Middle class caught in housing dilemma

By Dhananath Fernando

Originally appeared on the Morning

The system in Sri Lanka often categorises many individuals in the middle class as products of failure, not because they have failed themselves, but because the system has failed them. An evident sign of this failure emerges when individuals strive to afford a house, as the decision to build or buy a basic house in Sri Lanka frequently forces them to sacrifice many other life choices due to the exorbitant cost of construction.

Dr. Roshan Perera and Dr. Malathy Knight of the Advocata Institute recently authored a research report revealing that property prices in Colombo exceed the same income-to-property ratio found in New York, Tokyo, Beijing, and London.

The exorbitant cost of construction primarily stems from the steep prices of raw materials in Sri Lanka. For instance, a tonne of cement costs about $ 114 in Sri Lanka, compared to $ 53 in Thailand. Similarly, the cost of a tonne of steel in Sri Lanka is around $ 760, in contrast to $ 561 in Singapore.

Factors behind high costs

Two main factors force consumers to pay higher prices. First, Sri Lankans encounter restricted access to construction materials at lower prices due to import restrictions or tariff barriers, even when Free Trade Agreements (FTAs) are in place, as most construction items remain on the negative list. A negative list refers to an exclusion clause in an FTA that prevents an item from being imported.

Second, the high tariffs or import protection for construction materials are often justified under the narrative of ‘saving dollars’ or ‘preserving valuable foreign exchange’. However, the truth lies in the high cost structures of local manufacturers, making them unable to compete if import bans or tariffs are reduced.

For example, the total tariffs on tiles were approximately 83% in 2021, with para-tariffs such as CESS and PAL making up about 50%. High energy prices in Sri Lanka contribute to the high costs for local companies, and importing tiles may actually reduce foreign exchange expenditure due to energy savings.

Far-reaching impact

The high cost of construction for the middle class results in sacrificing many life choices, including higher education, education for children, investments, and wealth creation. This challenge becomes even more pronounced when faced with an interest rate of 10% for housing loans or business expansion.

The impact of the high cost of construction extends beyond housing to the tourism sector. Hotels require refurbishment approximately every five years to remain competitive, and with high construction costs, room rates tend to be high. This puts a strain on hoteliers, including small and medium-scale hotels, making them less competitive with markets like Thailand or the Maldives.

According to research, a 500 sq ft house can only be affordable for Sri Lankans in the 70th income percentile, while a 1,000 sq ft house is attainable only for those in the 75th income percentile, highlighting the underlying tragedy of the high cost of construction. Many construction inputs in the market exhibit characteristics of monopolies or oligopolies.

The solution to reduce construction costs involves first removing construction materials from the negative list and eliminating imposed para-tariffs. This competitive market approach will lead to lower prices, benefiting consumers. As a result, aspirational Sri Lankans will have more space in life for better choices, rather than spending their entire lives paying off housing loans. When the middle class has more choices in life, their decisions become a source of income for many other industries, fostering economic growth.

Why it takes so long to recover from an economic crisis

Originally appeared on The Morning

By Dhananath Fernando

I have been reflecting on the last few years of public policy and discussion, which I can broadly divide into three main chapters:

Chapter 1 – Denial

Chapter 2 – Realisation

Chapter 3 - Recovery

Chapter 1 – Denial

There was a time when even respected businessmen thought an economic crisis was a distant scenario. Many politicians, across all party lines, failed to consider a situation of 12-hour power cuts and long fuel lines, and viewed debt restructuring and accessing the International Monetary Fund (IMF) as taboo conversations.

We relied on a $ 3.6 billion bailout from an unknown Omani fund and thought China and the Port City would bail us out as a last resort. Some even thought the discovery of a sapphire cluster might be the breakthrough Sri Lanka needed. Sri Lankans believed we were a special nation with a magical power that would rescue us in some other way.

Despite our strategic location, beautiful weather, and natural beauty being undeniable assets, they do not guarantee a rescue from our own bad policies. Our denial was so strong that an international institution titled their report on the Sri Lankan economy as ‘Denial is Not a Strategy’.

