ECONOMYNEXT – Sri Lanka needs a holistic trade and investment liberalization law to take the country forward instead of ad hoc liberalizations which can bring new distortions and a push-back from lobbies, a top international economist said.
Boosting exports and international trade has now become part of the policy discussions in the country, which was a welcome reversal from the denial seen during the last regime, Razeen Sally a top international economist, who was recently appointed to chair Sri Lanka’s Institute of Policy Studies said.
"It is also not just a question of exports, it is also a question of more imports, more inward investment and inserting Sri Lanka into the kind of global value chains it is not in," he told a forum at the Ceylon Chamber of Commerce.
"Garments is the main exception, but it is not in all the others."
Prime Minister Ranil Wickremesinghe had said the right thing in an economic policy statement in November.
Investment and Trade Law
The budget contained a few measures to open up the economy for investment and exports including tea, but there was heavy lobbying by entrenched business against competition.
International trade and investments was inextricably linked together and it had to be looked at together.
"What I think is really needed, and I hope preferably in the first half of next year is a comprehensive omnibus trade and foreign investment bill," Sally said.
"Not these selective measures that are introduced in budgets or whatever ad hoc mechanisms.
"If you reverse the order of priority and say these is our general principles overall, for the trading economy, these are the sensitive areas which we will not liberalize for the moment based on political realities, that is the better way to go about it.
"I think the only way to do that is through a comprehensive Bill. That is what I think the Prime Minister should spearhead."
The budget had given effect to the words through a few liberalizations here and there including tea, but heavy lobbying by entrenched businesses had ‘ripped apart’ the potential of the budget, showing the danger of the approach.
Budget Potential Ripped Apart
"Firstly, this kind of very ad hoc selective liberalizations it might look good on paper, but it actually introduces new distortions, because you are not looking at the economy overall or at the linkages between sectors," Sally told a forum at the Ceylon Chamber of Commerce.
"It might have the un-anticipated effect of increasing the real rate of protection in some areas."
"Secondly we have seen the push-back from the usual suspects many of them members of this chamber who do not want to see more competition, whether it is from other companies domestically or from international competitors."
"And they have been lobbying the finance minister and the people who advise the finance minister, so we see the potential of the budget being ripped apart."
Though the budget promised to lower protection in steel and sanitary ware which would prevent the homeless being gouged by vested monopolies, heavy lobbying is seen to prevent them. Liberalization of tea has also been opposed again.
Effective rates of protection can be very high when partly finished goods, or finished goods needed for another production process is taxed at high rates.
In East Asia protection levels were brought down allowing global supply chains, a capitalist innovation more efficient than the ‘high value added’ single origin type of production seen in earlier centuries to take place.
Analysts say while countries like Malaysia tried to develop a ‘domestic car’ with protection, Thailand has now become a large exporter of cars of various brands.
East Asian Tariff regime
Sri Lanka is now has a complex mass of import taxes, export taxes, cesses and para tariffs designed to put extra profits in the hand of various lobby groups.
"The tariff structure is far too complicated. Para tariffs cesses need to go as quickly as possible," Sally said.
"The export duties need to go as quickly possible. And the tariffs need to be simplified, preferably to two bands at most, with the overall rate lower than it is more in accordance with the East Asian average than the south Asian average.
Trade facilitation and customs procedures have to be re-looked at he said.
"You cannot look at trade measures without looking at foreign investment measures if you want to get Sri Lanka into global value chains like logistics and IT enable services and may be one or two manufacturing industries".
"For that you need a holistic approach for foreign direct investment, which is not about tax incentives."
Sally said foreign direct investments would also have to be relaxed on a negative list principle taking holistic approach.
At the moment there was protection for areas like shipping, which prevented large logistics companies from investing in logistics hubs.
"FDI policy in Sri Lanka is a fetish about tax incentives, which of course is open sesame for corruption, from the usual suspects and some dodgy Indian businesses who beat a path to the BOI (Board of Investment). (Colombo/December30/2015 – Update II)