Kath Noble

Sri Lanka’s economic hotchpotch

Posted in The Island by kathnoble on September 18, 2013

How the Government is increasing tariffs to promote local industry while simultaneously negotiating free trade deals

carsThe Government’s economic policy is quite a mystery. It combines elements of what economists regard as completely contradictory ideas, unencumbered as it is by any clear ideology or even vaguely worked out plan of action.

Consider its approach to international trade.

Last week, the Indian media reported that India’s largest car maker Maruti Suzuki is to decide on whether to set up an assembly unit in Sri Lanka by the end of this financial year. It would be its first overseas venture.

Its chairman was quoted as saying that the initiative is being considered in the wake of significant increases in tariffs by the Sri Lankan authorities. Maruti Suzuki exported 15,000 vehicles to Sri Lanka in 2011/12, accounting for half of the 29,000 new cars sold in the country – preowned vehicles made up the remainder of the total market of 59,000 vehicles. But sales have dropped sharply.

Import duty on cars has been increased from 120-291% to 200-350%, while import duty on threewheelers and twowheelers has been increased from 51-61% to 100%. Excise duty has also been increased.

Sri Lanka is the largest export market for Indian cars, earning them $800 million in 2011/12, so manufacturers have responded with considerable concern.

Typically, it has been portrayed as a move to undermine India in favour of China. The story in the Business Standard referred to a $20 million investment by a Chinese company in an assembly unit in Sri Lanka, suggesting that the changes in the Sri Lankan tariff regime were part of the Mahinda Rajapaksa administration’s enthusiasm for all things Chinese.

That Sri Lanka has moved closer to China in recent years is undeniable.

China has become Sri Lanka’s biggest donor. As Saman Kelegama of the Institute of Policy Studies noted in a recent speech, China provided 25% of the Government’s foreign assistance in 2010, up from virtually zero a decade ago. The major donors in 2000 were the Asian Development Bank with 27% and Japan with 20%, which now account for only 11% and 13% respectively.

He repeated the long list of projects in which China has been involved – from the not so appreciated Norochcholai coal power station to the as yet unproven Hambantota port and airport via the Southern and the Colombo-Katunayake expressways, the Moragahakanda hydro power and water supply project and the surely purely decorative Nelum Pokuna theatre.

India is extremely keen for people to draw attention to the potential dangers of depending on Chinese aid, and Saman Kelegama referred to a couple. He said that the interest rate is generally high, while China usually insists on the use of Chinese workers.

He also claimed that technology transfer was relatively limited, compared to Indian assistance.

These may indeed be problems, but at least as I have argued in previous columns the Chinese don’t have grand ideas about how the Sri Lankan economy should be run, as is still the case with the West and Western influenced multilateral institutions like the Asian Development Bank.

One problem that he didn’t note is the lack of transparency, with the details of projects undisclosed and thus opportunities for corruption multiplied.

Really there are no great deals to be had with aid. All countries give while expecting to receive – now or later – which is why trade and investment is so crucial.

We’ll come to that shortly.

But it is not only China that has been providing more funds to Sri Lanka of late. India is now the second biggest donor, accounting for 15% of foreign assistance in 2010, again up from very little a decade earlier. Indeed, the increase in Indian finance to the Government may very well be a direct result of the increase in Chinese finance, since India is trying hard to avoid any erosion of its influence.

Sri Lanka’s links with India have been growing too.

If there is a competition between India and China in Sri Lanka, both are winning when it comes to economics.

And the changes in tariffs on vehicles play no part in it.

They are actually elements of a surprisingly positive yet completely unpublicised effort to promote local industry that has seen four assembly units being set up since 2006, not just involving Chinese firms but involving Indians and Koreans as well, according to a paper on economic policy under Mahinda Rajapaksa by Australia based economists Premachandra Athukorala and Sisira Jayasuriya.

The authors would appear to be gung-ho neoliberals, so they are not very keen on either the policy or Mahinda Rajapaksa, but they do suggest that it has had an impact.

It certainly shows that there is an alternative to the Government’s most common practice of offering investors a whole lot of freebies if they deign to come and do business in Sri Lanka, as I discussed a couple of weeks ago with regard to its plans for higher education.

This is what I mean when I say that its economic policy is a hotchpotch.

And one can’t even rely on the mess to remain the same over time – its shape and dynamics are constantly changing.

Last week, as Maruti Suzuki was talking about setting up an assembly unit in Sri Lanka to get around the increased vehicle tariffs, the Government announced that it was pursuing a Free Trade Agreement with China. According to a statement by senior Communist Party member Liu Yunshan on the occasion of his visit to Sri Lanka, negotiations have been going on for six months already, although this is the first the public have been told about it.

Without a proper plan for the economy – dreaming of making Sri Lanka the centre of the world as in the now infamous five hubs strategy doesn’t count – it will be extremely difficult for the Sri Lankan side to do a good job.

Since China thinks much further ahead and a lot more seriously about literally everything, there are plenty of reasons to be worried by this news.

The Free Trade Agreement with India did not turn out to be very helpful in securing for Sri Lankan businesses access to its huge market, despite the hype put about by the Government and its ever willing supporters in the media. As I have discussed in other articles, its major success was in helping Indian manufacturers of a couple of products using raw materials from Southeast Asia to circumvent high tariffs in India by temporarily basing part of their processes in Sri Lanka – trade which slightly improved Sri Lanka’s balance of payments while it lasted, but came to an abrupt end when India changed its tariff regime.

China’s huge market is likely to be at least as difficult to crack.

Meanwhile, with a Free Trade Agreement, Chinese goods that Sri Lankans are already buying in bulk would enter the country without tariffs, making them cheaper and thus more attractive for consumers, but also reducing the already very limited revenue of the Government and using up even more valuable foreign exchange.

Of course, the Government may not actually sign – this may end up like the Comprehensive Economic Partnership Agreement with India, which has been negotiated for almost ten years and finally appears to have been dropped.

It’s not generally considered a good omen when not getting around to or not being able to decide on a course of action is regarded as the best possible outcome.

This article was published in The Island on 18th September 2013. The internet version may be accessed here.

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