Limited Distribution. GENERAL AGREEMENT ON 2 July 1973 TARIFFS AND TRADE. BOP/135/Add. 1. Original: English

Transcription

1 ementary In ofmatiopqsuppliedkny RESTRICTED BOP/135/Add. 1 GENERAL AGREEMENT ON 2 July 1973 TARIFFS AND TRADE Limited Distribution Original: English 1973 CONSULTATIONUNDER ARTICLEXVIll: 12(b) WITH SRI LANKAWK1'Â of Sri Lanka e Government In recent years, the most dynamic element's in Sri Lanka's balance of payments Balance of payments 1972 have been imports, debt servicing (comprising capital repayments and interest repayment on outstanding debt), offincial capital inflows and International Monetary Fund accommodation. Imports and exports formed the largest parts of the current account of the balance of payments. In 1972, while exports as a proportion of total earnings (including imnvisiblese) formed 81.2 per cent, imports accouneted for 84.3 per cent of total current payments. In the innvisibles account the largest earnings category is "other transportation" which is composed in the main of payments received from foreign airline and shipping companies for commodities and services supplied. In1972 it contributed 5.4 per cent to total earnings. Nearly as significant were earnings from the "other services" category (5.2 per cent), bute due to even higher payments on this account, its net contribution to the balance of payments was negative, whereas the transportation account was the largest single category to showa not surplus (earning), the merchandise account included. The geographical location of Sri Lanka in the East-West trade routes complex and the port facilities provided-have enabled Sri Lanka to traditionally earn a consistent surplus in this account - indeed the only account in surplus always, if official transfers (grants) are excluded. Remittance abroad of investment income, comprising dividends of foreign companiesoperating in Sri Lanka and interest on foreign loans is the largest item of current payments. As host to a substantial bloc of foreign-owned capital, Sri Lanka traditionally experiences a deficit on this account reinforced in recent times by theincrasing interest payments incurred on the growing volume of foreign public capital. Given the weight of imports and exports, the outturn in the current account of the balance of payments crucially depends one theirmovements. Morchandise exports, valued mainly at f.o.b. priceamouns, to Rs 1,963 million while imports, valued mainly at c.i.f. prices cost the country Rs 2,265 million so that in 1972 the deficit on visible tradeamounted to Rs 303 million. Compared with a deficit of Rs 287 million in 1971 when exports fetched Rs 1,931 million and import payments amounted to Rs 2,218 million, the 1972 outturn is seen to be a deterioration. The services account, too, was in deficit ot teh tuen of Rs 14 million in 1972 when payments totalling Rs 363 million were matched by receipts only to the extent ofrs 349 million,so that in the combined goods and services account the deficite expanded to Rs 317 million. (The trend in the previous year, 1971, was similar when on the goods and services account

2 BOP/135/Add.1 Page 2 the deficit expanded to Rs 301 million.) However, once transfer payments (thë other category of transactions which together with services formed the invisibles account of the balance of payments), more particularly the receipt of outright grants from foreign governments, are taken into account the deficit in the current account as a whole, in similar fashion as the previous year, contracted to Rs 269 million in 1972 (Rs 216 million in 1971). In View of the very low level to which monetary reserves had fallen, a deficit of this size could be financed only through borrowing abroad. After allowing for capital repayments, long-term capital inflows amounted to Rs 289 million and, together with the SDR allocation valued at Rs 62 million, not only compensated for the deficit on current account, but also resulted in an overall favourable balance of Rs 93 million in the balance of payments. This easing of the pressure on payments through negotiated foreign credits also resulted in an increase in the gross external assets of Rs 229 million. Too much cannot be read into this as part of the increase, being the direct result of raising very short-term credit is bound to be transitory. and increased bank indebtedness abroad, Exports After a pause in 1971, progress towards reducing the dependance on three commodities, tea, rubber and coconut, for export earnings slowly resumed in Domestic exports other than the traditionals - tea, rubber and the three major coconut products - increased their share in exports from 7.5 per cent in 1968 to 12.4 per cent in These are made up of heterogeneous mass of commodities, both agricultural and manufactured. The promise which this statistical development has for future development, in terms of the production pattern and the structure of exports, however, must be tempered for two reasons. Firstly, the increased share occurred within the stagnant exports total so that part of the increase in the proportion is due to the absolute decline in the major (traditional) sector. Secondly, within the non-traditional sector, a large part of the increase - 25 per cent of the increase of 1972 ver is sustained by the export of gems and precious stones which has been brought about less by an increased production than by the channelling of the normal traffic through the official exchanges due in large measure to a very special scheme of fiscal and exchange incentives, the centre-piece of which is the facility of retaining 25 per cent of the earnings abroad usable for obtaining a range of foreign goods and services which is boyord the reach of the rest of the Community. According to customs records, earningss from the export of tea, rubber and three major coconut products, decreased from a total of Rs 1,732 million in 1971 to Rs 1,685 million in Earnings from tea increased marginally from Rs 1,145 million in 1971 to Rs 1,154 million in Both rubber and coconut products registered lower earnings: the former falling from Rs 307 million to Rs 265 million and the latter from Rs 280 million to Rs 266 million. Partly, this was due to a fall in the volume exported: tea exports decreased by 6.1 per cent from the previous year's level and at 416 million pounds was the lowest for

