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Thursday December 7th, 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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COP28 sees new era for climate action with $57 bln pledge; Sri Lanka’s proposals need approval

ECONOMYNEXT – The 2023 United Nations Climate Change Conference (COP28) has witnessed governments, businesses, investors, and philanthropies announcing support of over $57 billion across the climate agenda in just the first four days of the global event with eight pledges and declarations receiving historic support.

After a historic deal to operationalize a fund for climate impact response on the first day, announcements have poured in across the entire climate agenda, including on finance, health, food, nature, and energy.

On climate finance, the COP28 host United Arab Emirates launched a $30 billion catalytic fund, ALTÉRRA, with an emphasis on unlocking private finance across the Global South.

The host nation also has announced $200 million for SDRs and $150 million for water scarcity.

The World Bank has announced an increase of $9 billion annually to finance climate-related projects, while the first two days of COP28 saw $725 million in pledges after a historic response to loss and damage was operationalized.

Eight new declarations have been announced which are expected to help transform every major system of the global economy.

These include the first ever declarations on food systems transformation and health, plus declarations on renewable energy and efficiency, as well as initiatives to decarbonize heavy emitting industries.

The eight declarations are:

  • The Global Renewables and Energy Efficiency Pledge has been endorsed by 119 countries.
  • The COP28 UAE Declaration on Agriculture, Food, & Climate has received endorsements from 137 countries.
  • The COP28 UAE Declaration on Climate and Health has been endorsed by 125 countries.
  • The COP28 UAE Declaration on Climate Relief, Recovery & Peace has been endorsed by 74 countries and 40 organizations.
  • The COP28 UAE Declaration on Climate Finance has been endorsed by 12 countries.
  • The Coalition for High Ambition Multilevel Partnerships (Champ) Pledge has been endorsed by 64 countries.
  • The Oil and Gas Decarbonization Charter has been endorsed by 51 companies, representing 40 percent of global oil production.
  • The Industrial Transition Accelerator has been endorsed by 35 companies and six industry associations, including World Steel Association, International Aluminium Institute, Global Renewable Alliance, Global Cement and Concrete Association, Oil and Gas Climate Initiative, International Air Transport Association.

Three additional declarations will be announced in the coming days on hydrogen, cooling, and gender. The number of countries supporting these declarations and pledges is growing and demonstrates an unprecedented level of inclusivity at this COP.

Sri Lanka President Ranil Wickremesinghe announced three new proposals: Climate Justice Forum (CJF), Tropical Belt Initiative (TBI), and International Climate Change University in Sri Lanka.

However, the proposals are yet to get approval from the general UN body though the island nation’s authorities expect wide support for the moves.

“What we have done is to talk to countries about the initiatives and launch them. Next step is for them to be formally recognized by the main body,” Ruwan Wijewardena, the Senior Advisor to President Wickremesinghe on Climate change, told Economy Next.

Breakdown of financial pledges and contributions so far:

  • Loss and Damage: $725 million
  • Green Climate Fund: $3.5 billion (increasing second replenishment to $12.8 billion)
  • Renewable Energy: $2.5 billion
  • Technology: $568 million
  • Methane: $1.2 billion
  • Climate Finance: Over $30 billion from UAE (plus $200 million in Special Drawing Rights and an increase of $9 billion annually from the World Bank)
  • Food: $2.6 Billion
  • Nature: $2.6 Billion
  • Health: $2.7 billion
  • Water: $150 million
  • Relief, Recovery and Peace: $1.2 billion
  • Local Climate Action: $467 million (Dubai/Dec 6/2023)
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Sri Lanka to start international tourism branding campaign

ECONOMYNEXT – Sri Lanka will soon start a tourism international marketing campaign under the theme ‘You will come back for more,” Tourism Minister Harin Fernando said.

“We have not had a branding campaign for 15 years,” Fernando told parliament. “A campaign has been developed by Ogilvy.

“It will help us reach the target of 2.3 million tourists next year.”

This year Sri Lanka is expecting a 1.5 million tourists with close to 1.3 million reached by November.

About 6,000 tourists are now coming each day, at the moment he said.

On December 10, three cruise ships are due. (Colombo/Nov06/2023)

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Sri Lanka 3-month Treasuries yields fall

ECONOMYNEXT – Sri Lanka’s Treasury bill yields eased across maturities with the tree month yield falling 19 basis points to 14.67 percent, data from the state debt office showed.

A total of 185 billion rupees in bills were sold, with sharply lower than offered volumes in 12-months sold.

The debt office offered 55 billion rupees of 3 -month bills and sold 87 billion.

92 billion rupees of 6-month bills were sold after offering 60 billion at 14.38 percent down 14 basis points.

Only 5.2 billion rupees of 12-month bills were sold after offering 70 billion rupees, at 12.88 percent, down 01 basis point. (Colombo/Dec06/2023)

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