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Monday April 22nd, 2024

Sri Lanka free trade agreements generate three times more exports than imports

ECONOMYNEXT – Several free trade deals with Asia and Pacific has generated sharply more exports than imports in the first six months of 2020, with the Indo – Lanka Free Trade Agreement bringing most of the results, official data shows.

In the six months to June 2020 Sri Lanka had exported 93.7 billion rupees under several trade agreements and imported 26.64 billion rupees of goods or three and a half times the imports.

One Way Street?

Sri Lanka had exported 52.3 billion rupees of goods or 239 percent of imports of 21.8 billion rupees to India via 4,883 goods under concessions, data from the finance ministry showed.

Sri Lanka has a trade deficit with India, with most of the imports coming from heavily taxed items such as cars, which are not included in the Indo – Lanka Free Trade deal.

But the trade deficit has been used by Mercantilists to discredit free trade deals.

Current Account and trade account deficits are an outcome of a savings-investment gap where the government borrows abroad to finance deficits or foreign direct investment comes in or expatriate savings in the form of remittances come in to create import demand when spent within the economy.

Sri Lanka had exported 7.46 billion rupees of goods to Pakistan under a free trade deal, or more than five times the imports of 1.33 billion rupees.

A South Asia Free Trade Agreement (SAFTA) had generated 2.72 billion rupees of exports or 381 percent of the imports of 715 million rupees.

An Asia – Pacific Trade Agreement (APTA) had generated over 10 times the imports with 28.5 billion rupees of exports and 715 million rupees of imports.

It is not clear what role import controls, imposed in April 2020, played in the trade.

But exports to India had grown rapidly under the free trade agreement with the country becoming the third largest export destination after the UK.

In the first eight months of 2020, India had bought 396 million dollars of Sri Lankan goods, (about 73 billion rupees), behind UK’s 552 million dollars.

In 2019, India had bought 768 million US dollars of goods, behind UK’s 998 million dollars and US’s 3.14 billion dollars.

Items under Indo Lanka concessions had generated more exports than imports consistently, though Mercantilists (crony-capitalists) who want to force-sell overpriced goods to consumers cornered by import duties had opposed it and funded a campaign against free trade.

A budget for 2021 had revised duties of a number of items, which may benefit the country, though over 2,500 items remain under very high protectionist duties.

Related

Sri Lanka publishes trade taxes for import substitution economy, new duty list

The Indo-Lanka Fee Trade Agreement was the brainchild of Saman Kelegama, one of the top economists produced by South Asia.

He was attacked by Mercantilists, despite Sri Lanka having a large negative list (items which are not given tariff concessions) than India. While India had 429 tariff lines under a negative list Sri Lanka had 1,180 items under a negative list.

The Institute of Policy Studies, a think tank he used to head had shown that the Indo Lanka Free Trade Deal had consistently brought in more exports than imports.

However trade deficits, deficits of with individual countries current account deficits are also neither neither good nor bad, but is a consequence of having a savings – investment gap.

Remittances (foreign savings of expatriate workers) and tourism recoipts, triggers a trade deficit as the recipients spend the money, while government foreign borrowings for deficit financing and foreign direct investment will trigger a current account deficit.

Imports are vital to keep economies ticking, generate revenue for public services (exports are postponed consumption) keep monopolies in check, get people out of poverty by lowering the cost of goods and services, and make economies competitive and efficient.

Related Stories

Sri Lanka imports from India mostly outside free trade deal, 70-pct of exports from FTA

Related Link

India-Sri Lanka Free Trade Agreement: Sri Lanka Reaping the Benefits from Preferential Trade

Interest of the dealers

Before Adam Smith helped educate people on economics, Mercantilist exploitation was the driving philosophy of business in most of the world, with corporations such as the Dutch East India Company and British East India Company playing a key role.

He had warned that the public can be easily duped into believing that extra profits of businesses were in the country’s or public’s interest.

But the general public, especially low income earners, who pay the highest price for restricted competition, are still deceived in the 20th century.