Chapter 2 – Realisation

The moment of truth came, but we were too late to respond. None of our bailout expectations materialised and the international financial architecture found it difficult to save us. Our debt is unsustainable and the IMF requires a commitment from our creditors before providing us financial assistance.

We are struggling due to global geopolitics and our poor diplomatic service and lack of professionalism doesn’t allow us to be taken seriously. We hurt all our friendly nations as well as India, China, Japan, and the US. Islamic countries too were concerned and unhappy with us over different issues.

People only realised the depth of the crisis when medicine was in short supply and their loved ones considered leaving the country. Inflation skyrocketed, prices increased, and poverty affected about 30% of the population.

Chapter 3 – Recovery

The moment people realised the severity of the crisis, they started asking about when we would recover. The simple answer is that it takes a long time and now many of us understand why. Overcoming a crisis of this scale, which in itself is a combination of multiple crises, cannot be done easily.

Simultaneously, we face a balance of payment crisis, a debt crisis, a financial crisis, a humanitarian crisis, and a political crisis. The cost of delaying a response to the crisis and mismanagement has to be shared by us all, with mounting tax increases and high inflation pressure from the grassroots.

As a result, we can see constant protests and interruptions to public life, further worsening the situation. At the same time, this opens a new political space where any political party can make unrealistic promises and auction for votes. This vicious cycle is why recovery from the economic crisis takes a long time.

The specifics of debt restructuring are still a mystery to us. We don’t know how the restructuring will be carried out or the impact it will have on the banking industry. It is also unclear how the markets will respond.

Without domestic debt restructuring, even if we apply a 50% haircut on International Sovereign Bonds (ISBs) and Sri Lanka Development Bonds (SLDBs), our debt to GDP ratio after 10 years will be 136%, according to a Verité Research study published in October 2022. Cost of servicing new debt and the cost of rolling over previous debt at a high yield curve will not bring down our debt to GDP ratio.

Nevertheless, it is still possible for domestic debt to be restructured and banking recapitalisation is necessary. According to the same document, investments in Government securities, primarily Treasury bills and Treasury bonds, account for more than 30% of the interest revenue for the total banking industry.

Hence, changing the interest rates on these securities will affect the stability of banks. On the other hand, 82% of the money in the EPF and ETF has been put into Government securities.

As the required changes take place, no one will be happy, so people and opinion leaders will react in different ways. The changes will go back and forth and recovery will be prolonged. Elections will come and decision-making authorities will change and policy decisions will also go back and forth.

All this is why it takes so long to recover from an economic crisis.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Our only saviour is reforms

Originally appeared on The Morning

By Dhananath Fernando

Whether we will be able to receive International Monetary Fund (IMF) Executive Board approval is now a topic of discussion even amongst the most economically-illiterate person. Let us first set the context.

The Sri Lankan Government and the IMF came to a Staff-Level Agreement in early September 2022. One of the key milestones we have to pass through is to get to some level of negotiation with our creditors. Our credit portfolio is diverse. We have multilateral senior creditors followed by bilateral creditors, including members of the Paris Club, mainly Japan.

On the other hand, there are two main creditors who are non-Paris Club members; India and China.

Paris Club members agree on equal treatment in debt restructuring. In simple words, all member countries of the Paris Club will be treated equally when it comes to restructuring. India has also agreed to assist Sri Lanka in the debt restructuring plan and has provided a letter to the IMF. However, according to the IMF, letters provided by China are not adequate. It has indicated a two-year moratorium, but given the financial needs expected by the IMF, Sri Lanka will not be on a sustainable debt path after a two-year moratorium alone.

Generally, credit assistance provided by multilateral donor agencies such as the World Bank and the Asian Development Bank is not restructured, provided it has been given with very long maturity periods and very low interest rates. Therefore, restructuring those loans has not been the practice. That is how the global financial architecture is designed, given their assistance in eradicating poverty and the IMF being the lender of last resort. 

