By Madhusha Thavapalakumar
I was contemplating on whether to write this topic or not but an article I saw on Twitter last Sunday (30 May) titled “Sri Lanka’s economic plight a caution for Bangladesh”, although it has no direct connection to the article I am going to write, pushed me to proceed with the topic.
I have seen successive governments often making poor decisions in critical circumstances which may or may not be due to hidden psychological biases of leaders. Then they are overconfident in implementing such decisions, indicating their optimism bias. Sri Lankan governments more often than not have taken decisions on major and urgent issues that have done more harm than good.
One infamous policy decision taken by the Government that is in power was to introduce stringent import restrictions to protect the foreign reserves of the country against the backdrop of a complete standstill of tourism. One year and two months later, the Market Mine decided to review the effectiveness of this decision which faced and still faces wide criticism.
The tale of import controls
Sri Lanka with “big” plans for its international tourism and exports was moving into the month of March 2020 with $ 7.9 billion in its foreign exchange reserves while its close Asian ally, China, was combating the spread of Covid-19 that originated in its Hubei Province. In the meantime, the virus was steadily spreading into many western and Asian nations, yet up until mid-March, Sri Lankan airports were open for tourists. During this period, we all know that Sri Lanka was treating a Covid-19-affected Chinese individual upon whose recovery the local Minister of Health gave a bouquet of flowers, hugged, kissed her on the forehead, and sent her home. The good old times.
Then, we detected the first Covid-19-affected Sri Lankan national on 10 March last year. Two days later, three more cases were detected. People started panic buying, inbound flights were banned, and the Government imposed a seven-week lockdown. Swiftly, the Government also halted the importation of motor vehicles, air conditioners, perfumes, televisions, washing machines, mobile phones, and footwear; to make it simple, they halted imports which they thought were “non-essentials”. End-March foreign reserves fell to $ 7.2 billion amidst disruptions to exports, drop in worker remittances, and little to no tourism performance.
In April, following the Sinhala and Tamil New Year, the Government decided to print more money, shooting up the overnight excess liquidity in the banking system by several billions of rupees, and authorities decided to ban imports of more items till July 2020.
This time around the ban included rice, ornamental fish, alcohol, vinegar, grains, maize, pasta, vegetable oil, black gram, screws, nuts, and bolts, communion wafers, cement paint, batteries, small motors, marble, ceramic tiles, sanitary ware, and essential oils. By the end of April, the reserves had fallen to $ 7.1 billion. In the meantime, showing negative impacts of the islandwide lockdown, the decline in export earnings surpassed the decline in import expenditure, widening the trade deficit to $ 840 million. Total import expenditure fell to $ 1.1 billion from $ 1.5 billion, the same month of the previous year. Even though Year-over-Year (YoY) expenditure showed a decline, during April 2020, vegetables, seafood, spices, personal vehicles, coal, fertiliser, agricultural inputs, and mineral products showed a YoY growth.
And then came May; mid-month the country was reopened to operate as normal, yet with safety precautions. In May, total import expenditure dropped to $ 998.3 million while non-fuel import expenditure was $ 930.9 million. During this month, dairy products, vegetables, spices, and a couple of other items including fertiliser imports showed a growth compared to the same month of the previous year. In a shocking substitution drive, import controls were extended again in May by a further three months like the Sirimavo Bandaranaike Government did in the 1970s, crippling the economic activities of the country. At this point, foreign reserves were $ 6.4 billion.
In June 2020, import expenditure was $ 1 billion while the reserves had $ 6.6 billion, an increase of $ 0.2 billion from a month ago. With import controls still largely prevailing at the time, July, August, September, and October import expenditures registered as $ 1.2 billion, $ 1.2 billion, $ 1.5 billion, and $ 1.3 billion, respectively. By the end of October, foreign reserves were recorded as $ 5.8 billion.
In November, December (2020), January, February, and March (2021), import expenditures were, respectively, $ 1.3 billion, $ 1.5 billion, $ 1.5 billion, $ 1.5 billion, and a staggering $ 1.9 billion, the highest since March 2018. At the end of March, foreign reserves dropped to $ 4.1 billion regardless of import controls still largely being in place, exports returning to pre-pandemic levels, and worker remittances reporting a healthy inflow. This reserve position was after obtaining much assistance from various lenders. At this point, every type of import has gone up excluding seafood, personal vehicles, crude oil, wheat and maize, mineral products, and investment goods. In fact, imports of machinery and equipment, fertiliser, paper and paperboards, diamonds, precious stones and metals, refined petroleum, non-food consumables, telecommunication devices, home appliances, and food and beverages had shot up by over 100% YoY.
More harm than good?
The import controls were alleged to be non-systematic as economists pointed out that they were, during several occasions, manipulated or adjusted to permit certain products. At certain points, even the authorities were not certain on what they were doing. For example on 1 April 2020, the Government banned all imports apart from pharmaceuticals, fuel, and raw materials required for export purposes. On 19 April the same year, import restrictions were extended until 15 July and further expanded to restrict sugar, liquor, and apparel-related products.