“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,” explained Smith in Wealth of Nations.

“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/Nov25/2020)

Comments (3)

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  1. Piyadasa Godellewatte says:

    Glad to see hard core evidence stand as proof of effectiveness of sound policy options available for Sri Lanka. My enquiry and research, as ex-Director – Industry Trade and Technology in the then Ministry of Finance & Planning, always revealed that the vast Indian market is a gold-mine for Sri Lanka. But, the stronger mercantilist ghosts had the day.

  2. Vajira De Silva Gunasekera says:

    While it is true that the public suffers if the imports are highly taxed, the successive Governments have not followed an export oriented industrial policy with the notable exception of the garment industry. This has led to poor quality of economic development in the country, resulting in low wages – not having high value added export industries as well as persistent deficits in balance of trade. These deficits have lead to impoverishment of the country. The value external of the SL rupee has plummeted over the last 40 years.

  3. IJ says:

    Writer of this article has cherry picked this period of Jan-June 2020 on promote his idea of removing the import restrictions .As there may be 10 odd reasons to show off how SL had benefited from FTA’s with these countries during these 6 months, it would be obvious that FTA with India and others had yielded large deficits as we compare last 3 years .The stuff we export are under FTA’s are mostly Spices and non -value added items whereas these countries export many value added stuff ranging from Automobile to pharmaceuticals .

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Comments (3)

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Your email address will not be published. Required fields are marked *

  1. Piyadasa Godellewatte says:

    Glad to see hard core evidence stand as proof of effectiveness of sound policy options available for Sri Lanka. My enquiry and research, as ex-Director – Industry Trade and Technology in the then Ministry of Finance & Planning, always revealed that the vast Indian market is a gold-mine for Sri Lanka. But, the stronger mercantilist ghosts had the day.

  2. Vajira De Silva Gunasekera says:

    While it is true that the public suffers if the imports are highly taxed, the successive Governments have not followed an export oriented industrial policy with the notable exception of the garment industry. This has led to poor quality of economic development in the country, resulting in low wages – not having high value added export industries as well as persistent deficits in balance of trade. These deficits have lead to impoverishment of the country. The value external of the SL rupee has plummeted over the last 40 years.

  3. IJ says:

    Writer of this article has cherry picked this period of Jan-June 2020 on promote his idea of removing the import restrictions .As there may be 10 odd reasons to show off how SL had benefited from FTA’s with these countries during these 6 months, it would be obvious that FTA with India and others had yielded large deficits as we compare last 3 years .The stuff we export are under FTA’s are mostly Spices and non -value added items whereas these countries export many value added stuff ranging from Automobile to pharmaceuticals .

IMF official: Sri Lanka’s road ahead is challenging, critical to keep up with reform momentum

ECONOMYNEXT –International Monetary Fund’s First Deputy Managing Director Gita Gopinath said Sri Lanka’s future with many reforms are challenging, but it is critical to keep up with the reform momentum.

Gopinath stated this after meeting the island nation’s State Finance Minister Shehan Semasinghe Central Bank Governor Nandalal Weerasinghe, and Treasury Secretary Mahinda Siriwardena on the sideline of the IMF/World Bank Spring Meetings in Washington.

“I commended them on hard-won economic gains in the past year. The road ahead is challenging and it’s critical to keep up with the reform momentum,” Gopinath wrote on her X platform.

Under IMF programme, President Ranil Wickremesinghe has implemented a raft of hard reforms including higher taxes.

Sri Lanka agreed to the IMF programme after it declared bankruptcy with sovereign debt default in April 2022.

Semasinghe after the meeting tanks Gopinath for acknowledging Sri Lanka’s economic progress.

“Our discussion was insightful and productive, and we appreciate the opportunity to delve into the challenges and opportunities ahead,” the State Finance minister said in his X platform.

“We remain steadfast in our commitment to our reform agenda and eagerly anticipate continued collaboration with the IMF to advance our shared goals.”

Sri Lanka was compelled to go for IMF after the unprecedented economic crisis which was followed by a political crisis that ousted former president Gotabaya Rajapaksa and his government who were legitimately elected.

