productivity and efficiency improvements. A Single Window has enabled authorities to handle a larger volume of applications with much more ease. Mozambique, which used to face infrastructural weaknesses, through the implementation of its single window, is able to handle roughly 1,500 custom declarations per day.  Shifting to paperless customs processes would reduce costs for inventory and assist in improved resource allocation as personnel would not be required for trivial and mundane tasks such as preparation and cross checking of numerous documents. In totality, a fully digitised system provides government agencies with the means to do away with inefficiencies that hold back the speed of document processing, approval, communication and inspection stages. Further contributing to efficency, a NSW has also facilitated the dissemination of data through multiple agencies ranging from border control authorities, freight forwarders, customs brokers, shipping agents, banks and so on. As a result, there is improved inter-agency coordination and increased transparency.

Apart from a substantial increase in government revenue, the NSW will contribute to an improved business environment in Sri Lanka. The domino effects include an upward movement in the country’s global rankings, incentives for FDI and local business as well as a global recognition. 

Driving forces for implementation

While the NSW on the surface seems like an IT-based innovation, it is rather a platform for inter-agency and private sector collaboration. As the NSW is a system which requires involvement from government, the private sector and the transport community, it is crucial to ensure inter-agency collaboration. Ensuring public-private sector participation, introducing mandates and a steering committee to oversee implementation is crucial in developing such a system. The system as a whole is one that constantly evolves with no end stage. It requires continuous maintenance, support, and enhancement. This should be supplemented by the appropriate legislation, disclosure and publishing, backed by training and airtight data security policies. Thus governance of the NSW needs to be executed appropriately so that new technologies, techniques and new modes of trade can be leveraged. In best performing nations, a Single Window is not considered a single system but rather “a combination of trade-related platforms that serve various trade communities and modalities”. This has enabled leading countries such as Singapore and Hong Kong to facilitate seamless trade by building an environment of interoperable trade systems.

1. WTO, Trade facilitation Agreement Database, https://tfadatabase.org/members/sri-lanka , Accessed January 6, 2022.

2. WTO, Trade facilitation Agreement Database,10.4-Single Window, https://tfadatabase.org/members/sri-lanka/technical-assistance-projects/article-10-4

3. United Nations, UN/CEFACT, ‘Recommendation and Guidelines on establishing a Single Window: to enhance the efficient exchange of information between trade and government, Recommendation No.33, (2005), https://unece.org/fileadmin/DAM/cefact/recommendations/rec33/rec33_trd352e.pdf Accessed January 6, 2022.

4. World Bank Group, ‘Doing Business 2020’, Economy Profile Sri Lanka, Comparing Business Regulation in 190 Economies,(2020), https://www.doingbusiness.org/content/dam/doingBusiness/country/s/sri-lanka/LKA.pdf Accessed January 6, 2022.

5. World Bank Group, ‘Doing Business 2020’, Economy Profile Sri Lanka, Comparing Business Regulation in 190 Economies,(2020), https://www.doingbusiness.org/content/dam/doingBusiness/country/s/sri-lanka/LKA.pdf Accessed January 6, 2022.

6. World Bank Group, ‘Logistics Performance Index 2018’, (2018), https://lpi.worldbank.org/international/scorecard/radar/254/C/LKA/2018#chartarea Accessed January 6, 2022.

7. World Economic Forum,’The Global Enabling Trade Report 2016, Enabling Trade Rankings’, (2016) https://reports.weforum.org/global-enabling-trade-report-2016/enabling-trade-rankings/#series=CUSTSERVIND

8. World Economic Forum, ‘Enabling Trade Index 2016’, (2016) https://www3.weforum.org/docs/WEF_GETR_2016_report.pdf Accessed January 6, 2022.

9. World Economic Forum, ‘The Global Enabling Trade Report 2016, Enabling Trade Rankings’, https://reports.weforum.org/global-enabling-trade-report-2016/enabling-trade-rankings/#series=CUSTSERVIND Accessed January 6, 2022.

