‘Para-tariff reform momentum at risk of slowing’

Sri Lanka’s ongoing tariff policy reform momentum runs the risk of slowing down, due to the growing severity of external shocks and the possible impact it may have on Sri Lanka’s GDP and employment levels, Institute of Policy Studies of Sri Lanka (IPS) Executive Director and Head of Macroeconomic Policy Dushni Weerakone said recently (6), speaking to the World Bank.

“Sometimes I think if the current stress that we see as a result of external shocks becomes more intense, that reform momentum may slow down if there are impacts on expected GDP output for the year or any impacts on employment,” Weerakone said, on the subject of Sri Lanka’s ongoing efforts to phase out its Ports and Airport Development Levy (PAL) and CESS para-tariffs in the next four years.

However, she added that the broader context of the matter brings a positive outlook. “But I see positives on two fronts. One is that South Asia has always spoken of industrial policy in terms of tariff protection.”

According to the World Bank Group’s South Asia Economic Update report for April, the phase-out of Sri Lanka’s two largest para-tariffs, including India’s tariff-cut commitment to the European Union and the UK, would represent a nine-percentage-point cut in the simple average ad valorem import duties applied in the Indian subcontinent.

“Sri Lanka has been doing that for decades, if I’m not mistaken. We have incrementally offered more protection to domestic producers as a means of incentivizing them to increase production. But it has not worked.”

“It is now, I think for the first time, that we are seeing industrial policy and tariff reductions being spoken of as the way forward. To me that is the most positive message that I’m getting from policymakers, that we are seeing industrial policy and positioning Sri Lanka’s reforms in a different way now than what we have done in the past,” Weerakone said.

Weerakone added that the initiative speaks for a trade policy-wise shift in Sri Lanka, wherein para-tariffs policies are now being actioned by the Ministry of Industries - where they once had been mandated by the Ministry of Finance.

“The second positive message I see from that announcement is that if you look at the institutional and consultative process that was behind that proposal, I think again it is after a couple of decades that we are seeing the Ministry of Industries prepare that cabinet paper and get approval,” Weerakone said.

“Tariff reforms in Sri Lanka over the last two decades have been handled by the Ministry of Finance, with the primary focus being on revenue implications of tariff adjustments. And that really has not helped us think through building external competitiveness, etc.,” she said.

“So these two changes are signals of a broader shift in thinking about where Sri Lanka goes from now, having recovered fairly reasonably well, better than what was expected, and how to sustain that growth momentum.”

The World Bank report, addressing the changes Sri Lanka aims to make to its existing tariff framework, stated: “The simple average of Sri Lanka’s total import duties is 19%. Yet, less than half of these import duties are statutory tariffs. Of the 19%, 11 percentage points are accounted for by para-tariffs.”

The report further added that the removal of para-tariffs could raise consumption by 3.1% on average, with larger increases for the poorest households in Sri Lanka.

Source: The morning