The IMF programme has included reforms in state-owned enterprises, fiscal sector and financial sectors to ensure debt sustainability.

The global lender also has pledged its support to speed up the island nation’s lingering debt restructuring process with private creditors including sovereign bond holders. (Colombo/April 22/2021)

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Sri Lanka motor racing crash claims 7 lives, 4 critical

ECONOMYNEXT – A deadly accident at motor Race Sri Lanka’s hill country town of Diyathalawa has claimed at least 7 lives police said, after a racing vehicle, in the seasonal Fox Hill Super Cross ploughed in to spectators after running off the track.

Another 21 spectators were injured Sunday, and hospitalized and at least four were critical, police said.

Thousands of people come to watch the Fox Hill Super Cross race, which is usually held in April, as large numbers of people head to the cooler climes in the hills.

According to footage taken by spectators one car overturned on the side of the track.

Sri Lanka’s Newsfirst television said Marshalls were waving flags to caution other vehicles, when another car went off the track and crashed into spectators. (Colombo/April21/2024)

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Widespread support for Sri Lanka debt workout, reform progress at IMF/WB meet: Minister

ECONOMYNEXT – There was widespread support for Sri Lanka’s debt restructuring and acknowledgement of progress made under an International Monetary Fund program, at meeting of the fund and World Bank, State Minister for Finance Shehan Semasinghe said.

“The strides made in our economic recovery and financial stability have been acknowledged as significant advancements towards our country’s prosperity by our stakeholders and international partners,” Minister Semasinghe said in an x.com (twitter) post after attending the meetings.

“Further, it was heartening to note the widespread appreciation and support for Sri Lanka’s debt restructuring process.

“We remain steadfast in our commitment to reaching the restructuring targets and confident of smooth progress in the continued good-faith engagements for a speedy debt resolution that will ensure debt sustainability and comparability of debt treatment.”

Sri Lanka ended a first round of talks with sovereign bondholders in March without striking a deal but some agreement on the basis for a deal.

An initial deal with bilateral creditors have been reached, but they may be awaiting a deal with private creditors to sign formal agreements.

International partners have appreciated reforms made under President Ranil Wickremesinghe, Minister Semasinghe said.

“It was great to engage in productive bilateral discussions with all of whom appreciated the recent economic developments, progress in debt restructuring, strengthening of tax administration, and ongoing governance reforms,” he said.

Sri Lanka’s rupee has been allowed to re-appreciate by the central bank amid deflationary monetary policy, bringing tangible benefits to people in the form of lower energy and food prices, unlike in past IMF programs.

Electricity prices were cut as a strengthening currency helped reduce the cost of coal imports.

Related Sri Lanka central bank mainly responsible for electricity price cut

The currency appreciation has also allowed losses to the Employment Provident Fund imposed to be partially recouped, helping old workers near retirement, as well as raising disposable incomes of current wage earners on fixed salaries.

Related Sri Lanka EPF gets US$1.85bn in value back as central bank strengthens rupee

The IMF, which was set up after World War II to end devaluations seen in the 1930s after the Fed’s policy rate infected other key central banks, started to actively encourage depreciation after a change to its founding articles in 1978 (the Second Amendment).

The usefulness of money as a store of value, or a denominator of current and future values then decline, leading to loss of real savings, real wages and increases in social unrest.

Before that, members who devalued more than 10 percent after printing money for growth or any other reason, faced the threat of suspension from the organization as punishment.

Sri Lanka’s rupee has appreciated to around 300 to the US dollar now from 370 after a surrender rule was lifted in March 2023.

But there is no transparency on the basis that economic bureaucrats are allowing the currency to gain against the US dollar (the intervention currency of the central bank).

The rupee is currently under pressure, despite broadly prudent monetary policy, due to an ‘oversold position’ in the market after recent appreciation made importers and banks to run negative open positions as the usefulness of the currency as a denominator of future value declined with sudden strenghtening. (Colombo/Apr21/2024)

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