Top economists: Sri Lankan import restrictions at odds with WTO rules, hurts welfare of Sri Lankans

Originally appeared in the Daily FT, Ceylon Today, Ada derana Business

The Advocata Institute DeepDive Series on “ The Role of Trade in Sri Lanka’s Economic Recovery”

COLOMBO, Sri Lanka— A panel of eminent economists urged that the Government take credible and decisive action to carry out immediate trade reforms. Advocata’s Academic Chair Dr. Sarath Rajapatirana, emphasised that “Countries that have grown very fast, especially in east asia have understood the importance of trade reform”. Further adding that the first step of such a reform agenda should be to simplify the taxes at the border by removing the so-called ‘para tariffs’ that Sri lanka levies beyond the regular import duties and to introduce a single uniform tariff for all imports. 

Sri Lanka’s trade as a % of GDP has been low when compared to neighbouring countries like Thailand and Vietnam, indicating that we have not truly exploited our opportunity to trade. Research shows, Sri Lanka, has high tariff rates compared to other developing countries, and while tariffs play a role in protecting domestic infant industries, if tariffs are too high, they can become anticompetitive. Recent import restrictions, such as banning a  wide range of consumer goods since the beginning of April 2020,  have further worsened Sri Lanka’s growth potential and put Sri Lanka at odds with WTO rules. 

Dr. Dayaratna Silva ( International Trade Economist, Former Sri Lankan Ambassador to the World Trade Organization)  elaborated on the severe consequences for Sri Lanka’s economy if such import restrictions continue. He explained that there is a possibility of tariff retaliation. “Prolonged import controls are not consistent with the WTO, and its high time such is readdressed”, he went on to say. 

Such forms of retaliation could have a significant negative effect on our imports, thereby worsening our existing foreign exchange and balance of payment crisis. Another key long term concern for the economy. “My worry is the long term industrial development of the country because of these restrictions. Resources are inefficiently being allocated as a result”, further commented Dr. Dayartna De Silva. 

His Excellency  Denis Chaibi ( Ambassador, Delegation of the European Union to Sri Lanka and the Maldives) commented on the importance of adhering to global rules on trade. He commented that “the European Union tries to have a rule based order. When a country does not follow those rules, the rule based structure is affected. Without trade, for a small country like Sri Lanka, the prospect is not good”.  His comments brought into perspective the wider ramifications of import restrictions on Sri Lanka’s multilateral relations.  

 Professor Prema- Chandra Athukorala (Emeritus Professor of Economics, Arndt-Corden Department of Economics, ANU), who is an authority on global production networks, explained that “No country in the world now produces goods from the beginning to end within their geographic boundaries. Countries specialise in different components within the production value chain. Made in the country X label has become invalid, a  Country has to identify comparative advantage within the production network. “. Thereby elaborating on how Sri Lanka cannot achieve economic growth without joining global production networks through trade. He concluded by commenting on recent developments of import controls by saying that “selective intervention, without disturbing the incentive structure of the country as a policy, is going to be a recipe for disaster”.

These views were expressed at the event “Deep Dive”, organised by the Advocata Institute that aims to bring focus on Sri Lanka’s biggest policy challenges. The event was moderated by  Aneetha Warusavitarana, Research Manager, Advocata Institute.  As a precursor to the event,  Advocata released a primer on debt sustainability with the aim of helping Sri Lankans understand the topic.  The recording of the discussion can be found at Advocata Institute’s YouTube Channel https://www.youtube.com/watch?v=8M981XmlbAs / to get a comprehensive understanding of Trade and how it affects Sri Lanka’s economy and the livelihoods of all Sri Lankans. The event was organised in partnership with the European Union. 

Excessive Price Controls will worsen Shortages

Originally appeared in the Daily FT , Daily Mirror, Ceylon Today, Sunday Times and Ada Derana Business

New measures treating the symptoms rather than the disease.

COLOMBO, Sri Lanka— Harsh enforcement of price controls may worsen food shortages.

The Commissioner of Essential Services has been granted the power to seize food stocks held by traders and retailers and regulate prices.

There is serious concern with the steep rise in the price of essentials which has taken place over the past two years. Advocata’s Bath Curry Indicator (BCI), which tracks commonly consumed items,  shows a 30% increase in retail food prices in August 2021 compared to August 2020.   

The reasons for the increase in prices include import restrictions and tariffs that have disrupted markets. The classic example is turmeric that retailed at Rs.650 per kg prior to the import ban but now retails at Rs 3500 per kg according to the DCS and at around Rs 4400 to  Rs6900 on online retailers . Other products are similarly affected. 

The recent ban on fertiliser is likely to result in even further increases in the prices of vegetables and cereals over the forthcoming harvests.

These restrictive policies have been compounded by the acute shortage of foreign currency caused by the on-going balance of payments (BOP) crisis. Lack of foreign exchange has imposed additional restrictions on imports resulting in shortages causing prices to spike.

