Reducing Trade Deficit: Is the government jousting with toothpicks? = වෙළඳ හිඟය අඩු කිරීම : රාජ්‍ය ප්‍රතිපත්තියෙහි මඟහැරුනු ඉසව්වන්

Abstract

Sri Lanka has high trade deficits. And, instead of shrinking, they are increasing over the years. The current government policy, based on import substitution, will not be able to solve this serious problem. This Insight posits two reasons for the ineffectiveness of the current import substitution strategy. First, a key area that the import substitution strategy focuses on is food. However, the contribution of food to the import bill and growth in imports is low. Instead, it is petroleum that is the biggest driver of import growth, and progress on reducing the petroleum import bill has been inadequate. Second, Sri Lanka needs economic growth but its production supply chains (intermediate goods) are import dependent and without the large production scales that would be created by export orientation, it is not very profitable to invest in the supply chain inputs. Hence, focusing on an import substitution strategy without working to increase exports will mean that instead of saving foreign exchange, imports will merely get diverted from final goods to the intermediate goods which are inputs into production activities.