Protectionist syndrome

The 2014 budget extends protection to selected industrial and agricultural sectors as part of efforts to strengthen the domestic economic base. But selective protection for agriculture and industries could mean consumers end up paying more

By Rohan Gunasekera.

Published on December 08, 2013 with No Comments

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Global Trade Alert, a monitoring service, has a world map on its website showing both protectionist and liberalising measures countries have taken. There have been some 400 new protectionist measures put in place each year since 2009, it says, noting that the trend is on the increase. Sri Lanka, it says, has taken 24 protectionist measures and nine liberalising measures. That was before the Sri Lankan government’s budget for 2014 in mid-November which increased import levies in some form or the other on a range of items, from edible oil and cheese to beer, cement, ceramics and cars.
Increased taxes on food like sugar, salt, and canned fish, have drawn the most flak as there have been immediate increases in prices of staple items with the opposition political parties accusing the government of having some of the highest taxes on food in the region. The government’s stated aim is to improve local agriculture and industry and the measures announced in the budget indicate the success of different lobbies.
“The high cess on imported food and related items and construction-related products would immensely encourage local manufacturers involved in import-substituting food manufacturing and manufacturers of tiles, cement, cables, aluminium, bath and sanitary ware,” stock brokers Asia Securities said in a research report.
According to the budget, prevailing high taxes on edible oil at the point of Customs will be maintained to increase long-term cultivation interests. It proposes to restrict coconut oil and palm kernel imports and remove Nation Building Tax on coconut oil millers for three years to strengthen the coconut industry. “This will encourage the palm oil cultivating plantations,” says stock brokers Asha Phillip Securities in a report on the budget. Local beer producers like The Lion Brewery Ceylon get protection with the hike in cess on imported beer to 40% from 30%.
The budget said a high cess will be maintained on imports of butter, yoghurt and dairy products to further support the local dairy industry.
“The government’s policy of import substitutions through local production seems continuing in this budget too via the increased cess on imported products such as wheat flour, cheese, curd, margarine, chocolate, beer, vegetables and fruit juice,” Asha Phillip Securities said. “This will facilitate the local dairy manufacturers to be more price competitive in the local market.”
Keeping food prices high, as Sri Lanka has been doing, has serious social consequences that may not be glaringly obvious but show up in the statistics. Child malnutrition rates in 2002-08 were 21%. Among children under age five, 18% were stunted at the time, 22% underweight, and 15% wasted, according to the World Bank-Sri Lanka 2013-16 country partnership strategy report, which notes: “These malnutrition levels are higher than what is expected for countries at similar GDP per capita levels.” In the estate sector, where child malnutrition rates were among the highest in the world, stunting (height for age) affected more than 40% of children.
Poor nutrition in early childhood can result in poor brain development and reduces learning abilities. Conditions on estates are reportedly better now although the 2012 National Nutrition and Micronutrient survey shows the prevalence of stunting was highest (23.8%) in Nuwara Eliya district followed by Badulla and ranged between 6.8%-9.4% in the Western Province. That survey said stunting has declined over the last three years owing to “unrelenting” efforts of the government and other organizations. Stunting declined from 19.8% in 2009 to 13.1% in 2012 for children under five years. Still, the survey showed 19.6% of these children were wasted and 23.5% were underweight.
Analysts said measures to protect the dairy sector could prompt more local firms to get into the butter market. Imports by Fonterra Brands Lanka, the local unit of New Zealand’s co-operatively-owned multinational, dominate the local butter market with limited domestic competition from state-owned Milco and the unlisted Pelwatte Dairy.
The increase in the protection is huge in some cases. The tariff on butter, yoghurt and cheese rose by 50% to Rs 300 a kilo or 30% from Rs200 or 30%. The levy on margarine rose to Rs75 per kilo from Rs50 and that on salt from Rs20 to Rs 25 per kilo.
“A high cess will serve to increase prices and reduce demand, and possibly encourage a switch to local products (subject to availability of the latter),” CT Smith Stockbrokers says in a report on the budget. “Local dairy producers who are currently not engaged in butter production may consider entering the butter market.” These include Cargills (Ceylon), Lanka Milk Foods, Kotmale Holdings, Renuka Agri Foods and Nestle Lanka.