3 BOP/135/Add.1 Page 3 the past decade; rubber experts remained at the same depressed level as in 1971 when tapping in some areas was distupted due to insurgent action, although no such direct obstacle is evident in Coconut products alone show avolume increase of 23 per cent over the previous years level. The cumulative effect of all this is that the index of overall export volume fell from 99 in 1971 to 97 in 1972 (1967 = 100). The improvement in tea prices, notably those of mid and low-grown teas continued in 1972 and the average f.o.b. price of 2.77 shows a 10 per cent improvement on the previous year' s level. Much the larger part of this improvement reflects the inevitably higher local proceeds consequent to the downward adjustment of the rupee parity along with the major international currencies. International price trends anyway do not show an upturn in prices. In the London auctions, for example, within an average price decline from 43.25d. per kg in 1971 to 42.24d. in 1972, Sri Lanka teas fairly held their own at the previous year' s price. Both rubber and coconut products suffered sharp declines in prices; the former from Rs per lb. f.o.b. to Rs 0.93 cts and the latter from Rs 2,142 per ton in 1971 to Rs 1,549 in 1972 in the case of coconut oil, from Rs 350 per candy to Rs 296 in the case of copra, and.88 cts to.72 cts per lb. in the case of desiccated coconut. Measured in United States dollars therefore the shortfall amounted to about 2 per cent. In terms of the more neutral SDR, cf course, the shortfall was considerably higher. In sum, therefore, whereas the international price of tea steadied relative to the trend and local process increased, volume exported fell sharply. In rubber, prices fell sharply and volume stagnated while in coconut the sharp fall in prices was accompanied by a higher volume of exports. While unfavourable weather - the drought in the early part of the year - may have been a production depressant, the action of the producers to economize on costs through contracting, the margins of operations due to the long-term international trends for tea and rubber, too, have probably contributed to the fall in the volume produced and therefore the amount exported. It is noteworthy that the diversification tendencies in the export market which were felt in the three previous years sharpened in Parallel with the decline in consumption trends in the principal markets only 18 per cent of the total volume exported in 1972 wasdestined to the United Kingdom - yet the chief market - as against over a third in the mid-sixties. Pakistan emerged as the second most important in 1972 but the causes are mainly exogenous and lie in the particular political circumstances of this country. Little change is observed in the structure of export markets for the other commodities. Non traditionalexports Production and expert of most products of a non-traditional nature have undeniably if marginally increased from 1968 under the impetus of the effective premium rate of exchange (via the Foreign Exchange Entitlement Certificate Scheme) which stood at 65 per cent et the close of A multitude of both agricultural and manufactured products are included in this category. Taken individually, few

4 BOP/135/Add.1 Page 4 products, however, show a continuing upward trend due to extensive annual variations. Reports of frozen fish, gems and cinnamon, and made-up garments and footwear from, among manufactured goods, are the five notable cases where a steady increase is noticed. In 1972, they accounted for a quarter (Rs 61 million) of the total export earnings of this sector. Imports The demand for imports has been managed principally through import programming i. e. allocations within the framework of a foreign exchange budget. The advantages of restrictions based on a quota system-promptness of impact, degree of selectivity, the flexibility afforded cannot be overemphasized in the light of the liberalizing experience of 1969 when the trade deficit jumped from 15 to 20 per cent of export earnings to nearly 40 per cent. Due to the vast overhang of pent-up demand in the economy, which makes demand price insensitive within a very wide spread and over a broad spectrum of commodities, quantitative restrictions afford the most important single method of containing the balance of payments. Thus import capacity considerations dictated a drop in the import volume from 90 in 1971 to 88 in 1972 (1967 = 100). In value terms imports amounted to Rs 2,265 million. This compares with Rs 2,218 million in the previous year. Part of this value increase is due to the higher local currency outlay as a result of the re-alignment of parities with the currencies of Sri Lanka' s major trading partners. However, another, probably the larger, part is due to increased costs of imports due to the following factors: (1) Cost-push inflationary conditions in industrial countries from which Sri Lanka imports manufactured goods. (2) Increase in the international price of oil as a result of the successful pressure exerted by the oil producing countries to obtain better prices. (3) Higher price of imports from countries whose currencies have appreciated vis-à-vis the United States dollar. (4) Tight world supply position of three commodities which have a heavy eight in Sri Lanka's import structure - flour, sugar, rice - and the consequent price increase. (5) Sri Lanka' s increasing heavy dependance on short-term and long-term credits for financing her imports and the resultant wearing of her ability to make purchases from the cheapest sources.

