Overcoming the escalating Trade Deficit
Posted on September 28th, 2018

A trade deficit typically occurs when a country does not produce enough goods for its residents. Alternatively, a deficit means that a country’s consumers are wealthy enough to purchase more goods than the country produces. When production cannot meet demand, as in Sri Lanka, imports tend to increase. Persistent trade deficits are detrimental to the country’s economy because it is financed with debt. Sri Lanka currently owes around US $ 65 billion. High Trade Deficit also tends to negatively impact employment, growth, and devaluing its currency. If we are to reduce the trade deficit so that its undesirable effects are reduced, it is essential that exports are increased and imports are reduced as much as possible.

article_image

According to Central Bank Annual reports the Trade Deficit in Sri Lanka, during the last five years, as indicated in Table 1 has continued to increase from US $ 7609 million in 2013 to US$ 9620 million in 2017. A recent Central Bank’s press release reports that the trade deficit for the first half of 2018 had widened to USD 5,709 million, as against USD 4,751 million in the first half of 2017. On that basis, the trade deficit is likely to reach USD 11,000 million this year.

See the Table 1

Increase export earnings

The dire need to increase our export earnings to meet the severe financial crisis we are facing today has been emphasized by many. As indicated in Table 1, exports since 2013 have not increased by any substantial amount in spite of an Export Development Board and numerous other authorities. Increasing exports is of paramount importance to improve our economy. It is because of the importance of increasing exports that the government brought a National Export Strategy. But what are we going to export?

Plantation Sector

Our major exports have been plantation crops tea, tuber and coconut. Around 800,000 ha are cultivated with plantation crops and this sector, in the recent past, played a very important role in increasing our exports earnings. However, as indicated in table 2, production of these major export crops do not show any substantial increase during the last five years. Tea production has been fluctuating around 300 million kg during this period and it is unlikely that tea exports will increase substantially in the near future. As indicated in Table 2, it is the same story in the rubber sector. In fact, the annual total rubber production has decreased from 130 million kg in 2013 to 83 million kg in 2017. Coconut production too has declined during the present decade. This appalling situation in the plantation sector can be attributed to many factors, but the Ministry of Plantation Industries and the relevant authorities appear to have not taken affective strategies to remedy this situation. If the productivity of this sector is raised, it would be possible to increase foreign exchange earnings. However, as it is, it is very unlikely that it would be possible to increase the production of our major plantation crop by any substantial amounts.

A large number of crops other than tea, rubber and coconut cultivated in Sri Lanka have a high potential as export crops. There are 24 agro ecological zones, each characterized by specific climate and soils. This makes it possible the cultivation of different types of crops. Among these are spice crops such as cinnamon, tuberous crops, horticultural and floricultural crops, medicinal herbs etc. which have a considerable export potential. In 2013, spice crops earned around US$ 350 million. There are many organizations such as the Ministries of Agriculture, Industry and Commerce, Export Development Board, Industrial Development Board etc. but, there appears to be no proper plan to increase production of these crops.

See the Table 2

Out of the 6.5 million hectares of land, around 2.0 million hectares are in the Wet Zone. About 75% of it is cultivated and most of this land is of low-productivity due to soil degradation. In the Dry Zone, out of the 4.5 million hectares only about 2 million acres are in productive use. Thus, there is a large extent of potentially cultivable land in the Dry Zone. Most of the soils in the Dry Zone are relatively more fertile than those in the Wet Zone. Non-availability of adequate rainfall during the Yala season is one of the limiting factors of crop production in the Dry Zone. However, better water management practices would reduce this limitation. Also, various major irrigation projects such as Mahaveli, Kirindioya, Muthukandiya and Inginimitiya provide irrigation to about 200,000 hectares in the Dry Zone. The recently inaugurated Moraghakanda project is expected to provide irrigation water to nearly 80,000 ha. The numerous minor irrigation projects too would increase the irrigable area in the Dry Zone. Thus, there is a considerable potential to increase the level of crop production in Sri Lanka, export of which would enable to increase exports.