10. Johns, M. “Trade facilitation reform in Sri Lanka can drive a change in culture”, World Bank Blogs, 2017

    https://blogs.worldbank.org/endpovertyinsouthasia/trade-facilitation-reform-sri-lanka-can-drive-change-culture Accessed January 6, 2022.

11. UN ESCAP,’Digital and Sustainable Trade Facilitation in Asia and the Pacific 2021’, (2021)
      https://www.unescap.org/sites/default/d8files/knowledge-products/UNTF%20Report.pdf Accessed January 6, 2022.

12. UN ESCAP,’Single Window Planning and Implementation Guide’,

    https://www.unescap.org/sites/default/d8files/5%20-%201.%20Introduction_0.pdf Accessed January 6, 2022.

13. UN ESCAP, ’Single Window Planning and Implementation Guide’

     https://www.unescap.org/sites/default/d8files/5%20-%201.%20Introduction_0.pdf Accessed January 6, 2022.

14. UN ESCAP, ‘Single Window for Trade Facilitation: Regional Best Practices and Future Development’ https://www.unescap.org/sites/default/files/Regional%20Best%20Practices%20of%20Single%20Windows_updated.pdf, Accessed January 6, 2022.

15.  UNECE, ‘Trade Facilitation Implementation Guide, Singapore case study’, https://unece.org/fileadmin/DAM/cefact/single_window/sw_cases/Download/Singapore.pdf Accessed January 6, 2022.

16. United Nations ESCAP, ‘Single Window Implementation: Benefits and Key Success Factors’, (2012), https://unnext.unescap.org/sites/default/files/switajik-sangwon.pdf Accessed January 6, 2022.

17. UNECE, ‘Trade Facilitation Guide, Single Window Implementation in Mozambique’,
    https://tfig.unece.org/cases/Mozambique.pdf Accessed January 6, 2022.

18. UNECE,Trade Facilitation Implementation Guide, Interagency Collaboration for Single Window    Implementation:Thailand’s Experience, https://tfig.unece.org/cases/Thailand.pdf Accessed January 6, 2022.

19. United Nations, Single Window Planning and Implementation Guide, (2012) https://www.unescap.org/sites/default/files/0%20-%20Full%20Report_5.pdf Accessed January 6, 2022.

20. United Nations, ESCAP, Single Window Implementation: Benefits and Key Success Factors

     https://unnext.unescap.org/sites/default/files/switajik-sangwon.pdf Accessed January 6, 2022.

21. UNECE, ‘Trade Facilitation Guide, Single Window Implementation in Mozambique’,   
        https://tfig.unece.org/cases/Mozambique.pdf Accessed January 6, 2022.

22. United Nations, ESCAP, Single Window for Trade Facilitation:Regional Best Practices and Future  
    Development, (2018),  https://www.unescap.org/sites/default/files/Regional%20Best%20Practices%20of%20Single%20Windows_updated.pdf Accessed January 6, 2022.
    

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.

Trade, deglobalization and the new mercantilism

Originally appeared on the Hinrich Foundation

By Prof. Razeen Sally

The COVID-19 pandemic is accelerating shifts underway since the last global financial crisis (GFC). It ushers in a new era of deglobalisation and protectionism, indeed a new mercantilist world order.

Three global shifts will shape international trade. They will probably last beyond the immediate crisis to the “post-vaccine” future. The first is an accelerated shift from Market to State: more government interventions will further restrict markets. The second is to national unilateralism – governments acting on their own, often against each other – at the expense of global cooperation. The third is to more contested and unstable geopolitics, centred on US-China rivalry. Taken together, they herald a new mercantilism, whose main precedents are Europe and its colonial expansion in the seventeenth and eighteenth centuries, and the period between the two world wars in the first half of the twentieth century.

Mercantilism – the exercise of state power to control markets domestically and internationally – existed after 1945, but was constrained by the expansion of markets: it was relatively benign. But malign mercantilism governed the preceding decades, shattering domestic economies, shrinking individual freedom, destroying the world economy, and so poisoning international politics as to culminate in global war. Today’s emerging mercantilism is still far from that reality, but it risks heading in that direction.