However, over the last few years, there has been a request by private creditors, bondholders, and some stakeholders that the credit of multilateral donor agencies should also be restructured and China is one party that has made this request. Unfortunately, Sri Lanka is too negligible an economy to make that request or challenge the global financial architecture. .

Given the delays, there is now an emerging conversation on whether we have any other alternative options if the IMF agreement is further delayed. In fact, I asked this question at the meeting convened by the National Council Sub-Committee on identifying short- and medium-term programmes related to economic stabilisation, on whether alternative options were being considered in the likelihood of a delay. According to its Chair MP Patali Champika Ranawaka, the committee has not considered it, but he has an aim of being prepared for the worst-case scenario.  

As we have been saying over the years, we have come to this situation through our own policy errors and with our bad reputation, we do not have many choices in hand. Therefore, finding a solution without the IMF is a major challenge, but we, as a country, cannot avoid the consequences should this agreement get further delayed; social discussion is needed on what we can do to get it soon and on the available alternatives. 

Managing with what we have

One option is to drastically cut down our consumption, including essentials such as food and medicine, and face the situation with what we have. That option can trigger some level of social unrest because ‘a hungry man is an angry man’. 

Even at this level of consumption contraction, our poverty rate has increased above 30% according to a Parliament committee. Out of about five million households, about 1.7 million receive Samurdhi and another 1.1 million are on the waiting list. Of course, Samurdhi is not a good indication, as some people who should receive Samurdhi benefits are not recipients, while others who should not be in the programme are included. However, managing with what we have is one available option that comes with its own consequences. 

Moving ahead with debt restructuring without China?

The next option is to move ahead with debt restructuring without China. This option has a significant limitation because IMF confirmation is required even to restructure the debt of bilateral creditors. Without the IMF, it will be difficult to get Paris Club members and other stakeholders to a debt negotiation table. The more we delay and if China takes a very hard stance, which is likely, we have to request the IMF to move ahead with those who have agreed and hold China’s debt payments until we come to some level of agreement.

We have to understand China’s point of view and geopolitics as well. Our crisis has also become a tug of war between two economic powerhouses. On one hand, China does not want to align or agree with a US-led programme. On the other hand, the relief measures given to Sri Lanka have to be provided to all other countries making similar requests in future.

Pakistan and many African countries and emerging economies are expected to face debt distress in the coming years. China’s growth predictions are low, impacting global economic growth. Hence, the more we delay opening up Sri Lanka to geopolitical sensitivities, the more we will be pushed to align with certain superpowers. If we were to depend on China or India for continuous relief measures, it would be extremely difficult to avoid becoming a geopolitical pawn.

Possible reforms and opportunities 

In this context, it is clear that all available options (with the IMF or without the IMF), will result in extremely difficult times. However, in a crisis, there will be winners as well. Regardless of any of the aforementioned options, there are basic levels of reforms we have to undertake in any scenario. 

State-Owned Enterprise (SOE) reforms must be at the forefront. Without this, we have no future. One good opportunity is to capture the drive within the Indian market. Even if Sri Lanka does nothing, there will be spillover effects from India. The Indian economy, especially the North Indian economy, is growing very fast and we have to connect to their market. If we had played our cards right, we could have become a good connection point for trade between India and China. Instead, we made enemies all over. However, there is still potential. 

The more we delay reforms, it will further exacerbate the problem. As such, reforms are the only saviour in any scenario. It is sad to see how we are distancing ourselves from reforms, with political developments triggering another round of economic and political uncertainty which will lead to social uncertainty. Let us hope reforms move forward fast. 

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Sri Lanka’s biggest insecurity: Fear of competition

Originally appeared on The Morning.

By Dhananath Fernando

If we were to take some collective responsibility for the sad state of our country and attribute it to any cause, I believe it is due to our ‘fear of competition’. 

From top to bottom, Sri Lankans have been fearful of competing. Over a period of time, we have become very reluctant to compete and our fear has grown into incompetence. The fear of competition syndrome is spread across all sections of society, from the top executives to people below the poverty line. 

