• Ban forced many SMEs to shutter
• CBSL data casts doubt on ban’s effectiveness
• Major businesses thrived, SMEs suffered: SLTDC

By Maheesha Mudugamuwa Questions have been raised as to whether the Government-imposed ban on certain types of imports last year has yielded the expected result of conserving foreign reserves, with Central Bank of Sri Lanka (CBSL) statistics showing no major reduction in import expenditure in 2021. According to CBSL statistics, total expenditure on merchandise imports in 2021 was recorded at $ 20,637.4 million while $ 19,937.1 million was recorded in 2019, the year that the country functioned as per usual prior to the world plunging into the Covid pandemic in 2020. In 2020, total expenditure on merchandise imports was recorded at $ 16,055.4 million due to import restrictions. The national economy was hit hard in 2020 after the country was forced to lock down following the spread of Covid-19. With global and local travel restrictions, the tourism sector – which is one of Sri Lanka’s major foreign exchange earners, was affected badly with earnings plunging to just $ 957 million in 2020, down from $ 3.6 billion in 2019. As a result of the reduction in foreign exchange earnings, the country’s foreign reserves plummeted to $ 4.8 billion at the end of January 2021, the lowest since September 2009 when reserves fell to $ 4.2 billion. Sri Lanka’s gross official reserves were at $ 4.8 billion by the end of January 2021 from $ 5,665.1 million by the end of December 2020. Nevertheless, despite the restrictions, the country has spent a total of $ 3,848.7 million in 2021 on consumer goods alone, whereas in 2019 it was at $ 3,956.5 million. Import ban hits biz In a bid to save foreign exchange, the Government banned imports ranging from motor vehicles and electronic equipment, to beer, clothing items, and cosmetics and even spices such as turmeric, which is an essential cooking item in local households. The Government-imposed import restrictions negatively impacted the country’s local market as thousands of local Small and Medium Enterprises (SMEs) were forced to close down. Speaking to The Sunday Morning, Sri Lanka Trade Development Council (SLTDC) Chairman Roshana Waduge stressed that the business community had been severely affected by the import restrictions as these restrictions had been imposed on varied sections without a proper analysis. He alleged that several leading businesses had gained a massive advantage from the restrictions and they had indirectly paved the way to create a monopoly due to the lack of competition in the market. Nevertheless, the restrictions were initially announced as a measure to protect local businesses and the Government even promoted home-grown cultivation when it imposed the ban on importation of turmeric. Yet, there were a number of vendors on the roadsides with kilos of raw turmeric while dried turmeric powder was sold at higher prices in supermarkets. Waduge stressed that if the Government wanted to promote local businesses, there should be a mechanism to sell local products at a lower rate than that of imported products. “Instead, the price of a tile increased to around Rs. 1,400 whereas the prices of imported tiles were at Rs. 300. What is the point of selling them at higher rates that the consumers cannot even afford?” he questioned. Highlighting the importance of addressing economic issues with expertise, the SLTDC Chairman stressed that the former economic councils should take responsibility for the current economic crisis in the country. Ban fails to achieve aim It was reported last week that the National Audit Office (NAO) stated in its observations on the annual performance of the Imports and Exports Control Department in 2021 that although the import of certain goods had been restricted with the aim of keeping exchange in the country, the expected results had not been achieved due to the rapid increase in the number of import licences. It was further reported that the NAO had observed that the 47% increase in import licence revenue in 2021 compared to 2018, the year before the Covid pandemic, showed that imports were occurring without control. Nevertheless, when contacted by The Sunday Morning, NAO Deputy Auditor General P.L.K. Perera said the report was yet to be published by the office and therefore the contents could not be revealed yet. As per the CBSL, amidst the continuation of certain import restrictions, mainly on personal vehicles, expenditure on imports increased considerably by 28.5% to $ 20,637 million in 2021 compared to 2020. Economists’ views In such a backdrop, with traders raising concerns over the shrinking of local market exposure due to the restrictions, economic experts have different opinions. Speaking to The Sunday Morning, Economist and former Deputy Governor of the CBSL Dr. W.A. Wijewardena said that there had been a reduction in total imports to Sri Lanka. When asked whether the import restriction had saved foreign exchange, Dr. Wijewardena stressed that the restriction had been applied only to a very small fraction of the components related to consumer imports, amounting to only 20% to the total import bill. “If you want to have a major impact, there should be 60-70% of the crunch, but then again it will have a negative impact on economic growth,” he explained.   Commenting on the import restrictions, Ceylon Chamber of Commerce Vice Chairman and Ernst & Young Senior Partner and Head of Tax Duminda Hulangamuwa told The Sunday Morning that the import restriction had affected not only small-scale businesses but also large-scale businesses. “The restrictions were not aimed at raw material. Sometimes raw material can be used as consumer goods. Restrictions were imposed so as to reduce consumption,” he said. Commenting further, Hulangamuwa noted that for the moment it was a stability issue as businesses could not grow since there was no money. “At the moment what is most important is providing the basics. The restrictions can be gradually reduced once tourism grows by at least around 20% and the dollar stabilises,” he added. Increase in imports  The increasing demand for imports with the resumption of domestic economic activities, elevated price levels in global commodity markets including fuel prices, higher reliance on refined petroleum due to intermittent closures of the refinery, higher expenditure on account of medical and pharmaceutical items such as vaccines, and the relaxation of some import restrictions mainly accounted for the increase in imports despite extremely low imports of personal motor vehicles. Import growth was broad-based as observed in the increases in almost all major categories of imports.  According to changes in import volume and unit value indices, in general, import expenditure was influenced by both volume and price increases, despite volume and price changes varying across major categories of imports. As a percentage of GDP, import expenditure increased to 24.4% in 2021 compared to 19.8% in 2020, as stated in the CBSL Annual Report for 2021. It is further stated that the expenditure on food and beverage imports increased by 7.2% in 2021 compared to 2020.  Higher imports of coconut oil led the oils and fats subsector to record the largest increase in the food and beverage category, while the importation of rice, mainly towards the end of the year (about $ 63 million during the last two months of 2021), caused the cereals and milling industry products sector to record a considerable increase during 2021 compared to 2020. Dhal, sugar, and fresh fruits were the other major food items that recorded increased import expenditure in 2021. However, expenditure related to seafood, beverages, and dairy products declined during 2021, driven by low import expenditure on canned fish and sprats, alcoholic beverages, and milk powder respectively. The rise in unit values largely contributed to the significant increase in import expenditure.