THE TRADE DEFICIT
THE GAP LIKE NO OTHER!
Ad hoc solutions instead of long-term plans persist – Janaka Perera explains
Sri Lanka’s foreign trade volumes and trade gap have been widening more often than not since 2010 despite the end of the protracted civil war.
Recently, State Minister of Money and Capital Market and State Enterprise Reforms Nivard Cabraal held a media briefing on the bilateral discussions between Prime Minister Mahinda Rajapaksa and his Indian counterpart Narendra Modi.
He said that Sri Lanka imports more products from India than it exports to the subcontinent.
This issue is becoming complicated in more than one area. It highlights the impact of internal and external shocks on foreign exchange earnings in Sri Lanka, with special reference to imports, exports, tourism and international remittances. External shocks affect the domestic economy both directly and indirectly.
The government’s decision to withdraw an order by gazette issued on 2 February under the Imports and Exports (Control) Act, which had allowed the import of ceramic tiles and bathroom/toilet fittings on 180 days credit, is one example. This gazette notification was suspended until further notice
by the Controller General, Department of Imports and Exports the following day.
Earlier, in April 2020, import restrictions on ceramic ware were enforced to safeguard the country and its foreign reserves. However, the import suspension sent ceramic tile and bath ware prices in the local market through the roof, depressing the rebound seen in the country’s housing and construction sector.
The lack of a national policy in this space as well as in others has been the primary cause especially in a liberal open economy. Although the pre-
1977 closed economy had many weak points concerning import restrictions, in principle it was fully geared to boost local industries.
What’s happened since 1977 is that successive governments have sacrificed the future for short-term political gains. Over the past several decades, this situation has worsened even though the difference between the economic policies (of the two main parties) has narrowed.
The policies followed were ad hoc solutions instead of long-term plans for earning foreign exchange. There was no regulatory mechanism to balance imports and exports, and the country increasingly relied on a consumerist economy that resulted in a widening trade deficit.
No attempt was made to stabilise the value of the rupee except by trying to regulate it artificially with foreign loans and providing people with temporary relief. We became parasites in the international trading sector.
Politicians and planners never paused to think of the negative impact this would have on every aspect of the economy, and people’s lives in the long term. This continued for a decade with no change. The regulatory measures necessary for improving the economy in the context of a free market were never taken – and there was no clear vision to build a strong economy; and no proper plan to develop local industries.
Analysts say that compared to 2010, our GDP has reduced by 50 percent. Since the time has come to repay loans on which our past artificial development was based, the country has to face the consequences.
When local products bring in virtually no foreign exchange and yet it’s difficult to stop the import of essential items, the gap between the demand for and supply of foreign exchange undoubtedly increases. This makes it impossible to stem the fall of the rupee value.
According to the 2018 Central Bank Annual Report, 77.9 percent of Sri Lankan exports were industrial products while only around 21.7 percent was from agricultural produce. Of the industrial exports, around 45 percent came from the apparel industry in 2018.
The deficit in the trade account narrowed in November 2020, by US$ 198 million to 565 million dollars (from US$ 762 million recorded in November in the prior year) due to a larger decline in imports compared to the reduction in exports, the Central Bank’s external performance report says.
On the other hand, even if the demand for local products doesn’t shrink, it’s questionable whether Sri Lanka will be able to cater to the demand. The apparel industry, our largest export earner, is also likely to be affected. Considering these factors, the industry could face major challenges in the post-pandemic period.
The US is the largest single market for Sri Lankan exports as it imports products worth US$ 2.7 billion. Meanwhile, American exports to Sri Lanka amounted to 373 million dollars in 2018. Sri Lanka’s exports totalled US$ 11.9 billion in 2018 while imports were approximately 22 billion dollars.
As a result, the country’s trade deficit recorded an all-time high of US$ 10 billion that year.
Expenditure aimed at boosting political image and popularity will lead to uncontrolled inflation. In the final analysis, whatever the expenditure is, it should be beneficial to local entrepreneurs and manufacturers.