Import controls: Regression when we really need reform

Originally appeared on The Morning.

By Dhananath Fernando

I recall a visit I made to a small eatery back in 2015, just a few weeks after the interim budget speech by the new Yahapalanaya Government. The eatery prepared hoppers, egg hoppers, and short-eats – this was just after the then Finance Minister, in his Budget speech, had announced price controls on hoppers at Rs. 10, egg hoppers at Rs. 25, and, if my memory serves me right, plain tea at Rs. 5 and Rs. 10 for milk tea.

When I asked for an egg hopper, the shopkeeper (‘mudalali’) said: “Sir, we are not selling egg hoppers. If you want, you can buy an egg here for Rs. 17 and give it to the chef and he will put the egg on a normal hopper, which is priced at Rs. 10, and you will get your egg hopper.” I was totally confused and I asked the shopkeeper: “What do you mean? Can’t you give the egg from your counter straight away and give me the final bill?”

He replied: “Sir, because of the price controls we can’t sell egg hoppers at profitable prices. An egg costs about Rs. 17-18. Coconut is also expensive, as are rice flour, wheat flour, and cooking gas, so we can’t sell egg hoppers at Rs. 25. So we sell eggs and hoppers separately.” I then followed his instructions and got the egg hopper prepared.

Generally when buying hoppers, chilli sambol, known as ‘lunu miris,’ comes complementary. I was waiting for ‘lunu miris,’ which did not arrive. I asked the shopkeeper: “Where is my lunu miris?” He replied: “How can we give lunu miris free when we sell hoppers at Rs. 10? You have to buy lunu miris separately by paying an extra Rs. 10.”

Price controls never work

The recently-imposed price controls on eggs will not make any difference to the same set of outcomes I observed about seven years ago. Sadly, Sri Lanka’s policymakers have not learnt their lesson – that price controls have never worked and will never work. Following the implementation of price controls on tea, tea shops will stop serving sugar and ask people to buy their sugar separately. 

If you recall, in the recent past there was a Government-controlled price for chicken. Meat shops at one point stopped selling whole chicken and instead only sold chicken parts. Thereafter, we had many price controls on rice, dhal, tinned fish, sugar, cement, and even on USD. Anyone who has a reasonable memory will remember that none of these price controls worked. 

At one point, there were price controls on pharmaceutical products despite the currency depreciating by 80%. How can a company import the same drugs and keep the same price, with the cost rising by 80% due to poor monetary policy? The only option available for pharma companies was to stop procuring those formulas. 

The same happened with milk powder. The consumer became the ultimate loser by suffering shortages in the market. There is a sentiment that private businesses hoard similar goods, which are stocked at lower prices, and sell only when the prices are increased. There may be some truth in it. As we all are aware, the private sector is also a reflection of our Government sector and policymakers, and the private sector has been given those opportunities when competition is not allowed and financial instability is not managed. But ultimately the common person loses on both ends – both through shortages and higher prices. 

The price control on eggs is going to impact the less-fortunate the most, since eggs are their main source of protein. They don’t require refrigeration and they are more affordable compared to the other protein options. The price of 500 g of fish is now Rs. 1,500-1,800. Chicken and other protein sources are also very expensive. Even dried fish and sprats are more expensive than eggs when calculated on a per meal basis and when accounting for overall convenience, effort, LP gas consumption, etc. 

So when price controls discourage suppliers from supplying eggs at that rate in an environment where chicken feed prices have gone up and prices of medicine for poultry and transportation have increased, price controls simply become meaningless and send a completely wrong signal to markets, while we are in the spotlight for an IMF programme and debt restructuring. 

Import controls a mistake

The Government made a similar, crucial mistake by announcing import controls on 300 selected HS codes as a measure to save our valuable dollars. We need to first remember that we have already cut down quite a lot of imports and we are really scraping the bottom of the barrel by restricting our fuel and some essential medicines. We have completely banned imports such as vehicles for more than two years now. 

Sri Lanka’s imports have been declining since the 1990s; policymakers should ask themselves: if import controls brought us to our darkest hour, how are the same import controls expected to save us from the crisis? Some import bans are on intermediary goods, and, as economic theory has shown around the world, with import restrictions, exports will also decline and Sri Lanka will become a net loser. We have to discourage imports through the pricing of dollars so imports will automatically come down with higher prices.

Import controls will also confuse markets and dilute the credibility of the Central Bank Governor. As he mentioned, we have adequate forex for essentials in the coming months. So the question arises: if we have enough forex, what is the purpose of import controls?

Secondly, both import controls and price controls, in my view, will have an impact on IMF negotiations at home. The Article IV IMF staff report clearly notes that we have to phase out import controls. Announcing import controls at a time when they are visiting Sri Lanka sends a negative signal to the IMF and to our creditors that Sri Lanka is not open to reforms.

Trade is a two-way street

Already the European Union and Japan have on multiple occasions indicated the importance of trade. In fact, the European Union stated: “Trade is a two-way street.” In this context, we are creating more resistance from our neighbouring countries at the brink of a very important debt restructuring and IMF programme. 

Both recent policy actions indicate to the world that we are just following the same old methods and are not open to serious market reforms. We will also not comply with some guidelines of the World Trade Organization with this decision, isolating ourselves globally at a time we need support the most.

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.