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Sri Lanka haunted by ghost of Raul Prebisch as import ban bites tyre supply

ECONOMYNEXT – Sri Lanka’s businesses are hit and specialist vehicles such as ambulances are under threat, as the country runs out of some sizes of tyres, industry officials said, with import controls being slapped after money printing in March and April 2020 triggered foreign exchange shortages.

Vehicle imports are also banned. The import bans, which were renewed twice, are expected to run out in January. It is not clear whether they will be extended or not.

“The government suspended import of certain sizes of tires assuming that they could produce it locally. Twelve, 13 and 14 inch tires are temporarily restricted for importation,” Rohan Peiris, working director of Tirehouse Group of Companies told EconomyNext.

“The government only allows importation of tires in the sizes 17.5 inches and above.

“However, 17.5 inch and above vehicle population is less and thereby is not viable for domestic
production. Which is why we imported those tires.”

Tires used for Light Commercial Vehicle category under the sizes 14, 15 and 16 inches are also included in the import ban.

Sri Lanka has been importing several sizes of tyres ranging from sizes 12 to 14 inches and sizes 15 and 16 inches from the Light Commercial Vehicle segment.

Peiris said India’s CEAT which has factories in Sri Lanka, is making some sizes but the demand is high. Commercial vehicles owners also have other options such as re-building.

Sudden state interventions such as import bans are called ‘regime uncertainty,’ which disrupts the economic environment for businesses. Many businesses which depended on imported inputs are scrambling to find alternatives.

With volume-handling tires being banned, tire importers are faced with a revenue downturn.

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“There is a market shortage for the tire sizes 12, 13, and 14 as they possess high demand,” Dhammika Jayaweera, General Manager of Douglas & Sons (Pvt.) Ltd. said.

“The dealers, end customers and the importers took a hit due to this.

“The local manufacturers can produce only 1000 tires per month in the Truck and Bus Radial (TBR) tire category whereas the market requirement goes well over 5000 tires,” he said.

Import Substitution

Sri Lanka has controlled imports to give business to domestic firms on a philosophy of ‘import substitution’ a type of Mercantilism which can also build monopoly power.

Import substituting companies exploit customers through trade controls the same way original Mercantilist colonial companies like the Dutch East India Company and the British East India Company did, by robbing economic freedoms through the coercive power of the state, critics say.

Modern import substitution became popular in Latin America in the last century under an ideology promoted by Raul Prebisch – the creator of Argentina’s central bank and Hans Singer generally called the ‘Dependency Theory’ or Prebisch-Singer hypothesis.

Import substitution got another leg up from soft-pegged exchange rate central banks in Latin America which were also set up in the style of Prebisch’s central bank in Argentina, as they printed money and caused forex shortages.

Many Latin American countries that practised the policies eventually ended up in sovereign default, helped by forex shortages coming from soft-pegs, which were set up with technical support from either Prebisch himself or the Latin America unit of the Federal Reserve, which was inspired by him.

Sri Lanka also has a Fed assisted soft-peg which collapses periodically, especially when there is a strong economic recovery, like in Argentina as money is printed to cut interest rates.

Analysts have called for reform of the central bank to stop both monetary instability and some of the regime uncertainty that comes from ad hoc controls as a result of forex shortages.

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East Asia, especially countries like Singapore and Hong Kong which used free trade and lately Vietnam, which abandoned state driven development in 1986, used policies that were diametrically opposed to the Prebisch-Singer hypothesis. (Import Substitution Made Countries Such as Argentina Poorer)

CEAT Sri Lanka used to produce almost half the domestic tyre requirement before the import ban, partly helped by import controls.

The firm has been increasing its production in the types they manufacture.

CEAT however is not a typical import-substitution firm that exploits customers with low quality high priced goods which cannot compete in export markets. Though it sells at higher prices in the domestic market due to import duties, it can also compete abroad, analysts say.

Imports also increases competition, pushes innovation and keeps manufacturers on their toes, making them competitive.

Disruptions

Meanwhile more pain may be in the way for vehicle users and others, as import bans trigger ripple effects.

Ambulances which operated throughout the lockdown period up to now in full steam will be disrupted due to the shortage in light truck tires in the market.

“We have got about over eight million vehicles in Sri Lanka in total. According to the production capacity of the domestic manufacturers, they are not able to cater to the entire national demand,” Peiris said.

“These Suwaseriya, Health ministry ambulances experience high wear and tear of tires since sometimes they maneuver over pavements due to urgency,” he said.

“There is also a difference in quality of local tires compared to imported ones.”

Some vehicle owners also prefer to use Original Equipment Manufacturer (OEM) tires recommended by the manufacturer due to comfort, or wear and tear concerns on for suspension.

Some sizes applying to large trucks under size 20 are also banned.

“Due to this import suspension both bias tires (nylon-canvas tires) and radial tires (all-steel tires) coming under size 20 cannot be imported,” Pieris said.

“This is an issue since OEM tires are usually international brands like Bridgestone, Dunlop or Yokohama which ensures the expected safety and quality pre-requisites are met,” he said.

“As a Sri Lankan, even we personally like to use local tires. However, this shift is not an overnight transition and we still have a long way to go on that front

Importers are allowed to import Passenger Car Radial (PCR) segment tires from size 15 inch and above.

“All these cars will not have tires and the local manufacturers will not be able to cater to the demand,” Jagath Samarasekara, Chief executive of Ideal Motors said.

Samarasekara also said that there is a common notion among vehicle owners that local tires are not up to expected quality standards.

“All the three wheelers and taxis run with small tires and very soon they will be out of business without
proper tires.

“Dual purpose tires are not allowed to be imported too.

“Our local manufacturers must be in a position to maintain an uninterrupted supply for a ban of this sort to be effective,” he said. (Colombo/Sep25/2020)