An Echelon Media Company
Monday November 29th, 2021

Sri Lanka cronies profiting from import controls, SMEs battered: Samarajiva

ECONOMYNEXT – Sri Lanka’s so-called cronies who benefit from customers trapped under state controls are raking even more profits from current import controls, while smaller firms are getting wiped out, a policy specialist and liberator of poorer consumers said.

Many domestic businesses also needed inputs.

“Import controls are creating a lot of opportunities for permit holders and cronies to make money,” Rohan Samarajiva, founder of LirneAsia, a regional policy advisory group told a forum organized by Advocata Institute, a Colombo-based think tank.

“And in those oligopolistic conditions they will raise the prices and they will add supra normal profits on top. Because they are now oligopolistic and they will control the market.

“I think we really should look at import restrictions in that way.”

“So the consumer and the industrialist will be paying more without question and because of that their demand will also go down, which is desirable from the point of view of the government.

“But instead of it being done efficiently, it will be done inefficiently where the permit guys – the permit raj – will benefit.

Samarajiva as Sri Lanka’s telecom regulator was responsible for de-regulation that made international calls cheap for Middle Eastern workers, and the outsourcing industry, the spread of fixed and mobile telephony into an everyday product from a super luxury status symbol.

He was also a key driver of South Asian aviation de-regulation which unleashed private budget carriers and de-regulating visas that made India the biggest source of tourists benefiting both small operators and high end hotels.


“Just to give an example the current controversial gazette which is requiring 100 percent deposit minimum deposit on invoices is basically knocking out small importers, who will not be able to afford the minimum deposit and all those harsh conditions and will leave us with a few importers who have deep pockets.

“What we are building is a kleptocracy which will then pollute and completely distort the political processes of this country from this time onwards. Not that they weren’t polluted enough, but this will aggravate it.”

Powerful business groups backed by nationalist academia in the style of German Historical Economics had for years been opposing free trade for the poor and allowing producers to extract excess profits in food and building materials in particular.

Samarajiva said small businesses and the informal sector was getting wiped out from the Coronavirus pandemic but a few large businesses were doing well.

With the currency peg giving way under liquidity injections, costs are rising for most businesses.

Sri Lanka’s import controls are coming from a highly unstable pegged exchange rate regime called the ‘flexible exchange rate’ where a central bank suddenly suspends convertibility after printing money, unleashing chaos.

Under the ‘flexible exchange rate’ massive liquidity injections have been unleashed from 2015 through term repo unwinding, overnight reverse repo injections, outright purchases of bonds monetizing past deficits, and also injections through dollar-rupee swaps.

The rupee is now floating around 230 to the US dollar for trade transactions but for government deals convertibility is provided at 203 to the US dollar.

The flexible exchange rate involves the most severe monetary anchor conflicts seen in the country perhpas and has driven the rupee from 151 to 230 so far.

The flexible exchange anchor conflicts involve pegging to build foreign reserves and printing money to target an inflation index or growth with artificially low interest rates completely out of step with domestic credit conditions.

Under the flexible exchange rate the monetary authority is given free rein to inject liquidity to target an inflation index until it become impossible maintain the reserve collecting peg and the convertibility suddenly suspended, leading to severe collapse in the credibility of the peg, leading to exporter hold backs and early covering of import bills.

Rate are then hiked under duress.

The contradictory flexible exchange rate has triggered three currency crises since 2015.

Analysts have called for the end of deadly ‘flexible exchange rate’ and return to rule-based consistent monetary policy of floating overnight rates or a free floating exchange with which inflation targeting is possible.

However the central bank has now run out of reserves and is on track to make large quasi fiscal losses on its reserve liabilities.

Protectionist Exploitation

Before free trade came to Britain and it became a major industrial power, Mercantilists used various means to influence politicians and get tax protections and also export controls for raw materials to fleece farmers like the export tax on non-packeted teas.

Classical economist and philosopher Adam Smith pointed out that since businessmen are generally good at making plans and implementing them, a Mercantilist (now called a crony capitalist) would be generally skilled at propagating their ideas and fleecing the public or the ‘country gentleman’.

Making large profits under cover of import duties, protected business, convince the public that the exploitation is in the public interest.

“Their superiority over the country gentleman is not so much in their knowledge of the public interest, as in their having a better knowledge of their own interest than he has of his,” Smith explained in Wealth of Nations, his treatise against Mercantilists or what is generally called crony capitalists in modern-day parlance.

“It is by this superior knowledge of their own interest that they have frequently imposed upon his generosity, and persuaded him to give up both his own interest and that of the public, from a very simple but honest conviction that their interest, and not his, was the interest of the public.”

Mercantilist businessmen would try to use the government to control the freedoms of poor consumers by limiting foreign competition, and force them to buy their products, which is clearly against the interests of the public.

“The interest of the dealers, however, in any particular branch of trade or manufactures, is always in some respects different from, and even opposite to, that of the public,” Smith pointed out.

“To widen the market and to narrow the competition, is always the interest of the dealers.

“To widen the market may frequently be agreeable enough to the interest of the public; but to narrow the competition must always be against it, and can serve only to enable the dealers, by raising their profits above what they naturally would be, to levy, for their own benefit, an absurd tax upon the rest of their fellow-citizens.

“The proposal of any new law or regulation of commerce which comes from this order ought always to be listened to with great precaution, and ought never to be adopted till after having been long and carefully examined, not only with the most scrupulous, but with the most suspicious attention.

“It comes from an order of men whose interest is never exactly the same with that of the public, who have generally an interest to deceive and even to oppress the public, and who accordingly have, upon many occasions, both deceived and oppressed it.” (Colombo/Sept19/2021)

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