COLOMBO: Sri Lanka has to reduce effective protection re-build a foundation of peace and rule of law to draw investment and boost exports, Finance Minister Mangala Samaraweera said. “Without reconciliation and durable peace, without guarantees of non-recurrence of conflict, Sri Lanka cannot achieve economic success,” Samaraweera told an investment forum organized by Sri Lanka’s Ceylon Chamber of Commerce. “Human rights, democracy, rule of law, good governance – these are tied to stability, and in turn, to economic success. “Reconciliation and development are intertwined. Without reconciliation and the stable foundation that it would bring, sustainable economic progress would once again elude our nation.” Samaraweera had already restored duty free access to the European Union when he was Foreign Minister. Sri Lanka was working on a number of trade agreements that would give access to China, Pakistan and Singapore. Other domestic policy reforms were also needed to boost investments into exports, he said. “Policy reforms which promote export transformation are essential and our attention is focused on this requirement, which encompasses getting the exchange rate; effective protection rates; trade policy including trade agreements; and trade facilitation, right,” he said. Effective tariff protection is a weakly understood phenomenon in Sri Lanka. Up to now Samaraweera is perhaps the only finance minister who has talked about effective protection.
Sri Lanka’s import tariff protection is high for final goods and also for intermediate goods and raw materials. In the modern global manufacturing processes ‘final’ goods at one state is an ‘intermediate’ goods at another stage of manufacture. When intermediate goods are taxed, the ‘effective protection’ of final goods rise to extreme levels, making it almost impossible for even domestic raw materials to be used for exports, as their prices also go up. Sri Lanka has a strong lobby of industrial oligarchs who fund politicians and get tariff protection exploiting domestic consumers and also harming the country’s export potential, critics have said. Sri Lanka has an unstable currency due to a so-called soft-pegged exchange regime with loose policy which is caught in a vicious cycle of depreciation and inflation. The weak currency which is destroying real wages has sent investors into flight to protect their capital from time to time and hundreds of thousands of workers are also fleeing regularly to the Middle East and also other countries like Korea to protect real wages. Sri Lanka also has weak investor protection with some firms being expropriated in 2011 and retrospective taxes being slapped.
