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Statistics released by the Central Bank last week about the performance of the external sector of Sri Lanka noted that it remained subdued with a widening of the trade deficit, a moderation in tourist earnings and a modest growth in workers’ remittances in February 2017. According to the external sector performance report of the Central Bank, a considerable widening in the trade deficit was observed in February and a substantial portion of the deficit increase is attributed to the reduction of exports. Meanwhile, the imports had increased.

It was noted in the report that earnings from tourism dipped with a marginal decline in tourist arrivals during the month, which could partly be attributed to the day time closure of the Bandaranaike International Airport (BIA) for the resurfacing of the runway. The growth in workers’ remittances in February remained below the expected level. Further, the financial account was adversely affected by significant outflows from the government securities market during the month.

 Sluggish export performance

The report further stated that the earnings from the exports at US dollars 868 million in February 2017 registered a decline of 2.7 per cent from US dollars 892 million in February 2016, mainly due to lower industrial exports. Accordingly, earnings from industrial exports, which represent about 76 per cent of the total exports, declined by 6.5 per cent, year-on-year, to US dollars 659 million in February 2017 mainly due to reduced earnings from textiles and garments. Export earnings from textiles and garments contracted by 14.5 per cent to US dollars 396 million in February 2017 reflected a significant decline in garment exports to the EU and the USA.

With the regaining of the GSP Plus, export earnings from the textiles is expected to go up. However, it remains a question whether that will be sufficient to overcome the larger issue of the reduction of exports. According to data from the Central Bank Annual Report, in 2000, exports were at a record high at 33.3% of the GDP and now it has declined to 12.8% of the GDP in 2015.

This scenario has posed an imminent threat to the Balance of Payment (BOP) consistently, and last year the IMF was the scapegoat for Sri Lanka when the country was on the verge of a BOP crisis. However, this cannot be repeated over and over again. With the policies expected to be followed by the government regarding migrant workers, the workers’ remittances are expected to decline in the short run until there is a significant rise of remittances from the professionals migrating abroad.

In that context, the way in which the government approaches international trade is very vital. For that very reason, the trade policy of the government would be the key for the external sector performances of Sri Lanka in the upcoming years.

Trade policy

At the moment, the government is in the process of drafting a Trade Policy. Last week, it was reported that the Minister of Development Strategies and International Trade, Malik Samarawickrema presented the New Trade Policy (NTP) drafted by a committee comprising of trade sector experts in consultation with a wide range of stakeholders to the Cabinet Sub Committee on Economic Management.

According to the Ministry, the formulation of a NTP was a long-waited task which was demanded by various parties including both public and private stakeholders especially professional associations, chambers, the academia, international trading partners etc. The lack of a clear vision and coherent trade policy that provides benchmarks to govern and guide the administration and the conduct of international trade have resulted in the development of ad-hoc and often conflicting rules, regulations and certain practices  adversely affecting the expansion of trade over the last decade.

However, the previous draft of the Trade Policy was subjected to criticism by several economic experts. The Sri Lanka Association of Political Economy (SLAPE) had noted that it was imperative that the trade debate be centred on a suitable industrial policy, which has a home-grown approach that would take Sri Lanka to export markets. A trade policy per se would not achieve this objective. We urge that the Government should first create new productive avenues through such an industrial policy, possibly emphasizing the role of technology related innovations and adaptations. Any trade policy contemplation to promote exports without such a productive foundation would be unsustainable and meaningless.

“The draft Trade Policy appears to be over-whelmed by the desire to augment export earnings, in which the positive role that import substitution could play has not been given its due place. While appreciating the limitations imposed by the market size of the local economy, complete neglect of the potential developmental impetus of import substitution is deplorable. One dollar of foreign exchange saved through import substitution is likely to generate greater economic value than one dollar earned through exports, because of the already high import intensity of our exports. Therefore, the SLAPE opines that any national trade policy without an adequate emphasis on import substitution possibilities would not be pragmatic or sustainable,” noted a statement issued by the SLAPE

Long-term solution

In that backdrop, it is observed that the country requires long-term efforts to fix the issues relating to the external sector. A trade policy is vital, but it should focus on various aspects, including giving more focus to the import substitution instead of entirely relying on export growth.

However, import substitution is not that simple. Research findings show that exports are very much import-dependent. According to a leading think tank in the country, Verite Research, three structural issues constrain trade deficit management. Those are that post-war growth has been import driven, government revenue is import dependent and exports are heavily reliant on imports. Therefore, whatever the policy changes that are brought in, they should be mindful about the impact of such reforms to the government revenue which is very low, and the impact to the exports that are dependent on imports.
The country needs to capture new export markets without relying on tea and apparel. The bitter truth is that as the income level in Sri Lanka goes up, wage rates go up which makes it harder to compete with countries  such as Bangladesh as the prices of Sri Lanka is higher than such countries. Therefore, investing more on Research and Development is a must, through which the country can export advanced technological products in the future.