Following requests made by heads of leading apparel businesses, the Ministry of Finance issued an extraordinary gazette notification under the Imports and Exports (Control) Act No. 1 of 1969 on 15 September 2020, permitting ready-made apparel products to be imported considering the upcoming festive season (Christmas 2020). The circular permitted selected ready-made garments to be imported under a 90-day loan facility. After several small players argued regarding this circular, Minister of Trade Bandula Gunawardana stated that he is going to restrict these imports, but following this, there had been no clear direction on this matter.
A similar incident happened with tile and sanitary ware imports. On 2 February this year, Prime Minister Mahinda Rajapaksa, in his capacity as the Minister of Finance issuing a gazette notification, “deleted” the ceramic items from “Schedule I” of the Imports and Exports (Control) Regulation No. 4 of 2020 published in the Gazette Extraordinary No. 21841/21 dated 16 July 2020 and included them in “Schedule II” of the said Gazette. Schedule II stipulated that items can be imported only on a minimum 180-day credit facility provided by the foreign supplier from the date of Bill of Lading or Airway Bill of said goods.
However, within a few hours after relaxing stringent import restrictions imposed on ceramic imports last year, an instruction was issued by the Department of Imports and Exports Control for Sri Lanka Customs and commercial banks to suspend the implementation of the said Extraordinary Gazette until further notice. It should be noted here that immediately following the Premier’s Gazette, share prices of ceramic companies dropped considerably but picked up when the Department of Imports and Exports Control cancelled it.
The greatest scam in the import control era was the sugar scam. Authorities permitted sugar imports and also reduced the tax imposed on them from Rs. 50 per kilo to a mere 25 cents which reportedly resulted in the Government losing about Rs. 15 billion of tax revenue.
Meanwhile, vehicle importers of the country were and still are heavily disappointed with the Government as the motor vehicle ban was reportedly implemented without providing an alternative option for them to make a living and making matters even worse, they were exempted from the set of reliefs, the Central Bank of Sri Lanka announced amidst pandemic. As of today, the motor vehicle import ban is still in place and the authorities who promised them to provide an annual quota to import vehicles are constantly avoiding the importers, postponing the meeting to discuss this matter further and further.
Amidst the non-importation of motor vehicles, several people have begun assembling vehicles using used or second-hand parts, causing greater harm to the environment, health, and even the Government’s tax revenue. Such assembling is also a possible violation of intellectual property. The ban on vehicle importation has put a massive dent on the Government’s tax revenue that is fighting to control the new wave of the virus which seems to be far deadlier than the previous two waves. In addition to this, the ban on several spices and agricultural products has led to people smuggling them in larger quantities.
Low reserves, decent exports, and back to normal import expenditure
While the import controls that are still in place may have protected the reserves during the peak of the initial wave, continuing these controls has not done any significant good, as per the statistics issued by the Central Bank of Sri Lanka. When import expenditure in March 2021 reached a three-year high regardless of import controls, particularly on motor vehicles, the public started suggesting that the authorities may as well remove them altogether. Even before reaching the three-year high in March this year, import expenditures for the previous months were akin to the expenditure figures recorded before the local outbreak of the pandemic.
[caption id="attachment_140780" align="alignright" width="399"]
Minister of Trade Bandula Gunawardana[/caption]
However, speaking to The Morning Business early last week, Minister of Trade Bandula Gunawardana stated that the import controls that are in place at the moment will be maintained and he provided reduced export earnings and effectively no tourism as reasons.
Import controls have been viewed as a negative impact to the Sri Lankan economy by many think tanks, economists, and foreign organisations. Institute of Policy Studies Research Economist Asanka Wijesinghe in a recent article stated that historically, the Government resorted to import controls when there was a balance of payment crisis. The current import controls have the same underlying rationale. He added that however, the trade deficit’s temporary shrinkage may not be sustainable if there is no increase in exports and if the exports are to be increased, Sri Lanka needs to remove hurdles on input supply, remove distortionary tariffs, and exploit market opportunities under the rule-based free trade system.
On the other hand, import controls have created a conflict between the European Union and Sri Lanka. Responding to a query made by The Sunday Morning Business recently, EU Delegation to Sri Lanka and the Maldives Political, Trade, and Communications Section Head and Mission Deputy Head Thorsten Bargfrede stated that the import ban certainly does not provide a suitable climate where the EU could grant any additional unilateral concessions, such as regional accumulation under the Generalised System of Preferences-Plus (GSP+). Such restrictions, combined with various currency restrictions, and high volatility of changing regulations, are also a disincentive for foreign direct investment (FDI), Bargfrede added.
He stated that the EU has raised the issue during the World Trade Organisation (WTO) Market Access Committee meeting in January 2021 and the WTO Balance of Payment Committee meeting in 2020. In early January this year, at an annual joint commission meeting conducted virtually, the EU asked Sri Lankan authorities to notify the WTO of its stringent import restrictions that have been implemented since last year, as open and fair trade requires a level playing field.