Agro-Industries:

Promoting agro-industries will have a considerable positive impact on increasing exports. There is an urgent need to develop agro-industries in Sri Lanka, which will have a tremendous impact on unemployment and rural poverty. A large number of crops cultivated in Sri Lanka, including rice, have considerable potential in various agro-industries. However, only rubber, coconut and a few fruit crops are used in industries. Crops such as cassava, horticultural and floricultural crops, medicinal herbs, cane, bamboo, sunflower, castor, ayurvedic herbs, etc. have a considerable potential as export crops, but are not cultivated to any appreciable extent for want of better and improved varieties, technological know-how, relevant market information etc. Development of agro-industries will also increase export income and will have a tremendous impact on the economy of the country, and also provide employment opportunities among rural people. Private sector can be involved in such projects for which appropriate technical assistance need to be given by the relevant public organizations.

However, there appears to be no proper long-term plan to develop agro-industries, except for some ad-hoc projects. The Ministries of Industries and Agriculture should implement an effective Agro-Industrial Development Programme, in collaboration with the private sector, which undoubtedly would improve export income, employment opportunities and incomes in the rural areas.

Small and Medium Term Industries

Products of crop based Small and Medium Enterprises (SMEs), have a high export potential and play a very important role in economic development of Sri Lanka because, they have the capacity to achieve rapid economic growth, while generating a considerable extent of employment opportunities. Promotion of SMEs would result in increasing industrial output of the country, leading to more exports. However, not much emphasis appears to have been placed on improving SMEs, except providing loans from banks. A main factor which limits the SME sector is inadequate raw materials. For example cane is not available for those in this sub-sector. It is so in most of the other sub-sectors too.

There has been rhetoric on promoting exports. It is meaningful and effective actions that are necessary. Giving talks at numerous seminars etc. will not increase exports unless there is a realistic plan implemented effectively.

Reducing Imports

While some talk about strategies to increase exports, there appears to be not much emphasis on reducing imports, which will have an appreciable impact on reducing trade deficit.

As indicated in Table 1 the imports has increased appreciably from US $ 18,000 million in the year 2013 to around US $ 21,000 million in the year 2017. Based on Central Bank reports expenditure on food and beverages in 2013 was US$ 1368 million and this has increased to US$ 1841 million in 2017. The expenditure in 2018 on food imports is likely to be even more due to the depreciation of SL rupee and drought.

Most of the food imported such as sugar, milk food, lentils, onion, maize, etc., involving US$ 1841 million, can be locally produced, thereby reducing expenditure on food imports. For example, nearly 16% of food imports is spent on importing sugar, most of which can be locally produced. Sugar production in the country has not increased by any appreciable amounts during the present decade in spite of three sugar companies, Pelwatta, Sevanagala and Hingurana and the Sugarcane Research Institute. Kanthale sugar factory remains closed over a long period, while a plan to cultivate sugarcane in Bibile remains shelved. There are crops such as coconut, kitul and palmyrah which can be used to manufacture sugar based substances such as jaggery and treacle, but there appears to be no effective strategy to promote the production of these crops.

With regard to milk production we have around 1 million cattle consisting of mostly indigenous cattle. Their productivity is low (1-3 liters/day) mainly due to the poor nature of the breeds and inadequate low quality feed supply. There appears to be no effective plan to improve the local breeds and supply of cattle feed. The dairy industry has a potential to contribute considerably to Sri Lanka’s economic development. But, instead of implementing an effective plan to develop the dairy industry in the country, the government is planning to import 20,000 cattle from New Zealand and Australia involving USD 73 million. There are reports to indicate that some of the previously imported cattle have a virus disease, and it may affect the local cattle. Importing cattle to improve the dairy industry in the country is a futile action, as importing cattle alone is not going to increase milk production in the long run, unless there is an effective programme to upgrade local cattle breeds, promote cultivation of  pasture grasses such as brachiaria, which can be grown under coconut.

Although we say that we are self-sufficient in rice ( a carbohydrate) a large amounts of wheat flour (another carbohydrate) is imported at a cost of around Rs. 45 billion. Annual wheat consumption in the country has increased from 38 kg/per person to nearly 80 kg/per person. There are many tuberous crops such as innala, sweet potato, yams which can replace a part of the wheat flour we import thereby reducing expenditure imports.

Eppawela Apatite (EA), which was discovered a few decades ago still remains partly underutilized. EA can be used to manufacture phosphate fertilizers. But, still we grind the rock and use the ground apatite as a P fertilizer, while spending millions to import Single Superphosphate and Triple Super Phosphate, which can be manufactured from EA.

