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Limiting imports


Comments / {{hitsCtrl.values.hits}} Views / Thursday, 18 October 2018 00:27


At a meeting of the National Economic Council (NEC) this week, President Maithripala Sirisena had given instructions to the Finance Ministry to compile a study into imports made by Sri Lanka and propose ways to reduce imports as a temporary measure to ease the pressure on the rupee. 

This follows previous steps by the Government to discourage imports of vehicles and certain electronic appliances that are perceived as ‘luxury’ items. This has the double aim of limiting fuel imports as well, since Sri Lanka’s largest import bill typically comes from oil imports. The Government had also appealed to exporters to repatriate their earnings more speedily to bolster reserves, but there is no way to enforce such a policy with moral suasion being the most feasible option for the State.  

During the NEC meeting, attention was also paid to increasing import substitution as a way to save foreign exchange. The Finance Ministry has also been encouraged to consider how better taxation and pricing formulas could be used to encourage consumption of locally made products.  

As the rupee continues to come under pressure from an appreciating dollar, it is natural to assume that imports are the problem. However, the global economy has changed vastly in the last few decades and imports or trade deficits are not the monsters that they were once seen to be. International trade relies on vast global value chains that most economies are now connected to, and exports and imports are a seamless part of this process. 

Most economists agree that imports have positive aspects as well. A large component of Sri Lanka’s imports, for example, are intermediary goods that are used to manufacture exports, and this complicated process can be hampered by selective limitations on imports. 

Imports also provide essential goods and services at competitive rates to consumers. While conventional economic thought tends to malign trade deficits, they nonetheless provide the space for goods and services to flow into a country at lower costs. Sri Lanka is not capable of manufacturing all the goods and services that it needs at competitive costs. This was evident before the opening up of Sri Lanka’s economy when the public had to stand in line for even basic goods. While it would be impossible to rewind the clock to that extent, the economic logic makes even less sense when Sri Lanka’s high levels of debt are factored in. 

According to Government estimates, Sri Lanka’s debt to GDP ratio is about 78% with debt repayments doubling to about $ 3 billion from 2019 onwards. This bunching up of debt is likely to last till 2021, and all experts agree that the best chance for Sri Lanka to maintain growth and repay debt is to increase exports and investment. This cannot be done by closing off the economy to global value chains and competition. Therefore, a short-term constraint on imports is at best a Band-Aid solution and should not be allowed to take root and result in backsliding of policies that have been introduced over the last three years to make Sri Lanka more competitive and link it with global value chains.  


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