Why do imports matter for a trade-oriented economy?

By Economic Intelligence Unit, Ceylon Chamber of Commerce 

Often in Sri Lanka imports are talked of in the context of a ‘cost to the economy’ or ‘a drain on our foreign currency’. But this notion lacks a fundamental understanding of the role that imports play in an economy – particularly one that is open to world trade, and aiming to be more export-oriented. 

Both the export and the import of goods and services have led to a high level of interdependence among global trading partners, and has been a key force that has shaped globalisation since the end of World War 2.These two flows of trade represent two sides of the same coin, not one less important than the other. An import in the receiving country is an export from the sending country. 

With the fragmentation of product manufacturing, trade in intermediate inputs has significantly increased and connectivity to global value chains has become an important determinant of an economy’s ability to benefit from, and take an active part in, international trade. In this context both export and import trade are equally important. As Sri Lanka envisions a new growth trajectory led by greater international trade, it is timely to discuss the relevance of imports in this. 

 

Imports in the Sri Lankan economy

In the Sri Lankan economy today, imports account for $ 19.4 billion (2014), about 26% of GDP. Sri Lanka’s export income finances about 57.2% of the import bill. Sri Lanka’s imports are dominated by intermediate goods, which are used as inputs in the value chain (58.7%) and investment goods (21.4%) with consumer goods (both food and non-food) accounting for less than one-fifth of total imports. Import trade plays a role as growth facilitator and as a tax revenue earner.

 

Imports as a growth facilitator

Historically, Sri Lanka’s economic growth has been highly import-intensive. Three of the biggest sub-sectors which contribute to economic growth are highly import dependent – 

1) The value addition of factory industry (manufacturing sub sector) 

2) Import trade

3)Transport (subsectors of the services sector) accounts for GDP shares of 15.8%, 7.9% and 12% respectively. In 2014, these three sub sectors contributed to 39.7% of the change in GDP.

Meanwhile, Sri Lanka’s export manufacturing supply chains are largely import-dependent. When analysing the composition of imports, the increasing relevance of imported inputs in production is evident with the intermediate goods and investment goods accounting for more than 80% of the import trade.

For example, textile and garments, which holds an export share of about 44% and is the single largest export revenue earner for Sri Lanka, is heavily dependent on imported intermediate goods in the manufacturing process. Import of textile and textile articles as an intermediate input of production accounts for 47% of the revenue earned from textile and garments exports. 

Given the constraints within Sri Lanka’s small domestic economy for investing in supply chains to source inputs via domestic production (import substitution), unlocking Sri Lanka’s potential for an export led economic growth will be very much dependent on the ability for export industries to import required intermediate goods and technology at a competitive price from trading partners.

Imports as a revenue earner

Taxes collected through the import trade continue to be a key revenue earner for the Sri Lankan Government. In addition to import tariffs (customs duties), a number of additional taxes and levies are imposed in imports (Figure 01). These taxes together contribute to about Rs. 464 billion worth of tax revenue, amounting to nearly half of total tax revenue of Sri Lanka or 5.4% of GDP. If analysed from the perspective of how tax revenue from import trade finances Government spending in Sri Lanka, it nearly entirely covers the entire annual capital expenditure, nearly all of the country’s annual interest payments, or 85% of salaries and wages, or more than half of current transfers and subsidies.

 

Way forward

Supporting an export-driven growth model for Sri Lanka requires a policy framework which gives due recognition to import trade and necessary facilitation measures to improve ease of trading for the import community.  

A simplified and transparent tax regime, a sound regulatory framework (to prevent ‘dumping’ by other countries), and simplified import procedures (similar to that of the export trade through an export facilitation centre), are vital elements in this. 

With the right policy focus and facilitation, the import trade will play a vibrant role in the Sri Lankan economy for decades to come, as a facilitator of economic growth and an important contributor towards value addition, employment generation and revenue.