Tariff reform vs. the high-tariff lobby

By Dhananath Fernando

Originally appeared on The Morning

There was a recent news story that the Government is considering a new tariff policy. That may sound technical. It is not. It goes to the heart of how expensive life is in Sri Lanka.

A tariff, in simple terms, is a tax imposed by a government on goods imported from another country. The definition is straightforward. The system is not.

Millions of products cross borders every year. In Sri Lanka, each of these items is taxed at different rates at the point of entry. Every product that crosses the border is classified under what is known as an HS Code – the Harmonised Commodity Description and Coding System developed by the World Customs Organization (WCO).

At the global level, goods are identified using a six-digit code. Countries can then add additional digits to create more detailed classifications. That is where complexity begins. With eight or 10 digits, categories become narrower, rates become different – and discretion enters the system.

There are generally two types of tariffs. The first is an ad valorem tariff – a percentage of the value of the good. For example, a vehicle may be taxed at 20% of its declared value. The second is a specific tariff – a fixed amount per unit, such as a certain number of rupees per pair of shoes or per kilo of cement.

Not all tariffs are created equal. In principle, tariffs discourage trade. Governments justify them either as revenue measures or as tools to protect domestic industries. But when tariffs become excessively high, they stop being revenue instruments. They become barriers. Products simply do not enter the market because, after taxes, they are no longer affordable.

The type of tariff also matters. A specific tariff can disproportionately hurt lower-income consumers. Imagine a flat Rs. 500 tax on a pair of shoes. A pair worth Rs. 1,000 faces a 50% tax. A pair worth Rs. 30,000 faces less than 2%. The burden falls heavier on those buying lower-value goods. That is not progressive policy; that is distortion.

Sri Lanka’s deeper problem, however, is structural. We have operated for decades with a highly complex, cascading tariff system. Multiple rates across thousands of HS codes. Para-tariffs layered on top of Customs duties. Different treatment depending on how a product is classified.

Complexity creates discretion. Discretion creates room for corruption. When tariff rates differ significantly between similar HS codes, the official determining the classification holds enormous power. A small change in classification can mean a large difference in tax payable. That gap becomes fertile ground for rent-seeking.

But that is only one side of the story.

The real push for high tariffs does not primarily come from customs officials. It comes from vested interests within the private sector.

There are companies in selected industries that mainly serve the domestic market. If cheaper or better-quality imports were allowed to enter freely, many of these firms would struggle to compete. Instead of improving productivity or innovating, they lobby for protection.

Construction materials are a clear example. Tariffs in some segments go as high as 70% or 80%, often through para-tariffs such as Commodity Export Subsidy Scheme (CESS) and Ports and Airports Development Levy (PAL).

Over time, the high-tariff lobby has become highly organised. It operates almost like a cartel. It finances political campaigns across party lines. It frames the narrative around ‘saving dollars’ and ‘protecting local industry’ while consumers quietly pay the price. Many of these protected industries function as monopolies or oligopolies, operating in near-cartel structures with limited competition.

To further entrench protection, many of these products are placed on what is known as the ‘negative list.’ Even when Sri Lanka signs a free trade agreement, items on the negative list are excluded from tariff reductions. In effect, the agreement becomes hollow for those sectors.

The proposed new tariff policy seeks to address this. It is expected to introduce a simplified structure, perhaps four tariff bands such as 0%, 10%, 20%, and 30%, and to remove para-tariffs like CESS and PAL. If implemented properly, this would be one of the most significant trade reforms in decades.

But reform in Sri Lanka is never a straight road.

Lobbying groups typically use three tactics to dilute such reforms. First, they demand long phase-out periods of three to five years, arguing that the industry needs time to adjust. In practice, those years allow political pressure to build and reforms to stall.

Second, they push to expand the negative list, adding more items under protection so that even with a simplified tariff structure, meaningful competition never materialises.

Third, they invoke anti-dumping measures to reintroduce barriers through another door, effectively recreating protection under a different label.

Many governments have attempted tariff reform. The fact that we are still debating simplification after decades is itself evidence of how strong vested interests are.

Moving towards a four-band tariff system and eliminating para-tariffs is commendable. But it must be done decisively. Without expanding the negative list. Without excessive phasing. Without hidden backdoors.

Every delay strengthens cartels. Every compromise keeps prices high. And every year of hesitation quietly squeezes consumers, especially the poor, by denying them access to affordable goods and better living standards.

Tariff reform is not a technical adjustment. It is a test of political courage. The question is simple: do we design policy for protected producers, or for the broader public?

