Banning foreign imports – Is a dollar saved, a rupee earned?

The Government early this week added 367 non-essential items to the enduring list of items banned from import. While not as controversial as the imported chemical fertilizer ban nor as divisive as the vehicle import restriction, this move to further restrict imports aptly comes during severe stress on foreign trade. One man’s arbitrary "non-essential" may well in fact be another’s non-negotiable in this climate. With citizens being painfully inconvenienced and bullied on the one hand, a pathetic situation arises on the other, as they dutifully bite the metaphorical bullet.

Regular dollar earnings cannot sufficiently manage USD liabilities, let alone correct the imbalance caused by dollar imports. With Sri Lankan exports recovering to $ 1.06 billion in January and regaining some form of normalcy, banning imports is in fact a firefighting task to ease the stress on foreign currency reserves.

Moreover, exporters too face a myriad of challenges operating in the post COVID-19 world that remains intact amidst escalating economic and geo-political tensions. All roads currently point to import restrictions to be held, begging the question of how long this needs to be held. 

Restrictions cause others acting in their best interests to retaliate by taking similar measures. This does fly in the face of economic free trade commitments and bipartisan agreements held to foster greater prosperity. The formation of black markets, as was the unintended consequence of the ban on imported turmeric in March 2021 too can be seen.

Furthermore, monitoring costs are incurred to prevent black-hand dealings while an inflated second-hand market often crops up. This is worsened in the case of restrictions on goods that do not have similar quality substitutes such as foreign alcohol and medication. Therefore, while a ban might be the best solution in the short term, it leaves much to be desired as a long-term fix without import dependency.

For example, during colonial rule plantations flourished, propped by the import of agricultural machinery. This industry, which experienced a great comparative advantage given Sri Lanka’s resources, eventually relied heavily on industrial imports from abroad to remain as productive. The onset of the 2nd World War caused a large-scale production bottleneck as disruptions to global trade routes led to industrial imports being undermined. This however did not impair the domestic economy and local agricultural exports, which, out of necessity, experienced a post-colonial revival in traditional agricultural practice that was independent of industrial imports. The agricultural sector post WWII coasted to some extent on these methods, while the Government and private sector took heed of this dependence on imports and took a pedagogical shift to industrial production. Import substitution refers to the act of discouraging imported goods and services, whilst channelling that demand to domestically produced goods and services. This is usually achieved by firstly imposing trade barriers such as tariffs -taxes on imports and bans on certain products and then promoting local industry. Surprisingly, the usual approach to help distressed industry is the same as that used to strengthen industry. Subsidies to farmers and manufactures are now encouraged for vegetable farmers with heightened Government intervention seeing the industry prop up hopefully eradicate veggie imports.

Overall, while this can be done to correct a lopsided import-export mix, it is as short-sighted as an import ban, because it does not consider that economic participants act largely in their best interest. One need not look any further than at our history to realise this. Eventually, as the Sri Lankan economy does recover from the current economic crisis, without the necessary rebalancing structures in place, a dollar saved will not mean a rupee earned.