By Kalana Herath
The lack of transparency and predictability are common and related elements, among other defects in Sri Lanka’s trade law regime and wider trade policy. It is imperative then that Sri Lanka moves towards a more uniform, predictable, transparent, and coherent trade policy framework. This blog will first provide an overview of the defects in Sri Lanka’s trade policy and legal framework and propose a more feasible approach.
Outlining the Scope of Defects of Trade Policy in Sri Lanka
No consistent or predictable policy framework currently exists to regulate government borrowing. As a result, undisciplined borrowing was a key factor that led Sri Lanka to accumulate an unsustainable debt cycle that contributed to the recent economic crisis. For instance, the drastic consequences of undisciplined borrowing were widely felt during the COVID-19 pandemic, whereby the Tourism industry, one of the key income generators of Sri Lanka, was greatly impacted. As the government no longer had the income to pay off the foreign debt accumulated, the State had to direct its existing foreign currency reserves towards servicing that debt, thus, draining it. The subsequent severe shortage of foreign reserve currency resulted in deficits in the balance of payments internationally and governmentally (in terms of the budget), exacerbating the economic crisis. These then added themselves to the list of reasons for the Economic Crisis in their own right, hindering the country from successfully importing essential goods such as food, medicines, and fuel. Access to imported goods further worsened due to the subsequent banking restrictions the government introduced to conserve US dollar reserves and to elevate the country’s poor credit rating.
The same fate of inconsistent and unpredictable policy befalls the arena of taxation. The unrestricted changes in taxation to suit the idiosyncrasies of each successive government, with the disastrous 2022 tax cuts being a notable example, was another core reason for the Economic Crisis. Predictably, bodies representing investors and traders internationally, such as the US International Trade Administration, expressed concerns over the unstable and ever-changing import duties causing uncertainty. The broad interpretation of Article.150 of the Constitution is one example of a flawed trade policy existing in Sri Lanka. This was evidenced when the former head of state, President Gotabaya Rajapaksa, availed this power to direct public funds towards loan repayment in the guise of a vote-on budget when parliament was dissolved. According to Article 150 (3), the President has the power to issue and authorise expenditure from the Consolidated Fund as he may consider necessary for public services until the expiry of a due period from the date on which the new Parliament is summoned to meet. Had the Parliament not been dissolved, Parliament would have reserved and exercised its power under Article 148 of the Constitution to prepare an Appropriation Bill and pass it into law as an Appropriation Act to set the tax policy in the usual manner.
Another inconsistent and unpredictable policy arena is the lack of transparency in public procurement processes, as well as the deviation from competitive bidding in public procurement in Sri Lanka. According to Verite Research, this lack of transparency arises from the nondisclosure of information leading to officials being reluctant to comply with regulations. The limited scope for public oversight leads to less accountability causing higher malpractice. Furthermore, deviations from competitive bidding have led to interested parties experiencing unfair, unequal, and restricted opportunities preventing them from participating in unbiased, consistent, competitive, and reliable procurement. It further restricts all interested contractors, suppliers, and consultants from having a level playing field to compete and directly expand the purchaser’s options and opportunities. Consequently, the trade framework in Sri Lanka is restrictive, pre-selected and discretionary, where a large number of unsolicited proposals are laxly accepted by cabinet discretion and often overlooked guidelines. Therefore, the current policy framework restricts choice and options which leads to a higher risk of selecting lower quality or higher cost bids and, in turn, returning lower value for money.
Additionally, the customs procedures in Sri Lanka involve slow, redundant, and numerous bureaucratic visitations and documents in importing or exporting. Such time-intensive practices have led to the overall slowdown of economic activity, inconveniencing international trade and hindering the country from attracting profitable investments.
Proposing A New Trade Policy and Legal Framework
Considering the defects outlined above, there is a clear need to implement a new legal framework and policy outlook for trade which favours transparency, certainty and predictability, profitability, and simplicity.
Transparency is of significance with regard to public procurement, where new laws must be enacted to mandate the publishing of information related to tenders, such as procurement plans, tender notices & contract awards, institutional frameworks & regulations, and benchmarks & monitoring of overall performance. Ideally, the new law could also mandate the electronic publishing of such information for easy access, gaining even higher visibility.
Certainty and Predictability:
There needs to be certainty in tax policy, especially for tariffs and VAT through law. This could take the form of introducing legislation setting out strict criteria for when tax rates may be changed. There also needs to be a parliamentary procedure whereby any changes proposed to the budget must first undergo public scrutiny by publishing a gazette, for instance, or in a parliamentary session before the speaker. Further, provisions must be made to give advance notice of a reasonable period before tax policy is changed so that stakeholders may adapt. Moreover, the public finance powers of the Executive President in times of emergencies to raise public funds for services, as per Article 150(3) of the Constitution, must be limited and barred from misuse, ideally with a Constitutional Amendment. Where this is not possible, the above prior notice rule must be extended to the President’s emergency powers in that respect.
Efficiency in customs procedures could be achieved through legislative measures to facilitate trade by fast-tracking the import and export process with less bureaucratic visitations and documents. This can be done by eliminating redundant steps in the procedure, removing unnecessary documents by merging similar documents to one, for instance, and doing away with as many customs procedures as possible through new legislation. Such policies can help bring much-needed simplicity to the process.
Profitability can be enhanced in public procurement by implementing legislation to guarantee competitive bidding. This includes stipulating a minimum number of bidders or level of competition and diversifying the range of bidders by appointing a ratio of private to state and national and international bidders.
High Time Sri Lanka Introduced a Holistic Trade Policy and Legal Framework
The concerns raised in this article heighten the need for Sri Lanka to adopt a new trade policy and legal framework to resolve its many defects. Currently, the country’s trade policy and legal framework lacks transparency, predictability, and consistency, leading to Sri Lanka being an undisciplined state that practices unsustainable borrowing, passes inconsistent tax policies, holds non-transparent public procurement processes, and carries out bureaucratically burdensome and redundant customs procedures. Therefore, the need to move towards a more uniform, transparent, certain, and predictable, simple, and profitable trade policy is integral.