Sadly, as a country, we have not understood the meaning of ‘competition’. In our vocabulary, competition is where winners are selected and losers are ridiculed. However, competition is actually where the winner and the loser both win – when the winner wins, the loser also wins. How can this be?

A winner is defined as an individual who takes the leap to utilise the resources available to their maximum potential. Even in a 100 m race, the winner is the person who covers the distance within the shortest time span.

The recipe for the title of a winner is determined by the effort endured by any individual to go that extra mile and maximise the resources available. Once that formula is found, even the loser can use the formula of the winning person without wasting their resources further. Losers can ask the winners to run on their behalf next time so that the losers can better use their skills elsewhere.

This is how we all use so many consumable goods. Let us take computers as an example: most of us have lost the race of manufacturing computers while many have not even tried. But someone found the computer formula, so now we can all use the winning formula, which helps many of us save our valuable resources. Thus, losers have also benefited. This is why competition makes winners win and losers also win. It is much more than simply picking a winner – it is about the allocation of resources.  

In the Sri Lankan context, the fear of competition is what mainly led to the misallocation of resources. From top to bottom, not only are Sri Lankans fearful, but we also instigate fear in others. 

It was recently reported that a driver who was providing a taxi service using a mobile app had been threatened by some other drivers who were not using the app-based taxi service. The threat had taken place while the service was being provided to foreigners. The underlying reason for this is the fear of competing with mobile app-based technology.  

Fear of competing with private medical schools

While our tuk-tuk drivers have fear of competition regarding app-based solutions, our doctors have a fear of competition regarding private medical schools. They do not want someone capable with a better service in the market because they are fearful that someone else will overtake them. 

Fear of competition in furniture manufacturing 

Our furniture manufacturers are fearful of competing with other furniture manufacturers in the region. Not only are they fearful, they even ask the Government to support some of these industries with taxpayer money.

Fear of competition in the construction industry

Our bathware and tile manufacturers are reluctant to compete with the same category of products overseas. As a result, our cost of construction is about 25-40% higher than the region due to our widespread fear of competition. Most of our construction materials have a tariff of nearly 100% to avoid competition. Even the private sector is suffering from the fear of competition, which is one of the main reasons Sri Lanka lacks big industries and innovation in the system.

University students’ and the labour force’s fear of competition 

Our university students and teachers do not want to compete with international students. As a result, resistance is high against the entrance of any type of private university to the market. Rankings of our universities and colleges have been deteriorating over the years, but we still remain reluctant to compete. Not only do university students want to avoid competition, but they also want to be dependent on the Government.

Our Government servants and entire labour force are fearful that if we open the job market, foreigners with better skills will replace them. Although we are not competitive, we want to maintain our stake.

Across the board, Sri Lankans are deeply fearful of competing with the world. We lack the courage to admit the truth that our competitors can produce high quality products with high efficiency and productivity. If we are so afraid to compete with the world, there is little reason to claim that we have to improve exports. Exporting would mean competing with the world on an uneven playing field with different tariffs imposed in different regions.

Hasn’t our fear of competition not only made the country worse, but also contributed greatly to our economic crisis? Not just politicians, but all Sri Lankans have promoted fear among our fellow citizens. There are no innovations, inventions, or new technologies without competition. That is the sad truth. We have unfortunately become victims of our own actions.

For once, we should admit that we are the problem without absolving ourselves and instead blaming our political elites. While the poor decision-making of politicians is definitely a problem, if we are reluctant to compete, they can easily say that they simply represented our worldview and opinion.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

Cycling to work in Colombo is easier said than done

Originally appeared on The Morning

By Dhananath Fernando

A new proposal is under discussion to encourage travelling to work by bicycle. No doubt any policymaker who pays a trip to Europe may observe many people commuting to work by bicycle and on foot. So it is normal for anyone to think “if Europeans can do it, why can’t we?”

