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The ‘restrictive’ reality of import controls

The ‘restrictive’ reality of import controls

13 Jul 2023 | BY Sumudu Chamara

  • IPS study queries the effectiveness of the continued imposition of stringent regulations, especially those on food  

Import restrictions or ‘bans’, as the general society called them, were a major topic of discussion during the peak of the economic crisis last year (2022). However, they are no longer viewed by the general society as a major concern as the Government has started gradually relaxing a number of such controls, although some sectors remain crippled due to prolonged import restrictions. While providing some level of breathing space for Sri Lanka’s struggling, foreign reserve crisis-hit economy, import controls dealt a heavy blow to several areas of the economy.

According to the local think tank, the Institute of Policy Studies of Sri Lanka (IPS), the strict import controls that Sri Lanka resorted to since early 2020, which were expected to reduce foreign exchange leakages on ‘non-essential’ imports, had gradually encompassed 31% of the total imports by September, 2022.It noted that the effectiveness and implications of these stringent regulations have raised questions, and that the Government should pay attention to removing import controls on consumer goods, including food. In addition, the policy goal behind these import controls remains unclear. This was mentioned with reference to the key findings of a recent study titled “Import Controls in Sri Lanka: Political Preference and Incentive Distortions” which was published by the IPS. 

The study 

Authored by IPS researchers Dr. Asanka Wijesinghe, Chathurrdhika Yogarajah, and Nilupulee Rathnayake, the study report offered an in-depth analysis of Sri Lanka’s import control policies during the economic crisis and shed light on the intentions behind them. Through a quantitative analysis, the study explored the distortions in the incentive structure that promote import substitution. It considered factors such as the impact of products on foreign reserve positions, their importance to domestic production, domestic substitutability, and interest group pressure. The IPS said that the study highlights the potential ramifications for the country's nutritional security as the continuous imposition of import controls on food products may have severe consequences.

At its launch in Colombo this week, a discussion was also held with a focus on addressing concerns regarding the country’s implementation of stringent import control measures during the economic crisis. The discussion held at the report launch was participated in by various stakeholders including representatives from the academia, think tanks, Government Ministries, institutions, and organisations. The speakers underscored the importance of considering broader economic impacts, such as on the foreign reserves, the export sector, and the food security context in Sri Lanka. In addition, the participants of the discussion paid attention to the implications of import controls and emphasised on the need for clear policy goals.

Study findings

The study identified eight waves of import controls implemented in Sri Lanka between the period spanning from April, 2020, to September, 2022, and they involved measures such as temporary suspensions, bans, import control licenses, and credit based requirements. Explaining this during his presentation of the study findings, researcher Dr. Wijesinghe highlighted that these controls significantly impacted various import categories, including consumption goods (46%), intermediate goods (31%), and capital goods (24%), and that notably, only 9.8% of the imported food items were exempted from the import controls.

While the Sri Lankan Government aimed to reduce foreign exchange leakages on “non-essential” imports through these measures, the study revealed that a considerable portion of imports consisted of essential goods such as raw materials, food, and medicine. This, according to the IPS, raises questions about whether import substitution was a motivating factor behind these policies. The study had further found that the structure of import controls may have inadvertently incentivised import substitution. While some export oriented industries had experienced minimal trade restrictions, the manufacturing of food and beverages faced significant import barriers. This emphasis on promoting domestic agricultural production has implications for the availability of certain food products in the market, as per the study findings. 

The findings revealed that by the end of 2022, import controls were primarily imposed on food imports, consumer items, and electronics, and that this structure of import controls creates an environment conducive to import substitution, reversing the gains from structural transformation. In addition, the IPS stated that the policy goal behind these import controls remains unclear, with conflicting statements suggesting a potential shift towards protectionism and import substitution.

The way forward

Based on its findings, the study put forward several measures that need to be taken in order to alleviate the impacts of import controls on the economy and the people in the current context. In analysing the impact of these restrictions, the study highlighted the need for a strategic approach to trade policy that considers long term growth prospects, export sector development, and the well-being of the population.

The study recommends a gradual phase out of import controls, starting with intermediate and essential nutritious food items, and emphasises the importance of removing import controls on consumer goods, including food, to encourage resource allocation towards export oriented industries and to alleviate domestic price inflation. The removal of import controls on consumer goods will also mitigate the burden on low income urban and suburban households, safeguarding their nutritional security, the study noted. In addition, it underscores the need for the Government of Sri Lanka to prioritise the removal of import restrictions on consumer goods and to focus on expanding the growth of the export sector. By doing so, it was explained, the country can address the balance of payment crisis, foster innovation, and enable participation in global value chains. 

Moreover, taking into account the study findings, Dr. Wijesinghe stressed the importance of recent deletions from the import control list, indicating the policymakers’ intention to phase out import controls on consumer goods. He noted that this positive step should be further expanded, with a particular focus on food and feed related items. Balancing the protection of domestic industries and ensuring the availability of essential goods will be critical during the crucial phase of phasing out import controls.

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