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Monday September 25th, 2023

Sri Lanka import controls and their impact

ECONOMYNEXT – Sri Lanka’s import controls have created shortages and inflated prices giving profits to some domestic producers from farmers to others who have always hidden behind import protection to target consumers.

Though a few producers benefit, restricting trade has other negative fallouts.

Asanka Wijesinghe, a research economist as Colombo based Institute of Policy Studies of Sri Lanka looks at the impact on the domestic economy as well as broader international trade relations.

Beyond Turmeric: How Import Controls are Impacting Sri Lanka’sEconomy

Raw turmeric roots on the shelves of roadside vendors is a frequent sight nowadays. Thanks to the import controls, turmeric now fetches a higher price domestically; prices having soared by as much as 275% from Rs. 80 per kilo to Rs. 300 per kilo.

The turmeric shortage, reports of adulterated turmeric powder, the ceiling price, black-market sales, and sensational stories of busting smuggling attempts are the manifestations of the impact of import controls.

The recent waves of import restrictions imposed by the Sri Lankan government have different justifications such as boosting domestic production and avoiding re-exporting substandard products and foreign exchange leakage. However, protectionism has costs. The significant costs are: 1) possibility of tariff retaliation by the trading partners; 2) impact on domestic manufacturing for exporting;and 3) resource misallocation.

These costs will have a severe impact on the recovery of the COVID-19 affected economy. In this article, the costs of protectionist trade policies and opportunities available for a faster post-COVID economic recovery are discussed.

Possibility of Trade Retaliation by Trading Partners

The economic literature documents the political and economic costof the China-US trade war thoroughly. China’s targeted agricultural tariffs, which were in retaliation to Trump’s unilateral tariffs, cost the Republican party the 2018 House election.

From a mercantilist point of view, countries like to export but are reluctant to import.

But trade is no longer a one-way street. The EU,in a statement on Sri Lanka’s new import controls,points out that “a prolonged import ban is not in line with World Trade Organization regulations.”

Returning to the turmeric story, Sri Lanka’s primary turmeric import source was India. In 2017, 97% (USD7 million) of Sri Lanka’s turmeric imports came from India. Media reports show that Indian farmers and merchants have raised concerns over Sri Lanka’s turmeric ban.

While these concerns have no immediate damage on the country’s exports, Sri Lanka should still be cautious to avoid the Trump administration’s blunderof getting into a series of tariff battles with crucial trade partners.

Impact on Domestic Manufacturing

Nowadays, the vertically linked manufacturing process through global value chains (GVCs) is the norm. Manufacturing in Sri Lanka is no exception. Around 49% of Sri Lanka’s imports are intermediate goods, and 14% are capital goods (Figure 1).

Import controls disrupt the input supply and may harm the export performance of industries that use foreign raw materials. One significant China-US trade war harm was on the US manufacturing sector. Comparably, Sri Lanka’s import controls in April 2020 seriously hurt the sectors which used imported raw materials.

It is, however, commendable that the government relaxed some of the import controls in June to ensure an uninterrupted supply of raw materials.

Resource Misallocation

Economic theory dictates that a country should produce and eventually specialise in products for which the country has a relative productivity advantage (production patterns correlate with predictions from Ricardo’s comparative advantage theory). Import controls distort production and induce the allocation of scarce resources (land, water, and labour resources that have high-valued alternative uses) to relatively unproductive sectors.

Sri Lanka imported around 75% of the turmeric requirement, and 97% of imports came from India. The Revealed Comparative Advantage (RCA) index for turmeric shows that India has a superior export performance (Table 1).

Sri Lanka traded turmeric following the “revealed comparative advantage” logic, but the import controls distorted it. The prospect of exporting domestic turmeric is not promising. India dominates the global turmeric market currently and has a cost advantage. It is doubtful if Sri Lanka can grab a sizeable chunk of world trade through protectionism. However, now the resources are diverted to the protected sector, and domestic consumers pay an exorbitant price.

A Way Forward

Historically, the government resorted to import controls when there was a balance of payment crisis. The current import controls have the same underlying rationale.

However, the trade deficit’s temporary shrinkage may not be sustainable if there is no increase in exports. To increase exports, Sri Lanka needs to remove hurdles on input supply, remove distortionary tariffs, exploit market opportunities under the rule-based free trade system, and in the long run, improve the country’s GVC participation.

Sri Lanka successfully realigned the production process to produce widely demanded COVID-19 related medical supplies showing the benefits and opportunities of free trade (Figure 2). The high demand may continue to another year, and countries have removed tariffs on medical supplies. Some countries have banned the exports of medical supplies like PPE opening substantial market opportunities for Sri Lanka.

Increasing GVC participation by producing products closely related to the current competitive sectors but have higher complexity, is a practical approach. Sri Lanka may not make the final good within the country, but the country may process the materials it currently exports by a little. Participation in downstream, as well as upstream GVCs, makes countries better off.

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Sri Lanka sells 2028 bonds at 14.52-pct

ECONOMYNEXT – Sri Lanka sold all offered bonds in 2026 and 2028 maturities raising 220 billion rupees from an auction Monday, data from the state debt office showed.

The debt office sold 135 billion rupees of 1 June 2026 bonds to yield 15.64 percent.

Another 85 billion rupees in 01 July 2028 bonds were sold to yield 14.52 percent.

The 2028 bond is offered on tap at the weighted average yield. (Colombo/Sept25/2023)

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Sri Lanka’s stocks end down on Monday after slow day of trading

ECONOMYNEXT – Sri Lanka shares were down at close of trading on Monday.

Turnover was 550 million rupees.

The main All Share Price Index was down 0.36 percent or 40.02 points to 11,216.50, while the S&P SL20 was down 0.44 percent or 14.07 points to 3,164.52.

Trading in the Capital Goods Industry (174,037,134) drove turnover.

Commercial Bank, Expolanka Holdings, and Aitken Spence plc saw losses, while National Development Bank, John Keells Holdings and Melstacorp saw gains in the day’s trading.

The market saw a net foreign inflow of 13 million rupees, while the yearly net foreign inflow was 429 million rupees. (Colombo/Sep25/2023)

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Sri Lanka rupee closes at 324.75/324.90 to the US dollar

ECONOMYNEXT – Sri Lanka’s rupee closed at 324.75/90 to the US dollar on Monday, from Friday’s close at 324.70/325.00 dealers said.

Bond yields were up.

A bond maturing on 01.07.2025 closed up at 15.55/15.70 percent on Monday, after closing at 14.95/15.30 percent on Friday.

A bond maturing on 01.08.2026 closed up at 15.50/15.65 percent up from 14.95/15.10 percent.

A bond maturing on 15.09.2027 closed up at 14.75/15.50 percent from 14.55/15.00 percent.

A bond maturing on 01.05.2028 closed up at 14.25/14.60 from 14.00/14.30 percent.

A bond maturing on 15.05.2030 closed stable at 13.00/13.50.

A bond maturing on 01.07.2032 closed at 12.95/13.45 percent from 13.00/13.45 percent. (Colombo/Sept25/2023)

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