The media reported that the government intended to put in place a system of import quotas and rationing of food and fuel. This is the latest in a long list of interventions over the past two years to address growing balance of payments problems. Like previous measures, this also only addresses the outward manifestation of a larger problem in the economy, but not its origin. Therefore, this political step will also prove to be futile in the end.
The government made the right decision a few months ago by removing price controls on a few selected products in the markets. Instead of quotas and additional controls, what is needed now is to withdraw from further interventions in financial and foreign exchange markets.
Sri Lanka has imposed an ever-growing web of controls on imports since April 2020, but the trade deficit remains stubbornly high. Between January and October 2021, imports increased by 26.5% and the overall trade balance increased by 34% to reach $ 6,498 million. And this, despite a good performance of exports, which increased by 22.1%. The problem is not with exports but with imports caused by excess demand in the economy.
The government pursues an extremely flexible monetary policy, artificially keeping interest rates down thanks to the interventions of the Central Bank. They also record a large budget deficit, financed by credit from the central bank or money printing. It is these two factors that fuel domestic demand and hence the import spiral. Curing the disease requires attacking its root, any other solution will only bring temporary relief at best.
Quotas and rationing – that’s what a voucher system entails are cumbersome and expensive to implement. They are also prone to corruption. Rationing will inevitably create black markets as coupons obtained by those best placed to acquire them are redeemed.
Existing import restrictions are hurting domestic trade, exports and consumers who face rising prices due to shortages. People often characterize the move towards a larger trade deficit as “worsening”, this terminology is flawed and reflects a failure to understand that imports and exports are good for the good functioning of an economy.
By purchasing goods and services at a lower price than it costs to produce them domestically, the nation benefits from imports. By selling goods and services in world markets, at prices higher to them than what he could earn by selling only at home, he profits from exports.
What a country can produce is determined by the resources available. It also determines the standard of living of a country. Given the limitation of a fixed set of resources, if a country tries to produce every item it needs, it may not be very efficient in how it uses scarce resources. Cutting back on imports restricts the inputs available for local production.
There may be things that can be produced efficiently while others may not be so well. It makes sense to allow a country to produce what it has a relative advantage in producing and import what it does not. Imports are therefore necessary for export growth.
The proposed imposition of quotas will further harm the economy and increase the suffering of citizens. The government must tackle the fundamental problem; tighten monetary and fiscal policy, free up the currency, and craft an appropriate stimulus package that can prevent further deterioration.
This will undoubtedly cause a shock – but then allow trade and economic activity to resume. The alternative, however, is much worse; suppressing the symptoms of the disease will also stifle economic activity, leading to slow and certain impoverishment with no hope of growth.
Advocata is an independent political think tank based in Colombo, Sri Lanka. We research, provide commentary and organize events to promote sound political ideas compatible with a free society in Sri Lanka. Visit advocata.org for more information.
Advocata spokespersons are available for live and pre-recorded interviews via 077 4858401
Communication Manager, Advocata Institute
Email: [email protected]