SRI LANKA AND IMPORT CONTROLS : A TRYST MOST DANGEROUS

Since the 52-day lockdown to contain the coronavirus pandemic in early 2020, the government has imposed import controls to conserve U.S. dollar reserves. Foreign debt repayments have turned into a mountain of a problem due to crawling exports, tourism in the doldrums, and FDI drying up to a trickle. Instead of being a solution, the import controls strategy, risks becoming a bigger problem, a think tank warns.

Trade in the Pandemic Era: A One-year Assessment, a report by the Institute of Policy Studies (IPS), suggests the government should reconsider its import controls policy, particularly on food. Worse still, a government obstinate in banning chemical fertilisers is stoking food insecurity too!

“Global food prices are rising although the production prospects are encouraging. In Sri Lanka too, food inflation is on the rise. However, Sri Lanka continues to impose import restrictions on food items,” the IPS stated.

“Special commodity levies are being imposed on food commodities periodically. In addition, credit-based restrictions are supposed to delay the outflow of foreign currency, though the trade volume data show that credit basis did not affect trade volume much (see chart),” it said.

The government should also reconsider the proposed chemical fertiliser ban in the context of these restrictive trade policies, the think tank suggests. “Economists predict a significant plunge in rice production if the proposed chemical fertiliser ban forces farmers to use only organic fertiliser,” it warns, saying only imports can help us avoid a drastic shortage of food.

Although the trade value of food imports has recovered to pre-pandemic levels, trade volume data of the top ten imported food commodities show a declining trend (see chart) – canned and dried fish, onions and sugar imports are below 2017/19 averages.

In the context of domestic food security, the government will have to re-evaluate existing import controls for two reasons, the IPS contends.

First, the third wave of COVID-19 may cause substantial income loss for informal sector workers, reducing their purchasing power. Food inflation could drag them below the poverty line. Second, the ambitious green agriculture policies may create a domestic food shortage if imports do not compensate for production losses in the interim.

The global coronavirus pandemic has exposed structural weaknesses in the economy. The government is staring down mounting external debt repayment challenges. Credit rating agencies Fitch and Standard and Poor’s have downgraded Sri Lanka to junk status.

“Sri Lanka’s external liquidity, as measured by gross external financing needs as a percentage of current account receipts plus usable reserves, is projected to average 122% over 2021-2024,” Standard and Poor’s said in April. “We also forecast that Sri Lanka’s external debt net of official reserves and financial sector external assets will remain elevated at around 167% in 2021”.

Sri Lanka’s debt obligations by 2026 will total an estimated $29 billion, and official U.S. dollar reserves currently only top $4 billion. Containing food imports is bad enough in the face of rising food prices and shortage risks, but the overall import substitution strategy to defend the exchange rate and conserve reserves is also a risky ploy.

“Though the exchange rate crisis is a valid concern from the policymaker’s perspective, the short-term remedies should not be worse than the issue”, the IPS said. It warned that the backward and forward participation in global value chains would dampen the pressure on the domestic currency in the long run.

Sri Lanka’s imports and exports have improved since the initial lockdown phase of the pandemic in 2020. “However, the slow recovery of non-fuel intermediate goods imports, investment goods, and the suppressed imports of essential food commodities require policy makers’ attention,” the IPS contends.

“The rapid export recovery to the pre-pandemic level, and continual growth from that point, need integration into the global market. Current import controls are inimical to such integration”.

Economists in Sri Lanka have long argued that an export-led, FDI-friendly economy requires imports. “It is a perpetuating myth that we can aggressively promote Sri Lanka as an FDI destination while continuing to maintain our kind of trade regime,” Anushka Wijesinha, an economist, told Echelon.

“We can attract FDI, but that will only benefit a small section of the economy. So yes, we would see FDI numbers improve, but would they deliver the multiplier effect we expect? Unlikely”.

Import controls to conserve forex reserves serve a narrow immediate need, but are a slippery slope that will lead to bigger problems.