“We will continue using the procedures foreseen in the WTO that apply for potential breaches of WTO commitments. The EU has also just updated its overall ‘Trade Enforcement Regulation’. This would allow the EU to apply possible trade policy countermeasures, if the WTO dispute settlement procedures are blocked. A senior official has been appointed as Chief Trade Enforcement Officer, and the Sri Lankan import restrictions are on his priority list for 2021,” Bargfrede added.
The Deputy Head of Mission further noted that Sri Lanka has to comply with the main WTO obligations when invoking balance of payments restrictions and added that Sri Lanka’s authorities should consider the following: a) there is an obligation to notify the General Council about these import restrictions and to enter into consultations with other WTO members; b) the measures should be temporary in nature, as the Sri Lankan regulations are being applied without an expiration date; c) there is an obligation to present timetables for the progressive relaxation until final elimination of the measures; and d) import restrictions should be managed in a transparent manner.
According to Bargfrede, Sri Lanka should avoid any unnecessary damage to the commercial and economic interests of any other WTO party, including the EU, and to do that, it should pay due regard, in carrying out its domestic policies, to the need for maintaining or restoring equilibrium in its balance of payments on a sound and lasting basis, by adopting measures which increase instead of decrease international trade.
Given the negative impacts caused by the prevailing import restrictions to the economy and many small and medium enterprises, failure to maintain low expenditure on imports regardless of import controls – which is the whole purpose import controls were introduced, and the dire need to diversify and increase exports without bittering the relationship with the EU, maybe it is high time Sri Lanka reconsiders its policy decisions related to trade after a nice chat with real economists who have expertise in the trade sector. Leaving aside the psychological biases and optimum biases of leaders, Sri Lanka is in a critical position to take sensible decisions without further being an example of caution to regional allies.
Minister of Trade Bandula Gunawardana[/caption]
However, speaking to The Morning Business early last week, Minister of Trade Bandula Gunawardana stated that the import controls that are in place at the moment will be maintained and he provided reduced export earnings and effectively no tourism as reasons.
Import controls have been viewed as a negative impact to the Sri Lankan economy by many think tanks, economists, and foreign organisations. Institute of Policy Studies Research Economist Asanka Wijesinghe in a recent article stated that historically, the Government resorted to import controls when there was a balance of payment crisis. The current import controls have the same underlying rationale. He added that however, the trade deficit’s temporary shrinkage may not be sustainable if there is no increase in exports and if the exports are to be increased, Sri Lanka needs to remove hurdles on input supply, remove distortionary tariffs, and exploit market opportunities under the rule-based free trade system.
On the other hand, import controls have created a conflict between the European Union and Sri Lanka. Responding to a query made by The Sunday Morning Business recently, EU Delegation to Sri Lanka and the Maldives Political, Trade, and Communications Section Head and Mission Deputy Head Thorsten Bargfrede stated that the import ban certainly does not provide a suitable climate where the EU could grant any additional unilateral concessions, such as regional accumulation under the Generalised System of Preferences-Plus (GSP+). Such restrictions, combined with various currency restrictions, and high volatility of changing regulations, are also a disincentive for foreign direct investment (FDI), Bargfrede added.
He stated that the EU has raised the issue during the World Trade Organisation (WTO) Market Access Committee meeting in January 2021 and the WTO Balance of Payment Committee meeting in 2020. In early January this year, at an annual joint commission meeting conducted virtually, the EU asked Sri Lankan authorities to notify the WTO of its stringent import restrictions that have been implemented since last year, as open and fair trade requires a level playing field.
“We will continue using the procedures foreseen in the WTO that apply for potential breaches of WTO commitments. The EU has also just updated its overall ‘Trade Enforcement Regulation’. This would allow the EU to apply possible trade policy countermeasures, if the WTO dispute settlement procedures are blocked. A senior official has been appointed as Chief Trade Enforcement Officer, and the Sri Lankan import restrictions are on his priority list for 2021,” Bargfrede added.
The Deputy Head of Mission further noted that Sri Lanka has to comply with the main WTO obligations when invoking balance of payments restrictions and added that Sri Lanka’s authorities should consider the following: a) there is an obligation to notify the General Council about these import restrictions and to enter into consultations with other WTO members; b) the measures should be temporary in nature, as the Sri Lankan regulations are being applied without an expiration date; c) there is an obligation to present timetables for the progressive relaxation until final elimination of the measures; and d) import restrictions should be managed in a transparent manner.
According to Bargfrede, Sri Lanka should avoid any unnecessary damage to the commercial and economic interests of any other WTO party, including the EU, and to do that, it should pay due regard, in carrying out its domestic policies, to the need for maintaining or restoring equilibrium in its balance of payments on a sound and lasting basis, by adopting measures which increase instead of decrease international trade.
Given the negative impacts caused by the prevailing import restrictions to the economy and many small and medium enterprises, failure to maintain low expenditure on imports regardless of import controls – which is the whole purpose import controls were introduced, and the dire need to diversify and increase exports without bittering the relationship with the EU, maybe it is high time Sri Lanka reconsiders its policy decisions related to trade after a nice chat with real economists who have expertise in the trade sector. Leaving aside the psychological biases and optimum biases of leaders, Sri Lanka is in a critical position to take sensible decisions without further being an example of caution to regional allies.