Sri Lanka is looking at demand, domestic substitutes, and its foreign exchange position in relaxing the country’s import restrictions which have been in place since March 2020, as the country phases out control measures under the Extended Fund Facility (EFF) of the International Monetary Fund (IMF), according to State Minister of Finance Ranjith Siyambalapitiya.
Speaking to The Sunday Morning, the State Minister said that the five-point approach to the relaxation of import restrictions had brought down the imposed restrictions on over 3,000 HS codes to about 300 HS codes.
He said that in the approach, the criteria the Finance Ministry had considered were items that had no domestic substitute, items that were essentials for agriculture, fisheries, tourism, and other industries, the amount of foreign exchange outflow as a percentage of import items, general demand in the country from the general public, industries, and requests from relevant ministries, and, finally, the consent of the Central Bank’s Economic Research Department.
During the EFF programme period, Sri Lanka is not allowed to impose or intensify import restrictions for Balance of Payments (BOP) purposes and is expected to phase out import controls subsequently.
The State Minister said that the Finance Ministry was following the import restrictions relaxation procedure in stages. “We cannot continue in the global market by imposing import restrictions, as the world demands an open economy and uses other means such as taxes and licences to control trade,” he added.
He noted that if a situation arose which required the control of imports to protect domestic production, substitutes, and foreign exchange, the Government would go for a tax or a licensing process to control the situation rather than reimposing restrictions.
Although it cannot be confirmed whether Sri Lanka will relax all import restrictions within 2023, Siyambalapitiya said that the Government did not hope to keep the restrictions in place further.
“We will relax them at every chance we can and will go back to the free trade that existed in the country before,” he added.
Balance between imports and saving dollars
Speaking to The Sunday Morning, Ceylon Chamber of Commerce (CCC) Vice Chairman (Import Section) Ushan de Silva said that while the importers were happy with the Government’s decision to lift import restrictions, he believed the Government had at the time taken the necessary precautions in restricting imports in order to protect local industries.
“In that regard, we have to have a balance between imports and how we manage without spending foreign currency on imports,” he said.
However, he said that local production needed certain raw materials to function and import restrictions had to be relaxed in such cases, “because exports cannot survive without having those imported raw materials”.
Moreover, de Silva said that the lower demand for imports was caused by the high inflationary situation that existed in the country and though inflation had come down to single digits, the disposable income of consumers was very low at the moment.
“Therefore, there is a decline in market demand for most of the products,” he said.
He noted that even with regard to essential imports, the importers had sufficient stocks but the movement of import bills was very low, due to which there were no drastic changes in the import numbers despite the relaxation of import restrictions.
The Government has already relaxed 638 HS codes including those of commercial vehicles since June 2023, but imports declined from May to June from $ 1.46 billion to $ 1.38 billion with a slight reduction in export numbers from $ 1.01 billion to $ 1 billion.
Central Bank Governor Dr. Nandalal Weerasinghe at the Monetary Policy Review on Thursday (24) said that they were monitoring the return of import demand: “We haven’t seen imports despite relaxation. It is still stable at about $ 1.3 billion, but if that goes up, obviously there could be some pressure on the currency. However, we haven’t seen it yet.”
De Silva said that the decreased demand for imports would be a very short-term scenario: “Going forward, the pattern will change once the economy recovers and there is a reduction in the interest rates. With that the economy may revive after three or four months,” he added.
Further, he said that since demand was low for imports, there was less pressure on the foreign reserves and the currency but the situation might change after the resumption of external debt servicing.
“The Government may have taken precautions. We may have to wait and see how it goes and then the Government may have to rethink and take some action,” he added.
Imports did not cause forex shortage
Meanwhile, Advocata Institute Chief Executive Officer Dhananath Fernando told The Sunday Morning that the foreign exchange shortage in Sri Lanka during the 2021-’22 period which eventually led the country to default had not been created by imports as all imports had been restricted since 2020, when the Covid-19 pandemic hit the country.
He said that it had been created by the excessive money printing that was carried out by the Central Bank at the time. The Central Bank printed Rs. 505 billion in 2020 and Rs. 1.2 trillion in 2021.
For instance, he said that importers did not go to the bank and ask for US Dollars for imports free of charge but paid the equivalent in rupees.
“This means I am giving something which I could have spent to import something. I am saving something, which means I am cutting down my consumption,” he explained, adding that if more rupees were added to the system, the value of the currency would depreciate and there would be more imports as consumption increased with more money in hand.
Fernando said that imports were mainly driven by the money supply in the local currency and low interest rates, which made it easy to borrow, rather than relaxation of import controls.
During the low-interest rate regime in the 2020-2021 period, private credit grew by Rs. 810 billion (13%) in 2021 and by Rs. 376 billion in 2020. Between January to July 2023, private credit declined by Rs. 225 while the NPL ratio was at 13.5% as of June, as per CBSL data.
However, he noted that it did not mean that interest rates needed to go up because other sectors would be affected in terms of getting credit and repayment at high-interest rates: “There could be a foreign exchange shortage if we supply rupees into the system, because otherwise the rupee will depreciate and import prices will automatically go up, so people will be slowly cutting down their consumption.”
Further, he said that importing items that could not be imported before following the relaxation of import controls may have a secondary impact on foreign exchange, but the main impact would be from money circulation and low-interest rates.
Despite import restrictions, the trade deficit was recorded at $ 8.1 billion in 2021 due to exchange rate depreciation, however the sharp depreciation of the rupee in early 2022, the tight monetary policy stance, the decline in real incomes and purchasing power, and tighter controls on imports resulted in a narrower trade deficit of $ 5.2 billion in 2022.
Fernando warned that Sri Lanka had no shortcuts at the moment as the longer-term solution was to allow imports and thereby improve exports to get the foreign exchange for imports.
According to the IMF agreement, Sri Lanka has to gradually phase out import controls, while according to the World Trade Organisation (WTO), member countries cannot have import controls.
Sri Lanka has been imposing import restrictions as a temporary suspension which has been extended every six months via gazette notifications.
Fernando said that generally there was political and business intervention in relaxing imports and also since Sri Lanka was in debt restructuring mode, there could be geopolitical pressure from official creditors to relax import restrictions.