Sri Lanka’s trade surplus is no problem, but protectionism is, EU diplomat says
ECONOMYNEXT – The European Union has no problem with Sri Lanka’s large trade surplus with the region, an official said voicing objections against rising protectionism and import controls for the second time, saying global trade needs to be open amid a Coronavirus pandemic.
In 2019 Sri Lanka exported 3.5 billion US dollars of goods to the EU (not counting EU tourists to Sri Lanka) which was 28.7 percent of total exports, and imported 1.68 billion dollars of goods which was 8.9 percent of the total.
Sri Lanka slapped a series of import controls in April 2020 after money printing and a so-called ‘flexible exchange rate’ put pressure on the currency and earned a credit downgrade.
“From the EU view point, that we have a negative trade balance with Sri Lanka is not an issue as such,” Thorsten Bargfrede, Deputy Head of Mission at the delegation of the European Union in Colombo told a business forum in Colombo.
“Failure of trade for us doesn’t come through a surplus (for Sri Lanka). We stand, as a principle, for a rule based open trading system, and do not believe in protectionism.
“And especially in times of the Covid crisis, global trade needs to stay open, not closed down.”
“The EU is remaining open as you know, for Sri Lanka as well, with GSP plus preferential access so far.”
Sri Lanka was to lose GSP+ access but as per capita gross domestic product fell after money printing triggered two currency crises in close succession in 2016 and 2018, Sri Lanka was downgraded to a lower middle income status again.
In November the EU has warned Sri Lanka against import controls saying trade is not a one-way street.
“The current import restrictions are having a negative impact on Sri Lankan and European businesses, and on Foreign Direct Investment.
“Such measures impair Sri Lanka’s efforts to become a regional hub and negatively impactSri Lankan exports by constraining the import of raw material and machinery.
“We recall that a prolonged import ban is not in line with World Trade Organisation regulations.”
In Sri Lanka there is a widespread Mercantilist belief that imports (or a trade deficit, or a current account deficit) causes balance of payments problems and pressure on the currency and it is not money printing and credit.
The last administration banned gold imports after printing money in 2018 just as the credit system was recovering from an earlier crisis. The rupee collapsed immediately after gold imports were halted.
The last administration also controlled imports after failing to restrain the central bank, which was following discretionary policy and printed money to as the credit system recovered. Vehicles are also a perennial favorite.
“The European Union looks at global problems – we have Covid now – as something that needs global solutions as well,” Bargfrede said.
“We believe we need to help ourselves, we need to work together to solve these issues.
“On consequence we feel for the Sri Lankan and for the global economy what we need are open and rules based trade so that business get confidence again to invest and re-start exchanges and to bring employment and revenues.”
Bargfrede said the EU along with the UK and US accounted for about two thirds of Sri Lanka’s exports in recent years.
Sri Lanka’s central bank governor W D Lakshman has suggested that the EU is over-reacting to the import controls.
Sri Lanka’s import controls run out in January 2021. However a pick-up in private credit has taken place over the past three months and money printing is still ongoing.
The cabinet of ministers had already approved an extension to exchange controls. (Colombo/Dec06/2020)