The expenditure on subsidiary crops such as chillies, green gram, ground nut, potato etc, is millions of rupees. The average per hectare yields and the extent of these crops have not increased to any appreciable amount during the last decade. A few years ago, a former Minister of Agricultural Development Chamal Rajapaksa, appointed an Advisory Panel to make proposals to develop the agricultural sector so that there is a quantitative and qualitative increase in crop production at a lower cost with no damage to the environment. During the last few years numerous programmes such as “AMA’, “Waga Sangramaya” and “Govi Sevana” were implemented. All these activities/programmes, appear to have not made any appreciable positive impact on the agricultural sector of the country indicated by increasing expenditure on food.

Car imports: Import of cars has increased considerably during the last few months resulting in an increase in imports expenditure. In the first half of this year 2018, import of cars has increased involving US$ 810 million. It will also cause an increase in the fuel imports which at present is around US $ 3 billion. In such a situation the government has given permits to import duty free cars which will further increase expenditure on car imports. Already, there is a huge stock of cars in the country and as a result millions of foreign exchange is blocked in the garages of car dealers. A few decades ago only those who earned foreign exchange were given permits to import cars.

Science and Technology.

Effective use of Science and Technology (S&T) would tend to reduce imports and increase exports. During the last two decades, effective use of Science and Technology (S&T) enabled most of the South and South East Asian countries to develop substantially. However, in Sri Lanka, in spite of a number of scientific organizations such as the National Science Foundation, National Institute of Fundamental Studies, The National Research Council of Sri Lanka, National Science and Technology Commission, which use a considerable amount of scarce financial resources, S&T has been used to a relatively very little extent to improve the economy of the country.

A primary objective of use of S&T in a developing country such as Sri Lanka must be to conduct appropriate studies on the critical issues and advice the authorities on relevant action to be taken. Science and Technology need to be used to utilize locally available resources. Conducting research alone will not lead to economic development, unless the technologies developed by research are made use or commercialized. Organizations such as the Industrial Development Board, the Board of Investments etc. need to coordinate with the relevant scientific organizations to attract investments on commercialization of proven technologies. Vidatha Centers have been established in many DS Divisions to commercialize S&T. Perhaps the Ministry of Technology and Research may indicate to what extent these Vidatha Centers have been effective in commercializing S&T.

Import of Fuel

The expenditure on importing petroleum is around US $ 3 billion which is about 15% of the total imports. In 2010, there was an Inter-Ministerial working committee, headed by Prof. Tissa Vitharana, the former minister of Science and Technology, on the use of bio fuel as an alternative to imported fossil fuel. Among the recommendations made by this committee were to promote the use of bi-fuel obtained from sugarcane and jetropha. A seminar on the use of bio-fuel was held in 2009 at the National Science Foundation. Several speakers at this seminar highlighted the possibility of using ethanol and jatropha as alternatives for imported petroleum. Ethanol and jetropha are used in many countries as alternatives for petrol and diesel respectively. However, the institutions responsible for S&T did not follow these recommendations, and now no one appears to be bothered on the use of bio -fuel and Jetropha as sources of fuel which has a potential to reduce our expenditure on importing fossil fuel.

In Sri Lanka, during the last two decades, perhaps a few thousands of research studies, involving billions of rupees worth of scarce resources, have been conducted. Findings of these research projects were presented at numerous conferences, seminars etc. It is important that we utilize these research findings to find solutions to the pressing problems of the country. But, there appears to be no effective system to achieve this. Instead, the authorities are concerned in conducting more and more seminars and symposia without any plan to effectively utilize the findings/conclusions.

Controlling non-essential imports and producing substitutes are essential to reduce the increasing Trade Deficit, which is likely to be around US $ 11 billion in 2018. In Sri Lanka we have been affected by persistent trade deficits over the years, but the relevant authorities appear to have miserably failed to implement effective strategies to ameliorate this situation, indicated by continuous increase of the Trade Deficit during the last few years. Strategies to reduce trade deficit would involve implementation of effective short, medium and long term plans. The responsible organizations need to discuss these issues and take appropriate action. There has been rhetoric on economic development during the last few years. It is meaningful and effective actions that are necessary.

([email protected])

Leave a Reply

You must be logged in to post a comment.

 

 


Copyright © 2020 LankaWeb.com. All Rights Reserved. Powered by Wordpress