Imports and tariffs

Monday, 20 April 2020 00:00 -     - {{hitsCtrl.values.hits}}

The Government over the weekend released an exhaustive list of import items that have been temporarily suspended to reduce pressure on reserves. As COVID-19 forces everyone to re-evaluate their priorities, it could also be a great opportunity for the Government to assess its import tariff structure and reform it so that it increases economic competitiveness and does not unfairly limit the choices of consumers. 

Obviously Sri Lanka depends heavily on imports, and while this comes with challenges, it also gives consumers choice and essential items at fair prices. Economists have long pointed out that Sri Lanka protects entire industries, sometimes for decades, and allows them to function as monopolies or duopolies even though they do not export products or services. 

In 2018, a study that was done by the International Monetary Fund (IMF) said Sri Lanka’s weak trade competitiveness was largely due to it giving the most protection to industries that do not export significantly and remarked on the use of lobbying rather than strategic development or high employment as reasons for being protected.   Processing of fruits and vegetables, bakery products, manufacture of pasta and noodles, sanitaryware, distilling and blending alcohol, cement, soft drinks, mineral water, and dairy products are among the top 10 most protected categories. 

Interestingly, many of the items that have been temporarily suspended from being imported are products that provide competitiveness to these same categories.  Needless to say, the import suspension, even though temporary in nature, will hit critical industries, such as apparel, hospitality/restaurants, and construction, somewhat offsetting the low interest loans the banks have been advocated to roll out by the Central Bank. Even imports of some essential food items, such as rice, flour and sugar, have been trimmed and could lead to shortages. 

Few would dispute that Sri Lanka has to reduce pressure on reserves but it can cover more than one problem. Sri Lanka’s weakness in trade competitiveness partly stems from its restrictive trade policies.  The introduction of para-tariffs has significantly increased the degree of protectionism. According to the IMF report, introduction of para-tariffs during the last decade has effectively doubled the protection rates, making the present import regime one of the most complex and protectionist in the world. 

The para-tariffs not only increase monetary costs for firms but also procedural costs. A survey by the International Trade Centre found that the biggest challenges from para-tariffs are a lack of information and extensive documentation as well as delays in processing, which is particularly hard to bear for small firms. 

The most protected segments of the economy benefit from both high tariffs and para-tariffs. In addition, some sub-sectors have a third layer of protection on their inputs through selected tax holidays or exemptions. Consequently, the Effective Rate of Protection (ERP) for the top 10 most protected sectors reaches between 170% and 524% as of 2015. 

The report observed that some of the most protected sectors do not necessarily represent strategic development or high employment activities but appear effective in lobbying for protection. 

Moreover, the increase in the web of protective barriers seems to coincide with the decline in total contribution of State-owned establishments to sectoral value-added manufacturing. 

Furthermore, it appears that the Government gave up direct ownership in some sectors but simultaneously ensured the lasting protection of private companies in those same sectors.

The Government could use this opportunity to streamline administrative processes and simplify the structure of para-tariffs and tariffs so protection for industries is rationalised and eventually have a beneficial impact on trade.