Some may even believe that countries in Europe have become developed nations because of behaviour involving “a healthier way of life”; commuting to work by bicycles and using electronic vehicles to reduce pollution.

That line of thought is no different to thinking that the work of Usain Bolt, the Olympic Gold Medallist is easy – running 100 metres in about 10 seconds while accumulating millions of dollars in wealth. All this while many other people cannot come close to accumulating the same amount of wealth even by working throughout their lifetime. 

But what many fail to realise is that Bolt had to put about 20 years or more of training to run that 100 metre in 10 seconds under Olympic game conditions. Similarly, most of the outcomes are a result of a series of policies which go hand in hand with culture, geography, and many other economic factors. 

There is no doubt that cycling is good for health and it will help reduce emissions as well. But if policymakers are deeply interested in encouraging people to cycle to work, it has a lot to do with Sri Lanka’s land, housing, and tariffs on construction materials policy rather than being purely based on cycling. 

You may ask how ‘cycling to work’ is connected to housing, construction tariffs, and land policy? 

It goes without saying that people can cycle to work when they reside at a reasonable distance from their workplaces. When many of the members of the workforce live far away from their workplace, they have to have a convenient mode of transportation not only for reporting to work but also for other personal needs. Given the poor public transportation and lack of interest in developing public transportation, the reasonable option available for the middle class is to have their own vehicle. 

As Sri Lanka became a middle-income country, many could afford a vehicle even at very high border taxes, which are as high as above 100%. So for the average middle class, the available reasonable choice is to reside far from the city limits (main cities such as Colombo, Gampaha, Kandy, and Galle) and commute in their personal vehicles.

The question is why people reside so far away from city limits. It is mainly because housing is not affordable within city limits. Unaffordability of housing is due to two main reasons. First, about 82% of the land in Sri Lanka is owned by the Government, including prime properties within city limits. So land prices are very high due to the Government holding land for completely unproductive enterprises. 

A simple walk around Colombo would bring to view a number of  single-storeyed State buildings where the space is utilised in a very unproductive manner due to poor city planning and excessive regulation. 

Secondly, our cost of construction is very high due to tariffs and paratariffs. Hence, the cost of productive land usage housing schemes such as apartments have become only affordable to the elite and not the middle class. Our floor tiles, wall tiles, cement, steel, construction, aluminium, electrical material and a long list of other materials are more expensive than the global market prices. This is due to very high tariff rates that do not generate much revenue for the Government but only benefit a few protectionist industries, which is called ‘rent’ in economic terms. On housing projects there is a regulation which stipulates that every apartment should have a parking space.

A young professional who uses mobile app-based taxi services or lives at a walking distance to their office does not necessarily need to pay for the land, bearing the construction cost for a 300 Sq.Ft. parking slot in an 800 Sq.Ft. apartment. It is such regulations that drive the housing prices within city limits and minimise choice for the consumer.

As a result we have very few vertical housing schemes that are affordable to the working middle class located within city limits. Young professionals who could easily settle in a two-bedroom apartment within walking or cycling distance to their workplace now have to buy unproductively utilised and expensive land far away from the city, along with a vehicle to commute to work.

If the middle class has housing options within city limits, they would be the happiest to settle in Colombo. They can save their hard-earned money on an apartment property which is a transferable asset rather than purchasing five-year-old low quality reconditioned vehicles which are subject to a tariff of more than 100% to commute to the workplace, burning fuel in the congested and traffic-riddled city streets. 

When middle-class aspirational Sri Lankans can afford to reside in the city where they will be able to use a bike instead of a reconditioned vehicle to commute to work, it is then that we will achieve the objective of saving fuel and minimising emissions and valuable foreign exchange, thus increasing productivity across the board. 

A few years ago the Colombo Mayor and Dutch Ambassador also promoted cycling on weekends. It just became a typical Colombo event and now we hardly see people cycling in Colombo. Often cyclists in Colombo are lottery sellers selling a dream of a fortune to the working middle class and aspirational Sri Lankans, where they can buy a house if they have the luck on a State-issued lottery ticket.

