Analysis
Sri Lanka's Import Restriction Predicament
Jan 21, 2023
The crippling shortage of foreign exchange forced the government to put a lid on imports. A protectionist policy of sorts. But the question remains. Why do we pay so much for imports? Why did the government restrict them and most of all, are these restrictions sustainable?

The crippling shortage of foreign exchange forced the government to put a lid on imports. A protectionist policy of sorts. But the question remains. Why do we pay so much for imports? Why did the government restrict them and most of all, are these restrictions sustainable?

Story & analysis by Umesh Moramudali \n Edited by Joshua Perera and Tineeka De Silva

CONTENTS

  1. Why imports matter to Sri Lanka
  2. How do we pay for imports?
  3. Resolving our dollar shortage via the restriction of imports
  4. What types of restrictions are we facing right now?
  5. How do these restrictions affect us?
  6. Has the government made a mess of its import restrictions?
  7. Can we really save more dollars by restricting imports?
  8. Conclusion 

The last two years have been tough on the economy. It has been even tougher on imports. Many items have been banned. Sri Lankans will gladly forget a time when supermarkets were stripped bare for weeks. Sugar, rice, and flour were rationed while butter, milk powder, and even water was off the shelves. Shortages were an unhappy reality, but this wasn’t merely because of supply chain kinks. It was also a sign of an indebted, cash-strapped government struggling to pay for imports.

In this article we will attempt to break down a few things.

Why do imports matter and how do they affect the people and the economy? What does Sri Lanka import? How do we pay for imports? Why did Sri Lanka restrict so many imports during the last two years? To what extent have the current import restrictions been helpful?

Why imports matter to Sri Lanka

You might question why imports have any bearing on Sri Lanka and her economy. Or to any other country for that matter. The short answer is that a country cannot function without imports.

Think back to any moment between the months of April and July last year. There wasn’t enough fuel to go around, no gas for cooking, shortage of medicine, and at times not enough food to eat. Consider what these factors say about Sri Lanka’s capacity to produce or pay for essential items. 

In a word, without imports, our country and the economy would effectively be crippled. 

Sure, not all imported items are essentials. The economy and most people, minus a negligible section of overly privileged individuals, would survive the absence of certain luxuries.

But for Sri Lanka, most imported items aren’t luxuries. They are actually essential for either consumption or production processes. Without them, daily life would come to a standstill. 

To understand this, let's take a look at these two visualizations.

\n We also looked at frequently imported items. Here’s a visualization of Sri Lanka’s top 50 imports. Note these visualizations are based on HS Code based import data bought from Sri Lanka Customs. For optics purposes the names of products are shortened. \n

\n Many of these imports are items which are essential for consumption or for production process. Much of Sri Lanka’s imports are intermediate and capital goods. This means that such imports are essential to complete the production process.

A vast majority of Sri Lanka’s imports are intermediary goods, ranging from fuel to textiles. While we are very proud of our apparel exports, the major components necessary for their production, being fabric and yarn, are imports. \n

\n Have a look at the visualization given above. You’ll notice that yarn and fabric rank high among our priority imports. 

How do we pay for imports?

We need to have an uninterrupted supply of imports to ensure the continued survival of our people and the economy. This necessitates the capacity to pay for imports on time.

As the word implies, imports are an international transaction. Therefore, anyone who imports goods is required to pay for them in international currency, mostly in USD

Take mobile phones for example. When we buy a phone, we pay for it in rupees. However, the person responsible for importing the device to Sri Lanka is required to pay their supplier in international currency. In most cases supplier payments are made in USD.  

How this happens is the importer’s bank transfers the money to the bank account of the supplier. This transaction happens in dollars more often than not. This means that the importer's bank is required to transfer dollars to the supplier's bank or guarantee that they will transfer dollars within a month or two. \n

\n Now for these transactions to take place smoothly and efficiently, the importer's bank is required to have a sufficient stash of dollars. If the bank does not have sufficient dollar reserves, they cannot make payments to suppliers or guarantee payments.

Our banks get dollars from exporters, tourists, migrant workers or the Central Bank. When banks don’t receive a sufficient amount of dollars through these means, paying for imports or guaranteeing payments for imports becomes a difficult task. \n

Resolving our dollar shortage via the restriction of imports

In the event of the banking system collapse and the Central Bank not having sufficient dollars, a government may opt to restrict imports. The Sri Lankan government decided to take this course of action after COVID-19 pandemic hit our shores. This was largely due to restricted dollar inflows from exports as well as tourism taking a hit.