Another set of historical precedents is also relevant. Increasingly, the US-China conflict today echoes that of the US and the Soviet Union in the “old” cold war. But China today, unlike the former Soviet Union, is an authoritarian (not totalitarian) power with a state-directed and partly globalised market economy (not a sealed-off command economy). China better resembles Germany and Japan as rising powers in the late nineteenth and early twentieth centuries. And US-China rivalry today better resembles that of the UK and Germany before the first world war: a contest between the established power, with a liberal-democratic political system and a free-market economy, and a rising power, with an authoritarian political system and a state-guided market economy.

Three eras of international trade preceded the present pandemic. The first – the quarter-century until the GFC – was an era of unprecedented liberalisation and globalisation. The second – the near-decade after the GFC – saw globalisation stall, though not reverse, and trade growth stagnate alongside “creeping” protectionism. The third, starting in early 2017, was triggered by President Trump, partly to retaliate against increasing Chinese protectionism. It centred on a US-China trade war but rippled out into copycatting protectionism by other countries. Protectionism went from creeping to galloping.

This pandemic has triggered the worst deglobalisation since 1945. International trade may shrink by up to a third, foreign direct investment by up to 40 per cent, and international remittances by 20 per cent, this year. The trade outlook is worse than it was during the GFC in two ways. Now economic contraction is synchronised around the world; during and after the GFC, fast growth in emerging markets, led by China, cushioned the fall in trade and enabled a recovery. Now services trade is suffering even more than goods trade; travel and tourism have collapsed. The GFC, in contrast, hit goods trade hard but services trade was more resilient, especially fast-growing travel and tourism. Now there are signs of a protectionist upsurge, starting with export bans on medical equipment, with new restrictions on foreign ownership in the pipeline.

What is the medium-term – post-vaccine – trade outlook?

First, protectionism is likely to increase as a spillover of domestic state – particularly industrial-policy – interventions that last beyond the present crisis. Crisis-induced subsidies will be difficult to reverse wholesale and will have trade-discriminating effects. New screening requirements might have a chilling effect on foreign investment. These and other interventions to protect domestic sectors and national champions have a home-production bias. The list of “strategic” sectors to protect on “national security” grounds against foreign competition will likely expand. There will probably be more restrictions on migration and the cross-border movement of workers.

Two precedents are relevant: the “new protectionism” of the 1970s and ‘80s, which partly resulted from bigger, more interventionist government in domestic markets; and, more perniciously, the expansion of government after the first world war, which empowered interest groups to lobby effectively for restricted imports, foreign investment and immigration.

Second, national unilateralism – this time “illiberal unilateralism” – will likely expand and make effective regional and global policy cooperation more difficult. It bodes ill for the WTO, APEC and the G20, also for regional organisations such as ASEAN, and will cramp the liberalising effects of stronger preferential trade agreements. This only increases the prospect of tit-for-tat retaliation, starting with the Big Three (the US, EU and China), and copycatting protectionism that will spread around the world.

Third, the reorientation of global value chains will accelerate. Western multinationals will relocate parts of their production from China to other countries on cost grounds, as they have been doing, but increasingly on political-risk and security grounds as well. There will be a combination of onshoring, near-shoring and regionalisation of value chains, which will vary widely by sector. But the overall effect will be to raise costs for producers and consumers.

Fourth, international trade will be hit harder by a more fractured and conflictual geopolitical environment, especially US-China rivalry, but not helped either by an inward-looking and divided EU. It will be squeezed between more unstable geopolitics and the recalibration of states and markets – more “state” and less “market” – domestically.

All the above points to a new mercantilist trade order that might be more malign than benign, echoing the “new protectionism” of the 1970s and early ‘80s, or, even more worryingly, the 1920s and ‘30s.

My ideal world is a classical-liberal one: limited government, free markets and free trade, underpinned by appropriate domestic and international rules. I would add political liberalism and legally protected individual freedoms. The post-1945 global order was some distance from this classical-liberal ideal, but it was liberal enough to deliver unprecedented freedom and prosperity. From this vantage point, the new mercantilist order, with emerging malign characteristics, is alarming – bad economics, politics and international relations; bad for individual freedoms and global prosperity. As a realist, however, I must take the world “as it is” rather than indulge in wishful thinking. To improve the world, principled liberalism must be combined with practical realism.