5 BOP/135/Add.1 Page 5 The corrosive influence of the persistently unfavourable terms of trade on Sri Lanka's balance of payments during the last five years is quantified in the table below: (Rs million) Export Import Effect of Year Terms of Tradetrso~tai (1967=100) (1967=trade100d)f i eict at 1967 prices price index price index r tems of trade It would seem that the loss on account of the terms of trade has been occasioned wholly by the importprice. If prices maintained the 1967 levels, other things remaining equal, the balance of paywments ould have been nearly in balance and previously earned reserves would have been available for a programme of import substitution, export diversification and export promotion. Services There was hardly any change in the balance of services account as a whole between 1971 and Payments exceeded receipts by roughly Rs 14 million in both years. Changes in individual items within the broad category of services due to clear casual factors are seen in receipts from port operations and tourism, and in payment on account of dividends and interest accruing abroald. Whie increased port earnings are largely due to historical factors, those from tourism are a relatively recent phenomenon. Tourist earnings show the fastest growth rate from, almong al iitems n the receipt side of the invisibles account. After encountering a set back in 1971 (largely due to the civil disturbances) receipts increased by over 50 per cent. The steady build up of the tourists infrastructure (hotels, travel organizations), the increasing popularityof charter travel, linking of Sri Lanka to international trarmvel fis and hotel chains, the grant of a premium, rate of exchange (viaeetho FCs)h are te major reasons for the increased contribution of tourism to the balance of payments. Repatriation of profits on foreign direct investment capital now takes second place to interest payments. Partly, this is due to the steady pace of Ceylonization in areas which were traditionally foreign owned. Partly it also reflects the diminishing returns attaching to traditional investments particularly in plantation tea and rubber. But very largely it is due to the rapid increase of interest payments which in 1972 was larger than dividend remittances by four times over. From a cr R s 38 million in 1968, interest payments have increased to Rs 120 million in 1972 and claimed over 6 per cent of export proceeds. This will increase further as the grace period of past loans expire and new long-term capital inflows take place.

6 BOP/135/Add.1 Page 6 Migrant's remittances (private transfers) and grants (official transfers) comprise the rest of the invisibles sector of the balance of payments, other than services. The bulk of migrant remittances is by persons of Indian origin leaving Sri Lanka. Remittances increased from. Rs 40 million in 1971 to Rs 59 million in 1972 and is principally due to the increased tempo of repatriation of Indians under the Indo-Ceylon Pact. Although grants fell to Rs 82 million in 1972 from the comparatively high level of Rs 105 million reached in 1971, it conforms to the general trend of the last few years as the 1971 receipts include military aid for counter insurgency operations. Capital account The deficit in payments of Rs 269 million which arose in the current account of the balance of payments worsens considerably when capital repayments are taken account of. On long-term borrowings these amounted to Rs 124 million (Rs 96 million in 1971) on suppliers' credits Rs 50 million (Rs 68 million in 1971); repurchases from the IMF amounted to Rs 170 million. Once again a deficit of this magnitude was covered only through a high level of overseas borrowing. Long-term capital inflows consisting mainly of commodity and project aid amounted to Rs 414 million, but was not quite sufficient to cover the payments deficit of Rs 613 million even after including the SDR allocation of Rs 62 million. In fact, the level of the inflow was lower than that in 1971 largely due to the depletion of the aid pipeline. Thus, continued resort to short-term credit and IMF accommodation was inevitable. Drawings from the IMF during the year totalled Rs 163 million comprising a purchase of US$14.75 million under the scheme for Compensatory Financing of Export Fluctuations and US$10.5 million under the Standby Agreement of the previous year. The receipts of 62 million in the SDRs account represents Sri Lanka's entitlement under the third annual instalment of the first allocation of Special Drawing Rights. In the event short-term credits and IMF accommodation were more than sufficient to meet the unfinanced payments commitments with the result that an increase in the external assets was made possible. External assets Despite the adverse outturn in the balance of payments Sri Lanka's external assets increased in 1972 by Rs 229 million. The assets of the Central Bank (the international reserve) increased by Rs 47 million, those of commercial banks by Rs 135 million, while Government assets also increased by Rs 46 million. The increase in external assets, it should be emphasized, does not represent an improvement in the balance of payments. Rs 62 million of the increase simply represent the allocation of SDRs. Against the balance increase must be considered the increase in short-term liabilities of commercial banks of Rs 68 million, and the increase in Government short-term liabilities of Rs 46 million. Equally,it must be noted that the assets are not freely available for use.

