By: Staff Writer
January 20, Colombo (LNW): The suspension of import tax reductions under the 2018 Free Trade Agreement (FTA) with Singapore has raised significant concerns about Sri Lanka’s trade and economic policies.
Initially, the FTA aimed to reduce the Port and Airport Levy (PAL) on imports from Singapore over five years, providing Sri Lankan consumers with access to more affordable goods.
However, the agreement has been stalled since the Gotabaya Rajapaksa administration, and recent parliamentary proceedings indicate ongoing resistance to its implementation.
According to Harsha de Silva, Chairman of the Parliamentary Committee on Public Finance, the process of reducing PAL resumed in 2022 but faced opposition from government ministers. De Silva highlighted that, as chairman, he disagreed with the decision to delay implementation.
Instead, government officials insisted on reviewing the FTA in line with their broader policy objectives. This resistance underscores the broader challenges Sri Lanka faces in embracing free trade policies.
Critics argue that rising taxes on imports, including PAL, CESS, and other duties, have shielded domestic producers from competition while enabling them to overcharge consumers.
This protectionist approach, which has grown over the past two decades, has been described as a “grand alliance between crony capitalists and the political establishment.”
By maintaining high import tariffs, local businesses benefit at the expense of Sri Lankan citizens, who face inflated prices and limited access to high-quality imported goods.
Historically, Sri Lanka once stood alongside countries like Singapore and Dubai as a free-trading nation.
However, the establishment of the Central Bank in 1951 marked a turning point, leading to monetary expansion policies that caused foreign exchange shortages and necessitated restrictive trade controls.
Over time, Sri Lanka became trapped in a cycle of protectionist policies that limited economic growth and trade freedom.In stark contrast, Singapore abandoned protectionist policies in 1965 following its separation from Malaysia.
Faced with the loss of the Malaysian common market, Singapore’s economic architects, led by Goh Keng Swee and advised by experts like I.F. Tang, eliminated import taxes entirely.
This bold decision transformed Singapore into a global free trade hub and ensured its economic stability by maintaining a strong currency through its currency board system.
Vietnam offers another example of the benefits of embracing free trade. Beginning in the 1990s, the communist nation adopted an export-oriented trade model, signing agreements such as the U.S.-Vietnam Bilateral Trade Agreement (BTA).
These reforms led to sweeping legal and economic changes that boosted Vietnam’s economic growth.
Unlike nationalist economies, Vietnam’s leadership ensured central bank control to prevent excessive money printing, avoiding the forex crises that typically accompany trade restrictions.
In Sri Lanka, however, trade freedoms have been repeatedly denied under the guise of protecting foreign exchange reserves. Import substitution policies have stifled growth, while monetary instability has exacerbated economic challenges.
Analysts point out that without significant policy reforms, including the reduction of import taxes and the embrace of free trade principles, Sri Lanka risks further economic stagnation.
The stalled FTA with Singapore symbolizes these broader issues. Its successful implementation could bring numerous benefits, including access to high-quality goods at competitive prices, enhanced economic cooperation, and greater trade integration with a global economic powerhouse like Singapore.
However, resistance from vested interests and the lack of political will continue to hinder progress.A shift toward free trade policies, as demonstrated by Singapore and Vietnam, would require bold leadership and a commitment to prioritizing consumer welfare over entrenched protectionist interests. For Sri Lanka, this could represent a crucial step toward restoring economic stability, fostering growth, and improving the quality of life for its citizens.