I believe the two biggest threats to global order are rising illiberal populism in the West, endangering the West’s adherence to its own liberal values, and the increasingly aggressive illiberalism of the Chinese party-state. Both have mercantilist features that spill over the border into protectionism and restricted globalisation. Both feed off each other in a global negative-sum game. Hence both must be resisted: naivety and complacency should apply to neither.

China under Xi Jinping, with its mix of authoritarianism, a state-directed market economy and external assertiveness, is becoming a classic mercantilist power, like Germany and Japan in the late nineteenth century and early twentieth century. Its external power projection, especially in the last decade, looks quite different to that of the US in the Pax Americana. Of course, at times, here and there, the US threw its weight about unilaterally and arbitrarily. But the essence of US leadership was to provide public goods for a stable, open and prosperous world order. It did so by organising concerts of international and regional cooperation. In international trade, that took the form of the GATT, later the WTO, and the multilateral rules it administers.

China, in contrast, prioritises a combination of unilateral and bilateral action to expand and entrench its power. That subsumes the expansion of the PLA Navy in the East China Sea, South China Sea and Indian Ocean; and tight, asymmetric bilateral relations with smaller, weaker states in a twenty-first-century recreation of the ancient tributary system. The Belt and Road Initiative should be seen in this frame: a network of hub-and-spoke bilateral relationships in which China wields power over-dependent states. This is classic mercantilism. It privileges discretionary power, exercised unilaterally and bilaterally, over plurilateral and multilateral rules that constrain such power.

China – meaning the Chinese Communist party-state – presents a pressing challenge to the liberal world order. Dealing with this challenge will require some trade, technological and investment restrictions, and limited supply-chain decoupling. But that could easily descend into an all-round mercantilist and deglobalisation spiral. Hence China must be engaged at the same time, not least to preserve existing links that are mutually beneficial. Engagement and strategic decoupling need not be mutually exclusive. Still, this will prove an incredibly difficult, perhaps elusive, balancing act.

Liberal or semi-liberal small states and middle powers in Asia, the West and elsewhere have a crucial role to combat malign mercantilism. In Asia, this group includes Japan, South Korea, Taiwan, Singapore, Australia and New Zealand. They need to keep their economies and societies open; demonstrate best policy and institutional practice (as they have done in this pandemic crisis); build coalitions of the willing on trade and other issues; strengthen alliances with the US and EU to nudge them to be more outward-looking and globally constructive, and finesse a mix of strategic decoupling and engagement on China. But doing all that in a global mercantilist environment will be an uphill struggle.

Prof. Razeen Sally is a visiting associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also the author of "Return to Sri Lanka: Travels in a Paradoxical Island."

Sri Lanka's Rajapaksa restoration is complete. What comes next?

Originally appeared on Nikkei Asia

By Prof. Razeen Sally

Government may have to rely on new Chinese loans to avert a macroeconomic crisis

Sri Lanka's parliamentary election on August 5 delivered a thumping victory for President Gotabaya Rajapaksa and his older brother Prime Minister Mahinda Rajapaksa's Sri Lanka Podujana Peramuna, or SLPP, party. Following Gotabaya Rajapaksa's decisive victory in the presidential election last November, what does the Rajapaksa family's unlimited rule portend for Sri Lanka and its external relations?

Illiberal democracy, a state-led economy, Sinhala-Buddhist supremacy -- Sinhala Buddhists are about 70% of the population, and a China-centric foreign policy were the hallmarks of Mahinda Rajapaksa's rule when he served as president until 2015. His surprise election defeat opened a window for liberal democracy, a more internationally open, private sector-led economy, reconciliation with ethno-religious minorities, and a more balanced foreign policy to reengage with the West and India.

