ECONOMYNEXT – Import tax reductions for the people of Sri Lanka under a free trade agreement with Singapore has been halted, suspending the implementation of the deal, according to transcript of parliamentary proceedings.
Sri Lanka has agreed to reduce the Port and Airport Levy, imposed on imports from Singapore over 5 years under an FTA signed in 2018.
Rising PAL, CESS and import duties on goods, allowing local producers to overcharge domestic consumers hiding behind a wall of tariffs, rapidly expanded over the past two decades, in what some critics call the ‘grand alliance between crony capitalists and the political establishment’.
The agreement was signed in 2018, where Sri Lanka committed to trade freedoms to the public each year. But it was suspended under the Gotabaya Rajapaksa administration.
“In 2022 the process of removing PAL was taken forward,” legislator Harsha de Silva, who is the Chairman of Parliament’s Committee on Public Finance had said according to a Hansard of January 08.
“But the government ministers in the Committee did not agree. I said as the Chairman of the Committee that I did not agree with them.
“But they said it has to be reviewed according to the government policy. So, there is a problem in implementing the FTA with Singapore.
“They said they will make an analysis of and put forward their stance to the Comittee.”
Related Sri Lanka begins implementing Singapore free trade deal
Sri Lanka was a free trading, and outward remittance country like Singapore and Dubai, before the central bank was set up in 1951, which started to print money through various schemes to cut rates, creating forex shortages, leading to progressive exchange and trade restrictions.
As US central bankers backed by inflationist academics, printed money in the 1960s and finally broke the Bretton Woods system in 1971, Sri Lanka fully closed the economy.
East Asia
Singapore was one of the first countries to abandon import protection and oppressing their own citizens by businesses.
The doctrine of oppressing citizens by businesses (import substitution) was pushed by UN agencies including ECLAC and ESCAP to developing countries in Latin America, Asia and Africa as forex problems worsened in the decade.
As a small country, which could not grow by selling internally under high priced protectionism, Singapore initially tried import substitution in a ‘common market’ (free trade area) with the Malaysian Federation, which it was part of at the time.
Singapore separated from Malaysia in 1965 after disagreements over PAYE taxes, pioneer certificates for its free trade zone and rising Malay nationalism and riots.
Singapore eliminated import taxes in one stroke making the entire country a free trade zone and re-established its currency board to maintain monetary stability with a strong Singapore dollar.
Ngiam Tong Dow, who had served as permanent secretary to Singapore economic architect and one time finance minister Goh Keng Swee, explained how the country abandoned protectionism in one go, after separation.
“Before that, we were pursuing import substitution,” Ngiam explained. “So the aim was to get local industry going, and that is why we had duties and tariffs. The Malaysian common market was the flavour of the day.
“But the moment we left Malaysia, there was no more Common Market. There was no more domestic market.
“So I F Tang (a Chinese born US trained foreign advisor who later became a naturalized citizen and civil servant) told Dr Goh, “OK, from now on must be export-oriented.”
“And in one stroke we removed all the duties and tariffs.”
Sri Lanka and South Asia has languished under import substitution, import taxes and also monetary instability giving the ideological backing to control trade to ‘save’ foreign exchange.
Another country which followed the free trade agenda to quickly become an export oriented country from the early 1990s was the Communist nation of Vietnam.
Communists are not nationalist, and free trade is ideologically compatible as long as the parliament can control the central bank and prevent it from printing money, which is what usually makes politician deny trade freedoms to the people through import controls, analysts say.
Marxists usually do not favour business magnates over the proletariat unlike in countries that pursue economic nationalism.
When Vietnam went on a free trade drive, including through the US-Vietnam BTA, which also led to sweeping legal reforms, there was no opposition from private businesses, which had just started to emerge over the preceding decade.
In the US, including under under Trumpism, nationalism has reared its head after several years of inflation and economic volatility in the aftermath of the collapse of the housing bubble fired by the Fed and quantitative easing that followed it.
In Sri Lanka however there is growing opposition to the politico-business nexus in social media, showing the expanding understanding of the effects of protectionism.
(Colombo/Jan18/2025 – Corrected – Committee on Public Finance not Public Accounts)
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