brand logo

Throttling imports: Essential or counterproductive?

15 Sep 2021

  • The restrictions on ‘non-essential’ imports and their ultimate impact on Sri Lanka’s economy
By Sumudu Chamara The Government’s decision to impose new regulations on over 600 import items is still a major topic of discussion, as it curtails the importation of a large number of goods used by common folk. However, despite the reality of the negative impact of these regulations on the people of the country, the Government maintains that the country’s waning ability to continue to import goods as it had done before, is a bigger issue. This is not a new development. Following the beginning of the Covid-19 pandemic, the Government decided to impose restrictions on the importation of vehicles and tyres, and turmeric, among other things, and the negative impact of these restrictions, even though they helped the country as far as foreign reserves are concerned, has led to the decline of several local industries that had been engaged in the importation, distribution, and sale of these products. Although the many parties who lamented these new regulations were vocal about the fact that this list included undergarments, mobile phones, and televisions, according to economists, these new regulations could pose a much larger issue affecting the overall economy, as well as the export sector the country is trying to revive. New regulations When questioned about the true nature of the new restrictions, Trade Minister Dr. Bandula Gunawardana stressed that no ban has been imposed on imports and no special permit is required to import these goods. He further noted that there is no increase in the tax percentage applicable to these goods. According to him, the Opposition is exaggerating the measures taken by the Government. He explained: “This step taken by the Central Bank of Sri Lanka (CBSL) to stop the money outflow, has been dubbed by the Opposition as a mere import restriction due to their lack of knowledge about it. The Opposition keeps claiming that the importation of a number of goods including mobile phones and certain clothes has been restricted, even though what has happened in reality is the imposing of a 100% cash margin on letters of credit (LCs) for over 600 goods. “The CBSL is the institution that has the power to handle the country’s monetary system, debt system, and banking system. According to the Monetary Law Act of 1949, the CBSL uses various tools to control the debt system, and those tools are categorised as qualitative and quantitative. When we import goods from a certain country, a bank should issue LCs. Even though it was possible before for an importer to pay a portion of the entire amount such as 25% and have the goods imported, now, the importer has to obtain an LC by paying the entire amount.” Moreover, he claimed that this measure is intended to discourage the importation of non-essential goods, thus controlling foreign currency outflow. Dr. Gunawardana added that the Government’s intention is not to control imports in general. Dr. Gunawardana alleged that the prevailing foreign currency outflow is the result of three actions by the former United National Front-led Government; namely, importing even the simplest of goods in large quantities, obtaining unbearable loans amounting to $ 13 billion, and disrupting the tourism industry following the Easter Sunday terror attacks. He noted that in this context, Sri Lanka has to manage its foreign reserves very carefully in order to continue to obtain essential goods it does not produce, and ingredients for certain goods the country manufactures. However, economist and Samagi Jana Balawegaya (SJB) MP Dr. Harsha de Silva is of the opinion that import restrictions are not something that a Government must impose on its people under normal circumstances, and that having to do so means that the country is in absolute distress. He added that in the face of large debt repayments the country has to make, the Government has taken a decision to manage with the foreign reserves it has, prioritising debt repayments. Expressing displeasure about the economic policies of the present Government, Dr. de Silva noted that due to the actions of the present Government, the country would go back to the pre-1977 era, and that quantitative restrictions would come into effect, after which the people would be told how much of what can be consumed. In addition, he said that in a context where schoolchildren’s education has been disrupted, imposing import restrictions on mobile phones, which are being used for online education activities, would further negatively affect children’s education. Furthermore, he noted that all sorts of imports have been negatively affected, with some imports being completely banned, some being severely restricted, some being given quotas, and some seeing the imposition of high tariffs. He expressed concern that the reason why Sri Lanka cannot seek the support of international markets is because the country has been downgraded by international rating agencies. Necessity of import restrictions To discuss the present economic situation with a focus on the newly imposed import restrictions, The Morning spoke to several economic experts, who underscored that considering the state of the overall economy and foreign reserves, these import restrictions could help reduce the pandemic’s negative impact on the economy for the time being, even though it is not recommended as a long-term measure. Explaining the rationale behind the new import restrictions, Advocata Institute Chief Operating Officer Dhananath Fernando said: “The import restrictions announced recently by the Government have been put in place in order to keep with the objective of curtailing the outflow of foreign exchange, or reducing the demand for foreign exchange, because at the moment, the country is facing foreign currency issues, as we have not secured sufficient foreign currency to make the necessary payments the country has to pay in foreign currency.” He added that when an import restriction is imposed, depending on the importance of the imports that were restricted, it can affect the domestic economy and market. Meanwhile, Verité Research Director – Research Subhashini Abeysinghe stated there are several factors that need to be taken into consideration when discussing import restrictions – i.e. the importance of the imports (on which restrictions have been imposed) to the domestic market, the importance of these imports to the lives of the people, the availability of already imported stocks in the domestic market, and how long the people or the Government expect to keep these import restrictions in place. She noted that generally, measures