In April 2020, the government issued a gazette temporarily suspending 749 items imports. These Items included rice, coconut oil, pasta, mineral water, specific alcoholic beverages, cement, polythene, shampoos, household and construction items. \n

What types of restrictions are we facing right now?

Imports are restricted in two ways.

The first is a ban on the importation of certain items which has negative effects. Import bans of this kind are usually implemented for health, safety or security reasons and last for long periods. These include banning importation of harmful chemicals, weapons, and animal or plant species that are considered harmful to the environment. 

For example, importation of blue asbestos (HS Code : 252410) is banned for health and safety reasons. Similarly, some chemicals are banned from importing (Ex : Trichloroethane (methyl chloroform) and Chloro-trifluoro-methane). 

The authority to ban selected items from importation is the domain of the Department of Import and Export Control. The full list of banned items can be accessed here. 

However, for convenience’s sake, we’ve got a visualization for you! \n

\n The second type of import restriction is temporary suspension. Often implemented due to payment-related issues, it’s what Sri Lanka is experiencing at this moment and it was imposed in response to the dollar shortage. 

How do these restrictions affect us?

Import restrictions limit local production. They also effect exports, as most of the raw materials required for local production are, in fact, imported.

Since April 2020, import restrictions have been imposed in an arbitrary manner without considering the needs of many domestic industries. These arbitrary import restriction regulations make it extremely difficult for companies to continue production processes.

The export barometer survey conducted by the Ceylon Chamber of Commerce shows that the majority of small and medium-scale exporters faced difficulties in continuing operations due to domestic regulatory barriers, and delays in obtaining raw materials.

It is not just that raw materials are needed for production. Import restrictions also affect the packaging and labeling of products. What this means is that entire production processes can grind to a halt. 

“Majority of firms, particularly SMEs, were concerned about their ability to export in the future due to delays or losses in suppliers resulting from the forex shortages.” - Export Barometer Survey - Findings and Insights Report February/March 2022

This is just one side of the story. Our previous long-form articles examined how the politically motivated and shortsighted ban on chemical fertilizer imports affect the farming community and by extension, the rest of the country and our food security.

Import restrictions have made it difficult to procure material for construction. We're not just talking about buildings and houses. We're also talking about the materials needed to repair houses. The current restrictions make it costly even the smallest of repairs. Daily wage earners engaged in the construction sector have been out of work for months.

Has the government made a mess of its import restrictions?

It’s true that desperate times call for desperate measures.

Sri Lanka is going through an immensely difficult period. Sure, we can’t afford every import on account of the dollar shortage. Therefore, it makes sense to restrict specific, non-essential imports.

On the other hand, restricting the importation of raw materials, intermediary goods and the like needed by various industries, will have long-lasting adverse consequences. This problem is aggravated even further when it is done arbitrarily.

Needless to say, the Sri Lankan Government has done exactly that.

Instead of identifying non-essential items whose impact on local production and export would be limited, the government decided to impose restrictions willy-nilly. There seems to be no long-term plan in implementing these restrictions.

Considering the number of import restriction related gazettes released in the last two years, we hold this problem to be self-evident. Since April 2020, the government has issued 37 gazettes to curtail imports. These gazettes are not only aimed at restricting imports.

The gazettes also constantly revise the statutes regarding import licenses, credit periods and other regulations pertaining to various exemptions. This means an item currently banned from importation might not be banned next month. Conversely, an item not requiring an import license right now, might require one next month.

It is glaringly obvious that such changes make it impossible to carry out business planning while also maneuvering massive uncertainties. Such uncertainties, as we have witnessed, have led to the increased price of imports as well as import-dependent items. 

During the last four months, the government has issued 5 gazette notifications pertaining to import restrictions. The most significant changes were introduced in August 2022, when the government temporarily suspended 1472 items. Just two weeks later restrictions on 709 items out of the 1472 were removed.

One wonders as to why those 709 items in question were temporarily suspended at all.

There appears to be a cycle to these arbitrary import restriction regulations. The government issues regulations banning some imports (or other regulations such as requiring licenses). Severe backlashes against the bans follow. Lobbying ensues. The government then issues a subsequent gazette revoking the import ban on some items. The cycle repeats itself.

As of January 2023, we’re two years into this cycle.

It is not just a question of banning raw and packaging materials required by certain industries. There were some import bans that raised questions as to the common sense of those who made decisions in the first place.

For example, in August 2022, braille typewriters were amongst the items that were temporarily suspended from importation. People don’t import braille typewriters for the fun of it. The ban was subsequently removed in September 2022 along with many other items. The question remains: why was the ban imposed in the first place? 