While the increases in prices is a real concern, the causes are complex and are largely due to poor policies. 

The balance of payments crisis arises not due to trade policy but due to the levels of aggregate demand in the economy,  principally through consumption and investment influenced by the prevailing fiscal and monetary policy. The tax cuts towards the end of 2019, fiscal dominance of monetary policy and non-pass through of global commodity prices through price controls and administered prices have contributed towards excess import demand.

This is evident in the trade data: despite the stringent import restrictions imposed after April 2020, import demand for the six months to June 2021 have surged by 30% over the same period in 2020. While exports in the period have also risen, it is the rapid rise in imports that have caused the negative trade balance.

Price controls and administered prices have led to shortages and hoarding.

Instead of addressing the problem at the root, the government is trying to control the symptoms. Previous attempts at price controls have not succeeded as  Advocata’s research in 2018 has shown but better enforcement is not the solution. Instead, the Government should address the policy weaknesses that are the cause of the problem.

Trying to negate policy missteps in fiscal and monetary policy through trade policy in an untenable exercise for it impacts economic efficiency hence growth and productivity and also leads to issues with economic distribution.

Harsh enforcement of price controls could in turn create black markets resulting in significant welfare losses in the form of  a deterioration in product quality, elevate scarcities, disadvantaging the poor who are less sophisticated and in the long run lead to higher prices, lower output due to lower investment.

We urge policy makers to urgently address the root cause of the current crisis by increasing tax revenues via more progressive tax policies - by increasing the tax base for both direct and indirect taxes and reducing the tax gap through greater tax effort. Further, it is best where possible to use well targeted cash transfers to vulnerable segments of the population to improve affordability instead of cutting taxing, imposing price control or using administered prices on utilities.

Key Points 

• Advocata Institute highlights the negative  effects of harsh price controls. 

•  The root causes of the present crisis lies in loose monetary and fiscal policies compounded by import controls and exchange control restrictions. Therefore restoring macroeconomic stability is a priority.

• Cash transfers to vulnerable segments is a better mechanism to implement distributive policies rather than intervening in market prices through tax subsidies, price controls or administered prices.

Extension of import controls further batters Sri Lankan economy

NEWS RELEASE

Originally appeared in the Daily News, Daily Mirror, Daily FT, Ada Derana and Ceylon Today

COLOMBO, Sri Lanka— According to the Extraordinary Gazette No 2182/10 of June 2020, import controls imposed by the earlier gazette Number 2176/19 of 22 May 2020 have been extended for another six months commencing from the 2nd of July 2020. The Sri Lankan economy, battered by the impact of the curfew and global recessionary patterns is in dire need of liquidity and access to credit. Downward pressure on the currency worsened the LKR’s position in the foreign exchange market which in turn led to a significant foreign exchange shortage during the COVID 19 Lockdown.  

To protect the currency, the Ministry of Finance (MOF) announced import restrictions on consumption. Therefore by use of the above extraordinary gazettes, the import of vehicles, refrigerators, luxury goods, certain raw materials and fruits and vegetables have been further restricted. Considering the nature of the emergency, it would be acceptable to limit the import of luxury goods and vehicles temporarily however import controls on consumer goods would be harmful and inflationary.  

 The Advocata Institute argues that such import restrictions will further hamper Sri Lanka’s growth prospects and will disadvantage businesses that rely on imported raw materials. As reported by the Central Bank, imported consumer goods only amount to 19.8% of total imports, while 57% of imports are intermediate goods for production. Therefore local manufacturers are already starting to experience the adverse effects of the import controls. One such key industry is the confectionery industry which is experiencing a  340% special commodity levy on block fat and margarine. The industry is already impacted by increased taxes on palm oil and sugar and is expected to experience an additional cost of Rs. 500 million to Rs. 600 million per month with import tax increases. The confectionery industry, directly and indirectly, employs over 600,000 people while exporting to over 55 counties bringing in $100 million in export revenue. 

Key Points 

• Advocata urges the government to eliminate import controls on consumer goods and raw materials, as import restriction would distort production and raise the price of goods.

• Importance of respecting consumer choice, while allowing imports of essential products which will allow for domestic production chains to sustain themselves.

• Maintenance of competitive and stable exchange rates to boost and support local producers as an essential tool to help the post lockdown recovery.

The Advocata Institute looks forward to venturing into exciting research in economic policy in the upcoming year. For more information on The Advocata Institute, visit https://www.advocata.org.

Advocata is an independent policy think tank based in Colombo, Sri Lanka. We conduct research, provide commentary and hold events to promote sound policy ideas compatible with a free society in Sri Lanka. Visit advocata.org for more information.

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CONTACT:

Yasodara Kariyawasam,

Communications Manager, Advocata Institute

Email: yasodhara@advocata.org