of this nature, introduced to address foreign currency issues, are expected to be temporary, and that once the Government is able to employ other measures to build back the foreign reserves and secure sufficient foreign currency, these restrictions should be lifted. Abeysinghe explained: “If a certain product is a very important part of the domestic market, and if there are no sufficient stocks, the expectation is that there will be a shortage in the market when compared with the demand in the market, and there will be an increase in the prices. Imagine a situation where there are actually sufficient stocks of this product available in the market to meet three to four months of demand. “Then the important question is whether the consumers have this information, and how much the consumers trust this information, because if the consumers do not have reliable information on available stocks, and if they do not trust the available information, what happens is it creates a panic in the market, especially if the consumers consider this product to be important. This panic will increase the demand above normal levels, as the consumers expect that there will be a shortage in the future and that they will not be able to buy this product as a result. “Therefore, even if they could buy it, the price will be very high. At the same time, they will tend to buy this product (before a shortage), resulting in an increase in the demand and a shortage much faster than expected. This situation can also be impacted by the people’s perception of how soon the Government can relax these restrictions. If there is quite a lot of uncertainty around it, that can also create a panic even if the public were informed that there are sufficient stocks.” Impacts on economy, people The country is yet to see the impacts of the newly imposed import restrictions. However, economists predict that it will negatively affect a multitude of industries, in various ways. Speaking of the detrimental impact on the overall economy and the public, Fernando said that the current import restrictions will negatively affect the economy on multiple fronts, ranging from small industries to matters of national importance, such as debt servicing and even exports. He explained: “First, we have to understand the nature of the prevailing context. Sri Lanka is going through a balance of payment crisis, which means, we do not have enough US dollars for our imports, debt servicing, and also for various other needs. So there is a bigger foreign currency demand we cannot meet at present. In this context, the import controls are definitely going to have an impact on multiple fronts within the overall economy. There will be an impact on the producers’ side and on the business community, because some of these imports, on which restrictions are imposed directly, affect their business operations. “Some of these imports may also be inputs for export products, and therefore, exports and related trades will also be affected. The consumers will also have to bear the cost of these import restrictions. If we cannot import or if we have restrictions, or if we have to go through difficulties in the importation process, obviously, that will have an effect cost-wise, timeline-wise, or in terms of the delivery timeline, and also in terms of the ease of doing business concerning our exports.” Expressing similar sentiments, Dr. de Silva said that every tax on imports is a tax on exports. Further, he noted: “Every tax on imports, in a country like Sri Lanka, is a tax on exports, because many things such as intermediate products and equipment that are necessary to manufacture export items are imported. If we look at the apparel industry, without which we would have been sunk by now, it also imports a fair amount of capital goods including machines, equipment, and ingredients that are necessary to produce high-quality export items with global value and demand. Due to this measure, exports are going to be less competitive in markets.” According to Fernando, the impacts of import restrictions go beyond economic and monetary aspects, and can directly negatively affect the quality of goods in the domestic market too. He emphasised that import restrictions could cause a broader negative impact on the overall economy, because imported products ensure the competitiveness of locally manufactured products and services. He noted that the manufacture of goods becomes locally competitive and more so when global standards are involved and products have to compete with imported goods. Moreover, he added that when imports are reduced, competition too reduces. Noting that removing competition within the local market is an injustice the country is doing to itself, he stated: “If we look at our trade data and the Global Competitiveness Index, we can see that Sri Lanka has been ranked 84th in the world. We are not a very competitive nation when it comes to international trade. It is obvious that when we cut down on imports, it is definitely going to bring our exports down as well, because we need low-cost inputs in order to produce things productively and at a lower cost. We have to import some of those ingredients, but we can produce some locally. “However, even if we could produce some of those imports locally, we have to consider whether we can produce them at a globally competitive rate. According to global data, that is one reason our exports are declining as a percentage of the gross domestic product, and obviously, if our exports are declining, our imports also decline. That has been proven statistically. As far as trade openness is concerned, we are ranked at the 140th place out of 141 countries, and that shows as to why we are performing very poorly when it comes to trade competitiveness.” Fernando opined that even though the import restrictions could help the country curtail foreign currency outflow, it has to be understood that there is no country that has achieved great development just by imposing import restrictions, because cutting down imports also means cutting down competition. “Owing to these restrictions, they will basically go out of business, which would in turn affect the job market and lead to unemployment,” he added. Speaking of the impacts on consumers, he noted: “All prices are a result of demand and supply. So, when we restrict the supply, even if the demand remains constant, obviously, there will be a price increase. At the same time, it could lead to panic buying.” He elaborated: “There is hope that with these import restrictions, domestic industries will grow. Of course, there will be opportunities for domestic markets and industries. However, the consumers will have to pay a higher price when buying a product