Additionally, we have to remember that there are regions in Europe where it’s less humid than Sri Lanka, so cycling to work is easier than in a tropical country.

If our policymakers really want to see a city of cyclists, they have to start working on our land policy, housing, and tariffs on construction. If we set those policies right, many more developments will be achieved rather than just producing cycling professionals within city limits. 

The Government will need to consider enforcing traffic laws and providing cycling space to enable safe and easy cycling to and from work. 

Reference:

• https://www.newswire.lk/2022/01/26/proposal-to-travel-by-bicycles-to-work/

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.

When floor tiles go sky high

Originally appeared on The Morning

By Dhananath Fernando

Sri Lanka can’t win by obstructing its competitors

I still remember some silly things I did when I was in school. It was an inter-house pre-selection race for 400 metres for the school sports meet. As you all may know, to match the equal distance for each athlete, the most outer track athlete is placed slightly ahead at the start of the race and the most inner track athlete is placed at the very behind at the start. So during this race, I got lane eight, the most outer track. Without realising that the starting point placement was done to provide a level-playing field I thought I have some added advantage to start the race well ahead.

The race started and we were all accelerating to the finish line. After a few metres, from the corner of my eye I saw the athlete next to my lane running faster and he was getting closer to overtake me. So I changed my track to lane seven and obstructed him. Just after a few seconds, I realised that the lane six athlete was about to overtake me. I changed my track to lane six. Then the athlete on lane seven overtook me. Throughout the race I was trying to obstruct the other athletes without running my race in my own track.

I was disqualified from the race. I was not only disqualified from the race because of my silly way of obstructing all athletes, but also because they had to redo the race. I still remember what my house master in charge told me after disqualifying me from the race. “Son, you can’t win a race by obstructing your fellow competitors. You have to work hard and practice to run faster than them. That is the only way you can become competitive and win a race.”

When I saw headline news stories on the Sri Lankan floor tiles, wall tiles, and bathware cess tax revisions and Customs import duties, and collective voices against obstructing imports of these product categories as per the new tax revisions, for a moment I wondered whether we as a country are trying to make the same mistake I did as a schoolboy athlete by trying to win a competition by obstructing our competitors without trying to be competitive by ourselves.

The bathware story took the limelight with a gazette notification allowing the importation of bathware with a 180-day credit period when the forward purchasing of foreign currency was not facilitated by banks. In simple terms, this is a condition where the importer has to negotiate with the supplier to give goods for a credit period of half a year and the importer has to bear the cost of exchange depreciation. So it was not at all very favourable for importers. Even in that context, the Imports and Exports Commissioner General instructed banks not to facilitate any imports of tile and bathware products on the next day itself. 

It was reported after a few days on some news stories (gazette notification is not yet up on the Government website) that the industry associations agreed to increase the Customs import duty to 30% from 15% and increase cess to a flat rate of Rs. 125. Currently for certain sanitary products cess is 0% and some other product categories are charged at 15% or Rs. 40 per kg.  

Essentially, if the media report is true, our Customs duty has increased by twofold and our cess has increased by threefold. According to the same media report, even before 2015, cess was 25% or Rs. 75 per kg. So even after a good seven years, we still want to obstruct our competitors at a higher degree with the higher cess. Let’s try to understand the overall impact 

First, many people do not know how the tax calculation is done. The import tax formula is not as simple as saying that it is the addition of one tax to another tax. There are taxes on taxes (Value-Added Tax [VAT], Port and Airport Development Levy [PAL], etc.). So if the Customs duty doubles from 15% to 30%, the impact on the final tax on the consumer can be larger than just adding 15% to the final tax rate. According to the current calculation revealed by Sri Lanka Customs, the effective rate can go up as high as 89.80% of the actual imported value. 