All this amounts to is the needless complication of the importation system. A system already overburdened with red tape as it is. \n Which leads us to ask the question…

Can we really save more dollars by restricting imports?

Sri Lanka has been desperately using import restrictions to save dollars since April 2020. Sure, some of those restrictions helped to curtail the dollar outflow.

For example, vehicle imports having been banned since April 2020, curtailed millions of dollar worth of outflows. In 2019, Sri Lanka’s vehicle imports amounted to approximately 1 billion dollars. Of course, production didn’t stall on account of the temporarily restricting of car imports.

Inevitably, the answer should be yes, but it is not as simple. News headlines will declare that the government suspended 1000-odd imports. However, do these items, when imported, have an actual adverse impact on our industries? Even if we select items that may be non-essential, can we save enough dollars by simply banning them?  Can further import restrictions be imposed without significant adverse impacts to her people and her businesses?

Based on the custom data, we ran the numbers to estimate how many dollars Sri Lanka would save through the import restrictions introduced in 2022 August. Through the gazette notification 2294/30 issued on 23 August, 1472 items were temporarily suspended.

In 2021, Sri Lanka spent approximately Rs. 522 billion to import these items each year. However, as we explained before, restrictions imposed on 709 items were removed in early September. Once the restrictions on those items were removed, the import bill for the remaining items for 2021 was approximately Rs. 162 billion. This amounts to only 4.2% of Sri Lanka’s total 2021 import bill.

Clearly, these restrictions don’t solve Sri Lanka’s dollar crisis.

These numbers, as well as the reversal of import restriction regulations, clearly indicate that import restrictions are not a sustainable solution for the issues Sri Lanka is grappling with.

Sri Lanka has played the import restriction card far too long. Any additional arbitrary restrictions coming into effect would further deteriorate business confidence and further complicate trade.

Sri Lanka’s top 100 imports amount to nearly 60% of the country’s total imports and most of these are essential items for consumption or for production. In spite of some of these items being essential, importing quantities are already restricted. Therefore, temporarily suspending any of these big-ticket items is not a feasible option.

We reiterate: the country cannot play this card anymore. 

For example, temporarily suspending the importation of computers, phones and tech will create havoc. Both computers and phones, being among the top 100 imports, would save approximately more than USD 300 million per year under the current import restrictions.

But the consequences of such a measure will be similar to the after effects that followed the fertilizer ban.

Sri Lanka also has issues when it comes to importing consumer goods such as mobile phones. For example, during 2017-2021, Sri Lanka had imported 26.4 million mobile phones, a number that grossly exceeds the country’s population.  \n

\n But that doesn’t mean the answer is restricting mobile phones. Such restrictions will result in shortages and price increases, allowing some businesses to profit by hiding behind shortages.

Imports are usually controlled by having a flexible exchange rate system. As the exchange rate increases (which means the rupee depreciates), the prices of imported items adjust upwards accordingly, forcing people to cut down on non-essential items.

It’s basic economics.  

Import restrictions, just like many other economic policies, have ideological supporters and those who lobby against it. But in reality, governments are compelled to work with the best available options. Not adhere to one specific ideological position.

The issue is not about having import restrictions or not.

It is really about whether such restrictions help to achieve short-term goals and whether the benefits exceed any adverse impacts. And more importantly, whether there’s a consistent and justifiable rationale behind these decisions.

Conclusion 

During the last two years, in light of the dollar shortage in the country, Sri Lanka has been relying heavily on using import restrictions to curtail the dollar outflow.

It is clear that the use of import restrictions by the Sri Lankan Government has been an act of desperation as opposed to being a part of a development plan. As a result, processes pertaining to importing goods have become increasingly complicated, less consistent and very lengthy.

While desperate times call for desperate measures, Sri Lanka’s use of import restrictions as a method to curtail the dollar outflow has been very messy.

Our analysis shows it lacks a justifiable rationale, planning, and an absence of basic common sense. It’s why we see import restriction regulations being changed almost monthly, making it very difficult for businesses. 

Imports restrictions are by no means a solution to the crisis Sri Lanka is facing. At the heart of the issue are the structural weaknesses of the economy which we have consistently highlighted in our articles.

Imports are essential to the country’s production and to sustain export growth. A fundamental economic truth that many people fail to understand is that exports cannot happen without imports. The idea of a self sufficient economy founded on import restrictions is an absurd and lazy dream. The darker, yet more pragmatic, reality is that the country's production and exports will come to standstill without imports. 

Sri Lanka has already restricted imports that impacts our daily lives, production or exports. Any further import restrictions are likely to cause more trouble for businesses as well as people, and to the overall economy.