But the coalition government that followed was a total disaster, crippled by no reform strategy, venomous internal warfare, corruption scandals and rank incompetence. The Rajapaksa restoration last November revived the core features of the previous Rajapaksa rule. But now Gotabaya Rajapaksa is in the driving seat, and Sri Lanka faces a COVID-19 plagued world.

With a handful of allies, the SLPP will have a two-thirds parliamentary majority, which will allow it to change the constitution at will. First will come the repeal of the Nineteenth Amendment, which limits presidential powers and strengthens parliament and the judiciary.

Optimists argue that Sri Lanka now has the political stability and decisive governance it lacked under the previous government. President Rajapaksa has centralized power in his small circle, crowded with retired senior military officers. Even more than his brother Mahinda, he favours Big Man rule, exercising untrammelled power, issuing orders and expecting them to be executed without dissent or delay. That has worked, so far, to limit the spread of COVID-19 in Sri Lanka. But will it work to tackle more complex and long-standing problems concerning the economy, interethnic relations, public administration and much else besides?

Countries become stable and prosperous by nurturing effective institutions and social trust over time, not with Big Man politics with its never-ending command-and-control, short-term, ad hoc fixes. That is something the Rajapaksas -- and all but a tiny minority of Sri Lankans -- don't seem to understand. Sri Lanka is now hurtling back to illiberal democracy. It may provide short-term political stability, but I doubt it will lead to better governance.

This Rajapaksa government, like the last one, espouses a collectivist economic ideology. Its first budget was full of tax cuts and expenditure entitlements, guaranteed to increase the fiscal deficit and public debt. The policy consists of diktats and constantly changing regulations on taxes, monetary expansion and import controls.

Sri Lanka was already in a debt trap when this government came to power. Total public debt is about 90% of gross domestic product, and total external debt, at over $50 billion, is about 60% of GDP. Then COVID-19 struck. The budget deficit may go up to 10% of GDP this year, and the economy may shrink by up to 5%. There is no fiscal space for tax cuts and extra public expenditure. The government desperately needs to negotiate debt moratoria, extra loans and possible debt restructuring with the International Monetary Fund and others. But, for now, it has no plan.

The Rajapaksas are unapologetic Sinhala-Buddhist nationalists. President Rajapaksa and the SLPP were elected with a huge majority of Sinhala votes but only a tiny percentage of ethnic-minority votes.

The Sinhala-Tamil cleavage is long-standing. The Easter Sunday blasts last year, perpetrated by Islamic radicals, opened a new cleavage between Sinhala Buddhists and Christians, on the one hand, and Muslims, on the other. The Rajapaksa Sinhala-Buddhist supremacist agenda is guaranteed to keep ethnic tensions on the boil. Muslims will be most at risk if that gets out of control.

President Rajapaksa has largely ignored the West, the IMF and other international organizations, but he is friendly with Narendra Modi, a fellow strongman and ethno-religious nationalist. China, however, remains "first friend." Money talks: Chinese state-backed investment is the only big game in town. There is a real possibility that Sri Lanka will rely on new Chinese loans to avert a macroeconomic crisis, especially if it does not come to a new agreement with the IMF.

Sri Lanka increasingly resembles a Chinese tributary state -- rather like a brief interlude in the fifteenth century, when Admiral Zheng He abducted a local king and took him to Beijing to pay obeisance to the emperor, after which an annual tribute was sent to China.

Sri Lanka is a bewitchingly beautiful country. Since ancient times, it has won the hearts of many a visitor. I would know since I grew up there -- I am half Sri Lankan, half British -- and have spent the past decade travelling all over the island to write a travel memoir.

But Sri Lanka is a little country with layer upon layer of complexity and paradox, and a dark side that has benighted its post-independence politics and institutions. As an adviser to the last government, I saw up close its shambolic disintegration. Understandably, Sri Lankans voted for the only realistic alternative: the Rajapaksas. The prospect of another decade of Rajapaksa hegemony does not fill me with optimism.

Prof. Razeen Sally is a visiting associate professor at the Lee Kuan Yew School of Public Policy at the National University of Singapore. He is also the author of "Return to Sri Lanka: Travels in a Paradoxical Island."