ECONOMYNEXT – A group of economists and policy analsysts have urged Sri Lanka to remove barriers to exports especially tariffs and para tariffs, which have hurt national competitiveness and benefitted a few against the many.
“For nearly two decades, Sri Lankan exporters have been weighed down by exceptionally high import tariffs,” the group of economists and policy analysts, said.
“This marks a sharp break from the 1990s, when our average tariff rates were comparable to Indonesia, Malaysia, and the Philippines—and lower than China, Thailand, and Vietnam.
“Unsurprisingly, this was when Sri Lanka’s exports were at their peak: our share of world exports reached its highest point at the dawn of the new millennium.
“Even then, benchmarking against large Asian economies isn’t good enough. As a small economy aspiring to be the Indian Ocean’s trading hub, we should, in the first instance, benchmark our tariffs to the UAE, Singapore and Hong Kong.”
The three territories however have monetary stability and has no policy rate enforced by inflationary open market operations, and as a result there is no public pressure to curb imports, analysts have pointed out earlier.
The respective monetary authorities do not create forex shortages which are then blamed on imports or the current account deficit.
Without macro-economic policy or inflationary rate cuts or central bank credit, the ability to import is limited by the inflows from exports of goods and services.
This was explained to Singapore’s parliament on August 26, 1966 by then Finance Minister Lim Kim San.
In 1966 as the speech was made in Singapore’ parliament Sri Lanka (then Ceylon) was in the throes of its first IMF program, after printing money, including for bank credit re-finance.
Macro-economists have since dragged the country to the IMF over a dozen times creating external instability with liquidity tools, critics say.
While the UAE and Hong Kong has absolutely fixed exchange rates, Singapore appreciates the currency when the Federal Reserve prints money and trigger inflation and commodity bubbles.
Since the break up of the Bretton Woods, the Singapore dollar has been appreciated from 3.0 to 1.3 to the US dollar by the Monetary Authority of Singapore, and there are no IMF programs.
Macro-economists in Sri Lanka’s Treasury started slamming para-tariffs from November 2004, in a new ‘de-liberalization’ drive, ending Sri Lanka’s trade liberalization, after money printing triggered forex shortages.
Ironically the 25-page gazette issued at midnight to ‘save foreign exchange’ was signed Trump-executive-order-style by then President Chandrika Kumaratunga who, early in her first presidency, slashed import duties and introduced value added tax to replace the lost revenues.
Businesses with political connections then started to call for greater protection and a few also lobbied against free trade deals, sealing the country’s fate.
Meanwhile the group of economists and policy analysts pointed out that the tariffs have benefited a few businesses at the expense of public welfare.
“Successive plans to reduce tariffs have failed to materialize, enriching the few at the expense of the many,” the economists said.
“An accelerated reduction is now essential. The government must now proceed to eliminate para-tariffs, reduce tariffs, and simplify our tariff structure.
“It must also address non-tariff barriers via the long awaited Customs Act, and full implementation of the National Single Window and WTO Trade Facilitation Agreement.
“It must not be swayed by the private interests of a few businessmen or officials.”
Beyond strengthening our negotiating position with the US and supporting export growth, these reforms will reduce input costs for businesses and prices for consumers—offering partial relief from the fallout of US tariffs.
The full statement is reproduced below:
Economists Action Plan on US Tariffs
Sri Lanka exported $3 billion to the United States last year—nearly a quarter of our total exports. These exports, and the jobs they support, will be at serious risk if recently announced US tariffs come into effect. Production is likely to shift to countries facing lower tariff hikes, such as India, Kenya, and Egypt.
In response, the Sri Lankan government will present a plan to reduce the country’s effective tariff rate. This is welcome. It is well understood that a tax on imports is a tax on exports.
For nearly two decades, Sri Lankan exporters have been weighed down by exceptionally high import tariffs.
This marks a sharp break from the 1990s, when our average tariff rates were comparable to Indonesia, Malaysia, and the Philippines—and lower than China, Thailand, and Vietnam. Unsurprisingly, this was when Sri Lanka’s exports were at their peak: our share of world exports reached its highest point at the dawn of the new millennium.
Even then, benchmarking against large Asian economies isn’t good enough. As a small economy aspiring to be the Indian Ocean’s trading hub, we should, in the first instance, benchmark our tariffs to the UAE, Singapore and Hong Kong.
Successive plans to reduce tariffs have failed to materialize, enriching the few at the expense of the many. An accelerated reduction is now essential. The government must now proceed to eliminate para-tariffs, reduce tariffs, and simplify our tariff structure.
It must also address non-tariff barriers via the long awaited Customs Act, and full implementation of the National Single Window and WTO Trade Facilitation Agreement. It must not be swayed by the private interests of a few businessmen or officials.
Beyond strengthening our negotiating position with the US and supporting export growth, these reforms will reduce input costs for businesses and prices for consumers—offering partial relief from the fallout of US tariffs. This may also create space for the Central Bank to reduce interest rates and facilitate depreciation of the rupee, thus improving export competitiveness.
The tariff shock is a stark reminder that Sri Lanka’s export products and markets have changed little since the early 1980s. No substantial manufactured or agricultural exports have emerged since then.
This lack of product diversification is a key reason for our market concentration. Expanding our export basket and entering new markets is urgent—but also difficult in a time of economic turmoil. Integrating into regional and global supply chains is critical.
Concluding or strengthening FTAs with India, China, and ASEAN—and ultimately joining RCEP—should be a priority. Sri Lanka currently doesn’t have the trade negotiation capacity to negotiate many agreements at once. In addition to operationalizing the Office of International Trade, as with the debt restructuring process, we must hire the world’s top trade negotiators to advise us.
More broadly, we must prioritise exports not just in word, but also in deed. That means removing barriers to export-oriented foreign investment —including reforms to labour, land and energy markets— and, considering the government’s fiscal constraints, unlocking foreign investment in export-enabling infrastructure such as industrial zones, freight forwarding, urban transportation, power plants, airports, high-density housing and universities.
The US tariff shock is not just a short-term threat, but yet another wake-up call to confront long-standing structural weaknesses. Over the last few years we have seen the results of our own complacency.
As the world economy becomes ever more tumultuous, we cannot afford such myopia again.
Sri Lanka needs a laser focus on reducing costs and improving competitiveness. Slashing tariffs, signing FTAs, reforming factor markets and building export infrastructure, integrated together, can propel Sri Lanka to compete, and win, on the world market.
Priority Actions:
1. Accelerate PAL and other paratariff phase-out
2. Reduce and simplify tariffs
3. Pass Customs Act, fast-track National Single Window and WTO Trade Facilitation Agreement full implementation
4. Conclude ETCA and China FTA negotiations
5. Operationalise Office of International Trade
6. Initiate ASEAN FTA and other bilateral FTA negotiations
7. Prioritize export-oriented infrastructure in the Public Investment Pipeline and create an export-oriented infrastructure PPP pipeline
8. Initiate structural reforms in land, labour and energy markets
Signed
Name Title
Anushan Kapilan Economist
Daniel Alphonsus Economist
Duvindi Illankoon Economist
K Don Vimanga Policy Analyst
Mathisha Arangala Economist
Raj Rajakulendran Economist
Ravi Ratnasabapathy Policy Analyst
Rehana Thowfeek Economist
Sarani Jayawardena Policy Analyst
Umesh Moramudali Economist
Yolani Fernando Policy Analyst