What does this mean for the local consumer? This means the local consumer has to pay twice the price to buy a bathware set, floor tile, or wall tile. In other words, our fellow Sri Lankans have to pay the cost of two bathrooms to build one bathroom. Needless to highlight, the bathrooms constructed by Sri Lankans are not royal-class gold-plated commodes and silver flushing systems; a basic commode and even a squatting pan have been taxed at a high rate as 52%. This will not only impact the local consumers but also other local micro, small and medium enterprises (MSMEs) as well. 

When most of the MSMEs do their small constructions, they have to spend twice as much for the bathware and tiles, which increases the capital they require to start business. Most of them take loans to start businesses. Ultimately, this high cost of tiles affects their competitiveness in the business as well. Think of a small clothing shop in your town. Most of the time the floor is tiled and the shop requires a bathroom, so can we justify asking that entrepreneur to pay twice as much for some of his construction items which is a main part of the building when he is starting the business?

It does not affect only the small entrepreneurs, but rather creates a ripple effect across the economy. In the tourism industry, construction materials such as wall tiles, floor tiles, and bathware are used for most constructions. So as a result, their capital investment goes up and they have to cover capital through the room rate. As such, in the same room category, Sri Lanka’s hotel room rates are higher than the competing destinations in the region.

It is the same for luxury hotels as well as medium and small leisure sector entrepreneurs. It is not just the leisure sector, but even the Government has a big problem with the cost of construction. If you list down requests from rural students to the President in the programme “Gama Samaga Pilisadarak”, they are all about a building to do their studies, toilet facilities, a laboratory, or a playground. The cost of construction is as high as the sky so even the Government has a problem in allocating money for construction capital expenditure.

Further, think about the young professionals and all Sri Lankans who want to build a basic house but consider it a dream house. They take a bank loan with the greatest difficulty and pay twice the price for wall tiles and floor tiles from the money they borrowed.

Protecting local manufacturers and industries?

The main argument that has been put forward on increasing the tariff on bathware and tiles is that it is a move to protect local manufacturers. As Sri Lankans, we unanimously agree that local industries should be protected, but we have to evaluate how we are going to protect them without punishing our consumers. The only solution to protect them is to become competitive and that is a win-win for local manufacturers as well as the local consumers. 

Many policy-makers and, to an extent, Sri Lankans are of the opinion that when we allow imports, it will affect the local manufacturers’ sales volumes. Some consumers are of the opinion that the higher import duties don’t affect them because only the prices of imported items are increasing and the prices of local manufactured products will remain the same. I too wish that the market acts the way we think. What happens in the market is actually the same thing I tried to do in the 400-metre race.

When we obstruct the competitor’s imported products, we narrow the window of competitiveness in the market and limit the entry of similar products to the market. In other words, we limit the opportunity for the consumer to buy a reasonably priced product from the market by imposing a higher tariff and making them uncompetitive. By doing that, like I obstructed the entire race which created an absolute disaster, all other connected industries will be affected. It will affect the pricing of apartments, roads, government infrastructure, wages, and the aspirations of young professionals. The tariff rates are extraordinarily high, not only with regard to tiles but in terms of most construction items. This obstruction of competition is not a recent phenomenon but it’s been there for decades in the tile and bathware industry. However, even after a near tariff imposition of over 80% on cost in some instances, we have managed to fulfil only about 50%-60% of the local market demand. As a result, Sri Lanka is stagnated in the same place without being competitive in industries, but rather complaining that our export portfolio is not diversified. 

How can we protect the local industries?

Local industries can only be protected by being competitive and the definition of protecting local industries should not be punishing the fellow voiceless Sri Lankans. The only sustainable way of winning a game is hard work and being competitive. Instead of being competitive, if we lose our focus and try to obstruct the competition, we will not be able to achieve anything more than what we have been experiencing so far. This was the same policy we adhered to for decades and we have to question ourselves as to why we haven’t succeeded. We have to remind ourselves what my house master in charge said many years ago and redefine the way we think as Sri Lankans.

The opinions expressed are the author’s own views. They may not necessarily reflect the views of the Advocata Institute or anyone affiliated with the institute.