Sri Lanka protectionism to continue, three band tariff for some

ECONOMYNEXT – Sri Lanka will simplify import tariffs of items that are not produced locally but will keep protective tariffs on products that are already produced domestically ‘to save foreign exchange’, Prime Minister and Finance Minister Mahinda Rajapaksa told parliament in a budget for 2021.

“I propose the to formulate a balanced trade policy yielding long-term returns so as to increase the export earnings of our industrial products and to save foreign exchange through import substitutions that could be produced locally,” he said.

“In ensuring that the production economy is geared to fulfill the above objectives, the following proposals will be implemented.

1. To limit importation of agricultural commodities except the items that cannot be produced domestically (negative List).

2. To impose the Special commodity levy to balance the supply and demand of domestic production for selected agricultural products

3. To impose CESS to provide the required protection on the imports and exports of domestic production.”

Sri Lanka has restricted imports of a large number of items to promote ‘import substitution’ after independence from British rule as a money printing Latin America style central bank set up with US advice in 1951 created forex shortages, triggering a ‘save foreign exchange’ mantra.

Sri Lanka’s agriculture, except spices, tea rubber and coconut, which were export competitive before a central bank with money printing powers was set up, remains export competitive though import restrictions were also placed on those items after independence.

Potatoes and onions, started in the 1980s amid severe currency collapse are new non-export competitive products that are keeping food prices up for the poor. The two items are now 55 year old ‘infant industries’.

Because the products were protected from the start and therefore non-export competitive due to low quality or low productivity (high per unit cost) a surplus cannot be exported to ‘earn foreign exchange’ like tea, and imports have to be controlled to keep prices high or other close substitutes have also have to be controlled.

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A periodic CESS will be imposed to protect them.

Latin America

Analysts have called for central bank reform to stop forex shortages, as Latin America style central banks set up by the Federal Reserve and Argentina central bank creator Raul Prebisch ended up with import substitution and sovereign default.

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In recent years a number of domestic industries owned by so-called (so-called crony capitalists or Mercantilists or land-owners) which are not export competitive but exploit domestic customers through prices higher than rest of the world have come up.

Maize which was not protected in the 1980s, has been protected to help a so-called ‘collector mafia- over the last decade and is pushing up protein prices and hurting poultry and dairy industries, which are in turn also protected.

A protected raw material, makes all other ‘value added’ industries that uses the protected item as an input more expensive than imports in the domestic market and also non-export competitive, putting countries that chase import substitution into further difficulties.

Protected building material such as tiles, cement or steel will make tourism or export industries in general uncompetitive by pushing up the cost of hotels, office buildings or factories.

Protective tariffs of steel may also promote bad construction and building collapses by forcing builders to scrimp on concrete re-bars.

Selected Inputs

The budget said taxes will not be cut on any item that is domestically produced, reducing the likelihood of export competitive business coming up in areas with domestic raw material.

“To remove import taxes on the raw materials not available in the country, machineries and equipment with modern technology, to boost exports, and also to encourage domestic industries to produce value added goods,” the budget said.

Others will be put a three band tariff, of 0, 10 and 15 percent, raising the possibility of new export industries naturally starting outside of the Board of Investment.

However value added export industries require more than one input.

BOI firms are allowed to import items of the required quality and price to compete with the rest of the world. In Sri Lanka are mostly barred from selling domestically, unlike in countries like Vietnam which have become highly competitive as a result.

“If any commodity has been exempted from VAT at its importation point, I propose to exempt from VAT, the domestic production of that particular commodity as well,” the Finance Minister said.

Any exempt product will not be able to re-claim VAT for export purposes.

The entire structure will be regulated by the Department of Import and Exports.

“In order to make import and export procedures more efficient the officials of required regulatory bodies, will be assigned to the Department of Import and Exports to provide the required services,” he said. (Colombo/Nov21/2020)

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