because they do not have an option to buy it at a lower price. The higher price margins will mean that consumers have to pay that additional amount. However, that can affect other industries too. For example, if I am paying an additional price for wall tiles or floor tiles when building a house, I will definitely have to cut that cost from other needs, such as curtains or furniture. In this context, this situation will affect local manufacturers. That is the nature of the impact on the overall economy.” In a context where every item is important to the people and local industries in some way, Fernando said that it is not fair to categorise goods as essential and non-essential when taking decisions, including those affecting imports. He explained: “The essentiality of a good depends on its usage. For example, rubber tyres are an essential item for private bus owners, because without tyres, they cannot run their business. Basically, the essentiality depends on the target groups (consumers).” Sustainability, solutions The advantages and disadvantages of import restrictions highlighted by economic experts raise a question as to whether import restrictions are the best available solution.  As a measure to deal with the situation, Dr. Gunawardana proposed that steps be taken to make the country’s health situation as safe as possible, in order to resume activities that help generate foreign currency. Moreover, he mentioned that attracting further foreign direct investments could help control the economic situation. In addition, he noted the importance of the Tax Amnesty Act, stating that it would help attract money generated by Sri Lankans including those living abroad. When queried on the need for better solutions to deal with the declining economy, the economists emphasised the need to pay more attention to adopting more long-term, sustainable solutions, as opposed to short-term restrictions. They stressed that under any circumstance, import restrictions are not a solution to the real economic issues Sri Lanka is dealing with, and that it is merely a mechanism that allows the Government to curtail foreign currency outflow for a short period. In this regard, Abeysinghe said that Sri Lanka needs to have a proper plan in place in order to ensure that the country builds back its foreign reserves, improves its ability to earn foreign currency, and enhances exports and investments in the long run, so that a similar situation is not faced in the future. “It is extremely important that we understand that without having robust complementary measures to address the prevailing situation, import restrictions alone are not going to be helpful at all. Therefore, no one should see it as a solution to the problem we are dealing with. Import restrictions are put in place to achieve a certain objective, and it just provides some breathing space while the problem is being resolved. The benefit of this breathing space is very much dependent on the actions the Government takes to resolve the situation beyond the import restrictions. So, these restrictions are imposed to address immediate issues such as making the most urgent payments for imports and repaying debts and interests.” Expressing similar concerns, Fernando also noted that since import restrictions are not sustainable solutions, the ideal way to look at the prevailing economic situation is to adopt long-term, sustainable economic reforms aimed at making Sri Lanka’s economy competitive by enhancing the ease of doing business. He added: “These are of course huge reforms, and we have to realise that the crisis we are facing is an unprecedented one. Therefore, the prevailing situation is not the fault of one government; it is a crisis that has been brewing for the last 70 years, as a result of not doing our economic reforms. For the last 70 years, we have not really done any economic reforms to restructure our economy and make our economy productive and competitive, and therefore we have had to pay the price. Now, we have to do serious economic reforms in order to stabilise our monetary system, and the lack of it is one of the main reasons we have a balance of payment crisis. In fact, a lot of analysts have warned about this before.” Among other reforms Fernando proposed, are using underutilised assets and paying more attention to the fact that the Government has approximately above 1.5 million staff on its payroll, for whom a considerable portion of the national Budget has to be allocated. “At the same time, we have to pay attention to our trade competitiveness, as we are not competitive at all. We have so many trade restrictions on exports and imports. Our neighbouring countries in the region are performing better, and as a result, investments are flowing out of Sri Lanka. So we have to do serious economic reforms. Sri Lanka has to address those bigger issues through economic reforms; otherwise, it would be very difficult to overcome this sort of unprecedented crisis. Import restrictions may be justifiable in this very difficult situation, but that will definitely not fix the broader issue.” It is true that a government has to make difficult decisions when dealing with a national-level crisis that has impacted almost all aspects of the people’s lives. However, every decision has its advantages and disadvantages, and this decision too has disadvantages which one cannot ignore, according to economic experts. Further, imposing import restrictions is a temporary solution and it is a measure taken to buy the country more time to deal with its declining foreign reserves and disrupted dollar-generating industries. Therefore, it is extremely important that the Government takes this into account and uses this borrowed time to make very real changes to strengthen the economic structure.

Kapruka

Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!

Discover Kapruka, the leading online shopping platform in Sri Lanka, where you can conveniently send Gifts and Flowers to your loved ones for any event. Explore a wide range of popular Shopping Categories on Kapruka, including Toys, Groceries, Electronics, Birthday Cakes, Fruits, Chocolates, Automobile, Mother and Baby Products, Clothing, and Fashion. Additionally, Kapruka offers unique online services like Money Remittance, Astrology, Medicine Delivery, and access to over 700 Top Brands. Also If you’re interested in selling with Kapruka, Partner Central by Kapruka is the best solution to start with. Moreover, through Kapruka Global Shop, you can also enjoy the convenience of purchasing products from renowned platforms like Amazon and eBay and have them delivered to Sri Lanka.Send love straight to their heart this Valentine's with our thoughtful gifts!


More News..