Small businesses stand to gain too. The budget announced a special loan scheme at an interest rate of eight percent to support small and medium enterprises in the dairy sector to promote dairy farms, collection centers and equipment and the production of animal feed.
The new taxes in the budget will have a widespread inflationary impact, the brokers said. Some like the Special Commodity Levy were effective immediately. “The increase in import cess, Customs Duty and the Special Commodity Levy on a range of commodities and staple products are expected to lead to higher product prices, thereby potentially leading to higher inflationary pressure,” CT Smith Stockbrokers says. “The government has been placing greater emphasis on promoting domestic production through import substitution and value addition for exports.”
Other increases in import cess such as on aluminium bars and tubes are clearly meant to help local construction and construction-related manufacturing firms. They will also gain from changes in regulations governing imports by companies coming under the Board of Investment which used to be routinely allowed duty free imports.
New provisions in the budget say a number of products required in real estate and infrastructure projects will be placed on the negative list of BOI concessions. These include cement, steel reinforcements, aluminium cladding material, aluminium and zinc roller shutters, paints, ceramic and porcelain wall and floor tiles, marble floor tiles, granite and quartz tiles, wash basins, bidets and sanitary fittings, and electrical wires and cables. The BOI will now allow companies to import these items on duty free basis only if they are not available from local suppliers.
Cable manufacturers also stand to benefit with the exemption from VAT on copper cable imports being made available only if such cables are not available in Sri Lanka up to the required quality and the quantity.
Listed firms which are potential beneficiaries include cement manufacturer Tokyo Cement Co. and tile manufacturers Royal Ceramics Lanka, Lanka Walltiles and Lanka Tiles which would now enjoy a relative price advantage. The Royal Ceramics group now has an effective monopoly on local production of ceramic tiles and sanitaryware following its acquisition of rivals Lanka Walltiles and Lanka Tiles. The change in motor vehicle depreciation rates, ostensibly to prevent under invoicing in the import of used motor vehicles, steel, tyres and motor spare parts, will mean prices of imported reconditioned cars will go up which will support local vehicle assembly operators. And a high tax structure will be maintained on imports of fishing boats to promote the local boat building industry.
Some measures are of an over-arching nature, with economy-wide effects like banning foreign shipping lines from levying terminal handling and other charges from January 2014 in addition to freight and specified international charges for container cargo. This has long been a complaint among shippers who have seen ancillary charges on their shipments increasing over the years. These extra charges are seen as a way shipping lines, wallowing in a sea of red ink owing to huge overcapacity caused by a spurt in ordering of new ships, could recover profitability.
The Sri Lanka Shippers’ Council reacted to the announcement by saying it addresses “many issues relating to the unfair trade practices prevailing in the shipping industry for many years.” The budget has sought to balance this measure by providing relief in other ways – with the taxes on profits of shipping lines, freight forwarders and logistics industry services being reduced and brought to the tax level of exporters.
The budget was not all protectionist, though. There was a cautious opening up of tea imports – partly meeting demands from the tea export trade lobby for free imports for blending and re-export. This was fiercely opposed by Ceylon Tea Services, which exports under the Dilmah brand, plantations companies, and tea small holders. The budget allows local tea exporters shipping value-added products in packed form that fetch prices in excess of US$12 a kilo, having established international brands and using 75% home grown tea, to import any specialty tea, free from restrictions for blending. Potential beneficiaries are HVA and Renuka Agri apart from Ceylon Tea Services themselves.
The government can argue that raising tariffs on imports is a necessarily evil to help build a domestic production base and has talked of achieving self-sufficiency in products like dairy products. This means consumers are denied access to imported products which are cheaper than what is produced locally. Admittedly, some of the imported products coming into the island could themselves be subsidised and protected in the country of origin. Many countries are known to provide both open and not so obvious subsidies and export support to their farmers and manufacturers.
Ultimately though, protecting farmers and a few industries could end up hurting the very people these protectionist measures are supposed to benefit, if consumers end up paying more for basic food products and other necessities.

 

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