Opening the door to trade: OBG talks to Razeen Sally, Chairman, Institute of Policy Studies

Interview: Razeen Sally

On which points do you see a need for Sri Lanka to embrace a more liberal economic approach?

SALLY: On the subject of trade, there are three issues to address. The first is the thicket of non-tariff barriers that, in my opinion, have increased protections over imports, and to some extent exports, by a factor of two over the last decade. This has caused huge distortions in the economy and has essentially de-globalised the country. If you look at the whole trade picture, Sri Lanka’s share of trade in GDP has shrunk, as has its share of global exports. Furthermore, unlike other diversifying East Asian economies, the export basket has remained static, based on garments, tea and rubber. Sri Lanka has not diversified into information technology and other manufacturing and services exports.

The second issue to be solved lies in the need for a reduction and simplification of import tariffs. This could be achieved through the introduction of a single 5% tariff on all dutiable goods by 2020, although this may not be politically feasible for agricultural goods. Beyond tariffs, I believe Sri Lanka should follow the examples set by other East Asian countries and simplify its Customs procedures, by introducing technology that will reduce the level of human resources and by bringing in automatic clearance procedures with real deadlines.

The third issue for discussion is the obstacles currently faced by foreign investors, specifically, the complex and inefficient procedures set by the Board of Investment (BOI). There is a need for an ambitious programme of domestic deregulation and automation of government services. This would be beneficial, not just for foreign investors, but also for domestic investors, and can be achieved by handing over the responsibility for licensing and permit approval procedures to just one or two agencies. Additionally, the simplification of procedures and efforts to increase uniformity and transparency could result in the development of facilities at the BOI that more closely resemble a one-stop shop.

Why are imports so widely regulated in a number of emerging economies?

SALLY: There is a misconception among emerging economies that imports harm the domestic market and put people out of work, thus causing agencies to promote exports and control imports. In actual fact, a tax on imports translates into a tax on exports. It disadvantages the tradable sectors of the economy and artificially boosts less productive domestic non-tradable sectors. Local companies lobby for protection against foreign competition. I believe imports to Sri Lanka must be encouraged further, in order to increase export levels. Invariably, some businesses lobby political connections who want to discourage foreign competition. This adds layer upon layer of complexity to the system.

What are the biggest priorities for Sri Lanka’s free trade agreement (FTA) negotiations?

SALLY: FTAs should be thought about strategically and prioritised carefully. Some are of more importance than others. I think that the top priority is to deepen the Closer Economic Partnership Arrangement with India and strengthen ties with Southern India, by tackling the non-tariff barriers and extending the existing FTA to include services. Steps can then be taken towards pursuing FTAs beyond those with developing countries in this part of the world.

The first priority here should be to look at the possibility of a revival of an FTA with the US, in a different form than previously. Forty percent of the world economy consists of the US plus the 10 other countries in the Trans-Pacific Partnership. If Sri Lanka applied to become a member, that would then obviate the need to negotiate further separate FTAs with other countries in Asia, such as Japan.