Imports are not the enemy

In April 2020, just as the pandemic began to bite, the Government swung into gear and banned a host of imports. The plan seemed simple enough, shrink imports to protect reserves and encourage local businesses to manufacture import substitutes, but a year later, the complicated and sometimes unintended consequences of attempting to define trade in such narrow terms is being played out in people’s day-to-day lives. 

First, it was the turmeric shortage, then there was flip flopping over tile and sanitary ware imports, and most recently, the suspension of checking for worn out tyres. All of these are connected to the import ban. What policy makers and the general public need to keep in mind is that trade is not just: exports good and imports bad. A significant chunk of Sri Lanka’s imports are intermediate goods, which means they are used to add value to exports. So, when import restrictions are placed, it impacts exports as well. 

Secondly, imports provide much needed choice and competitiveness that consumers benefit by. On paper, the idea of supporting local industries will seem attractive, but some local sectors are dominated by monopolies or oligopolies that can fix prices at levels disadvantageous to the consumer. Sri Lanka’s tile and sanitary ware industry is an excellent example of this. Despite having preferential taxes in their corner for decades, the sector has not achieved the levels of expansion policy makers hoped it would. Rather, the protectionism only resulted in consumers having to pay exponentially higher prices to build bathrooms and tile their homes than counterparts in the rest of South Asia. 

Moreover, an industry such as tile and ceramic ware also depends heavily on imports for raw materials and machinery. Given the scarcity of raw material in Sri Lanka, scaling up the industry to self-sufficiency levels could result in more environmental destruction, rather than the export bounty the Sri Lankan Government seems to believe is possible.  Countries such as China and India have large amounts of raw material, cheaper power prices than Sri Lanka and the ability to produce in large quantities, which makes them more competitive. Permitting imports in this instance makes good economic sense and protectionism does not protect reserves in large enough quantities to justify the burdens placed on consumers.   

Due to the Government’s ad hoc policies thousands of home builders, prospective home buyers and contractors have run into trouble as they struggle with both higher prices and supply shortages. Local manufactures, despite their enthusiasm to restrict imports, have done little to improve their logistics and at least provide better services to their customers. Even with the most optimistic estimates, local producers can meet only about 60% of current demand, leaving massive need unmet. 

The third point to consider here is that import taxes make up a significant part of public revenue. When imports are severely restricted, the Government must forego this revenue and to keep its Budget deficit in check resort to other fiscal measures, which can have indirect impact on the economy. Not only would tile imports benefit consumers but importing companies typically pay higher taxes than their coddled counterparts. Public revenue is responsible for many things, including funding universal education, healthcare, housing and other social protections. 

Given this myriad of factors it is essential that Sri Lankans, especially policy makers, stop thinking of imports as the enemy and understand its role in the larger economic system. Supporting local industries is not bad per se but they must be selected carefully, given support for a specific time and not allowed to infringe on the economic freedoms of citizens.