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Increasing exports and foreign investment are vital for Sri Lanka’s trade dependent economy. An overreaction to the current global economic dislocation by adopting inward-looking economic policies would be suicidal for Sri Lanka’s trade dependent economy. Sri Lanka has been and should continue to be a trade dependent export led economy to achieve a higher trajectory of economic growth.

Economic rationale

Enhancing exports is imperative for a small country with limited resources of raw materials and a restricted domestic market. As manufactured exports are highly dependent on imported raw materials, liberal import policies are essential to enable exports to be competitive internationally.

Being a small country with limited resources of raw materials and a restricted domestic market, the potential for growth lies in enhancing exports. If the cost of raw materials increase and their availability restricted, exports of manufactured goods would be hampered. Exports of industrial goods are dependent on free imports of a wide range of raw materials. Therefore Sri Lanka’s export led growth is import dependent.

Trade dependency

The country’s trade dependency (exports and imports as a proportion of GDP) was about 35 percent in 2019. While exports were US$ 11 billion, imports were US$ 19 billion. This high trade dependency is characteristic of small countries. The problem however lies in imports exceeding exports by a large amount and thereby straining the country’s balance of payments and external financial vulnerability. It is therefore crucial to enhance exports to bridge the trade gap.

Policies

Economic policies must be geared towards the expansion and diversification of exports. A strategy that attempts to reduce the trade gap by curtailing imports is not only limited in scope, but could hurt exports that are highly dependent on imports.

This does not mean that some non-essential imports cannot be curtailed or that one should not try to produce within the country imported items or substitutes. Efficient import substitution is a rational economic objective, but production of inefficient high cost inferior goods are a burden on the economy and people.

Antecedents

Sri Lanka has been an export import economy since the late 19th century. Exports played an important role even before that. Arab traders followed by the Portuguese conquest of the Island for “Christians and spices” imprinted a trade dependency. The plantation economy introduced by the British transformed the island into an export-import economy.

Post-independence

At the time of independence the country was an export-import economy and a relatively prosperous one in Asia. For a long period of time the country’s exports were the three tree crops: tea, rubber and coconut. This dependency was at times the reason for the country’s prosperity and at times for the economic difficulties.

At the time of independence, the economy was a relatively prosperous one in Asia, as it had benefitted from the high prices for rubber during the Second World War, when Ceylon became the main supplier of rubber for the allied forces. Soon after the country gained by the outbreak of the Korean war that resulted in rubber prices increasing sharply once again in  what became known as the ‘Korean boom.’

Adverse terms of trade

In contrast, the late 1950s and 1960s saw depressed prices for the country’s exports, on the one hand, and rising prices for the country’s large food imports. This deterioration in the terms of trade (prices of imports relative to export prices) led to a foreign exchange crisis in the 1960s and 1970s. This in turn led to inward looking policies that ushered in a period of economic scarcity, severe hardships and low growth.

Change

The character of the export import dependence has changed over time, but the economy continues to be an export-import dependent economy. Agricultural exports and imports are of lesser importance, while imports of raw materials and intermediate goods and capital imports are significant. This is inevitable owing to the limited raw material resources. Other small countries too are highly import dependent.

Self-sufficiency

In spite of these reasons, there is a repeated call for self-sufficiency. This is a popular and patriotic appeal, not a realistic economic option. In as much as the economy is dependent on exports for its economic development, imports are essential for exports.

Two sides of the same coin

Exports and imports are two sides of the same coin. The country cannot have one without the other.  This rationale is often not understood by well-meaning misguided policy makers. On the other hand, JVP spokesman have accepted the need for outward-looking economic policies and the need for foreign investment.

Policy imperatives

It is imperative to enhance the volume of the country’s current exports as well as diversify into new export products and markets. Enhancing agricultural exports is crucial in the country’s export strategy. Declining agricultural export earnings is one of the serious weaknesses in exports.

The main causes for this is the decreased production and export surpluses of coconut, tea and rubber. There has also hardly any increase in spice crops. Cashew is perhaps one of the few increases in agricultural exports. Sea food exports has been a significant new export.

Agri export surpluses

The export surpluses of all three principal agricultural exports have declined. Over time plantation agriculture was neglected owing to high taxation, threat of nationalisation, state take-over of estates in 1974, and mismanagement of estates. Consequently estate tea production in particular declined. Tea exports would have fallen sharply if not for the expansion of small holder tea production that is around two thirds of total production. Small holder productivity is about twice that of estates.

Tea estates

Plantations have a high proportion of low productive senile tea. These have to be replanted with vegetative propagated teas (VPP). Unfortunately there is no incentive for uprooting senile tea plots and replanting. Furthermore, research funding for tea is grossly inadequate and the once prestigious Tea Research Institute (TRI) is weak. There are also serious labour shortages.

Increasing tea production cannot be achieved in a short period of time. There has to be a medium and long term programme of replanting that would increase productivity over time.

Rubber

Similarly the neglect of rubber has resulted in the area cultivated shrinking. The Rubber Master Plan is ineffectively implemented. Rubber has a high potential as the country’s rubber is now mostly used for rubber manufactures. The country has made headway in exports of tires, gloves and surgical gloves. It is essential that natural rubber production is increased to enable an expansion of manufactured rubber goods.

Coconut

The reduction of coconut exports is due to the export surplus decreasing due to lower production and increased domestic consumption with the increase in population. The area under coconut cultivation requires to be expanded to enhance coconut production for domestic consumption and exports.

Conclusion

The world is going through an economic dislocation and recession of unprecedented proportions. It is quite natural to overreact to this and envisage a vastly different global economy in the future. In this mode of thinking Sri Lanka’s economic policy makers must not forget the character of the country’s import-export dependency. Our economic recovery is very much dependent on the global economic recovery which is still not in sight.

We have to adapt our trade dependent economy and face severe hardships till there is a global economic upturn and poise ourselves to benefit from the gains in international trade. The country must continue to pursue economic policies that promote exports to be a fast growing economy.