7 Measures to support the balance of payments BOP/135/Add. 1 Page 7 Several measures were taken during the course of 1972 to expand overall export and other earnings and to achieve a structural change in the commodity composition of exports. To counter the trend towards a contraction of production in the traditional primary commodity sector due to falling unit prices and rising unit costs, the rupee was depreciated by an average of 9 per cent against the major currencies at the time of the general realignment of world currencies thus raising the rupee returns to local producers. Further, in the case of tea the threshold level at which the ad valorem rate of duty of 50 per cent operates was raised front Rs 1.80 per lb. to Rs Simultaneously, rebate on export duty granted on teas that fetched low prices at the Colombo Auctions was raised from 10 to 15 cts. These latter two measures were introduced within the budget announcements in November In view of the severe slump. in the rubber industry the Government in September announced a guaranteed minimum price scheme so as to assure a minimum per unit profit for producers. Budget proposals extended the guaranteed price incentive to coconut oil, too. The spectrum of special incentives to encourage exports of products other than tea, rubber and the three major coconut products was expanded beyond the grant of a preferential rate of exchange (FEECs, itself raised from 55 to 65 per cent), and tax relief to include a scheme for retention in a convertible rupee account a part of export earnings. In the case of gens this operated from July and allowed 25 per cent of the f.o.b. proceeds to be credited to a convertible rupee account which could be utilized to import luxury goods not otherwise permitted - e.g. motor cars, washing machines, travel or education abroad. Later on in the year the same facility was extended to cover certain earnings for professional services rendered. Other non-traditional exports and tourist earnings qualified to retain 2 per cent of proceeds in a convertible rupee account but available for use as freely as by gem exporters. The Government has also set up an Export Promotion Council to assist exporters in seeking markets abroad and in other related matters. Measures to contain imports have consisted principally of subjecting all imports to individual quota licensing. A further step was taken to price imports at their true real cost when: (1) the rate on Foreign Exchange Entitlement Certificates from 55 to 65 per cent; (2) additional categories of imports were transferred from the exempt to the FEECs category and as at date the only commodities leftin the par value category are rice, flour, dhal, dried fish, drugs, fertilizer, twowheeled tractors, books and fixtures, wheat grain, infant milk foods and raw materials and packing material imports for some vital manufactures. On a value basis, roughly 30 per cent of the import transactions are still left in the per value category.

8 BOP/135/Add.1 Page 8 The policy of import substitution through price incentives was pushed further when a ban was imposed on the import of chillies (an important subsidiary foodstuff) and the guaranteed price paid for paddy was raised from Rs 14 per bushel to Rs18. To sum up, the balance-of-payments position of Sri Lanka continued to cause extreme anxiety. Earnings were disappointing and with heavy debt repayment obligations, payments, mainly for imports, had to be tailored to a level consistent with aid availabilities. A reduced flow of aid, procedural problems associated with aid disbursements and higher import prices reduced the actual volume of imports which the country obtained. With consumption levels reduced to the minimum consistent with political and social realities, the left-over to service industry and construction activity was inadequate. The price was no growth at all in 1971 and an extremely inadequate rate in 1972 when growth was confined to the services sector.

9 Item (A) (B) Goods and services Merchandise Non-m.netary gold Freight and merchandise insurance Other transportation 4.1 Passenger fares 4.2 Port expenditures 4.3 Other Travel Investment income 6.1 Direct investment 6.2 Other Government expenditure n.i.e. Other services 8.1 Non-merchandise insurance. 8.2 Other Total goods and services Transfer payments Private Official Total current account Capital and monetary gold (A and B) Non-monetary sector (Items 11-14) Direct investment Other private long term Other private short term Central Government 14.1 Loans received 14.2 Short-term liabilities 14.3 Assets Monetary sector (Items 15-20) Commercial banks - liabilities Commercial banks - assets Central Bank - liabilities Central Bank - assets Net IMF position SDRs Monetary gold Errors and omissions *Provisional Source: Central Bank. BALANCE OF PAYMENTS 1972* Cr. 1, , , , l, Exports mainly f.o.b. Imports mainly c.i.f. BOP/135/Add.1 Page 9 Dr. Net 2, , , _

10 COMPOSITION OF EXPORTS Valeu in rueepsuill ion Pecerntaeg, of total exports H comodity -_ Tea, 1,162 1,062 1, , Rubber Coontt products Brakdln of whiïh: (a)copra (b) 1Coconut oil ss oaod ont (d) roh nuts Othr domotia xprti Total domoic Oxorts875 1,976 1,S7!995 1,930 1, R-exports Total 2,035 1,916 2,033 1,947 1, Sourio Customs, Sr& Lnka. 1 BOP/135/Add.1W