The answer will determine whether Sri Lanka remains a high-cost economy trapped by interests or becomes a competitive one driven by opportunity.

India signs, Sri Lanka hesitates

By Dhananath Fernando

Originally appeared on The Morning

India has been playing well, not only on the cricket field, but increasingly on the trade field too. Its recent trade agreement with the European Union (EU) will have implications far beyond New Delhi and Brussels. It will have consequences for Colombo as well.

For years, Sri Lanka benefited from the EU’s Generalised Scheme of Preferences Plus (GSP+) scheme. Under GSP+, developing countries such as Sri Lanka are granted zero or preferential tariffs when exporting to the EU, provided they comply with international conventions on human rights, labour standards, environmental protection, and democratic governance.

That preferential access created a clear incentive. Indian investors, who did not enjoy GSP+ access, saw Sri Lanka as a gateway to the European market. Apparel, seafood, rubber products, and several manufacturing segments directly benefited. Some firms chose Sri Lanka precisely because of the tariff advantage offered under GSP+.

But the landscape is changing.

India’s expanded access

With India now signing a comprehensive trade agreement with the EU, the relative advantage Sri Lanka enjoyed under GSP+ becomes less meaningful. If manufacturing in India now receives comparable or preferential access to Europe, the tariff incentive that once distinguished Sri Lanka begins to narrow. Moving a plant to India versus Sri Lanka may no longer differ significantly in terms of EU tariff treatment.

There is also a structural difference worth noting. GSP+ is a unilateral, discretionary concession granted by the EU. It can be withdrawn. A Free Trade Agreement (FTA), by contrast, is a negotiated, reciprocal arrangement between two sovereign governments. It carries a different level of predictability and legal certainty.

Not many people remember that India’s very first FTA with Sri Lanka was the India-Sri Lanka Free Trade Agreement (ISFTA), which was signed in 1998 and came into force in 2000. At that time, both countries were at roughly similar stages in their trade liberalisation journey.

Since then, India has moved decisively, signing agreements covering nearly 60 countries and major economic blocs. The EU deal itself took nearly two decades of negotiation. Meanwhile, Sri Lanka signed agreements with Pakistan, Singapore, and later Thailand, yet questions remain about the depth, utilisation, and consistency of these arrangements. The contrast in trajectory is clear.

India’s expanded access to the EU may even influence other global players. Trade relationships are strategic; one agreement often triggers recalibration elsewhere. When a major market opens up to India, others take note.

Sri Lanka’s reality

For small economies like Sri Lanka, FTAs are valuable tools for securing market access. But we must also be realistic.

Sri Lanka’s economic backbone consists largely of Small and Medium-sized Enterprises (SMEs). Compliance with rules of origin, certification requirements, and documentation under FTAs can be costly and complex. For many SMEs, the administrative burden itself becomes a barrier. Signing an agreement does not automatically translate into utilisation.

FTAs tend to attract larger-scale investors more than smaller domestic firms. Yet even large investors do not come only for tariff concessions. They come for stability, predictability, and policy credibility. A trade agreement cannot compensate for macroeconomic instability or regulatory uncertainty.

That is why Sri Lanka must go beyond simply negotiating more FTAs. We need unilateral liberalisation, simplifying imports and exports, reducing para-tariffs, rationalising Customs procedures, and creating a predictable trade regime. If we are serious about trade-led growth, openness cannot depend solely on negotiations abroad; it must be embedded at home.

India, of course, enjoys structural advantages Sri Lanka does not. It has scale, a vast labour pool, and a large domestic market that lowers production costs. Sri Lanka lacks that scale. But that reality is not an excuse for hesitation; it is precisely why we must integrate faster and deeper into global trade networks.

A simple lesson

One of the greatest advantages of an FTA is predictability. In countries like Sri Lanka, where governance structures are often weak and policy reversals are frequent, even unilateral tariff reductions can be undone with a change of government or pressure from lobbying groups. A binding agreement provides discipline. It locks in reform.

There are also widespread misconceptions about existing agreements. Take the ISFTA. Many assume it benefits India disproportionately. Yet the data tell a more nuanced story.

In 2021, Sri Lanka exported about $ 815 million worth of goods to India. Of that, roughly $ 525 million, around 64%, entered under ISFTA preferences. In the same year, Sri Lanka imported about $ 4.4 billion from India, but only around $ 208 million, less than 5%, came in under the FTA framework.

In other words, most Indian exports to Sri Lanka do not rely on ISFTA concessions; they enter under normal tariffs. By contrast, a significant share of Sri Lankan exports to India depends on the agreement. Even if one believes exports are ‘better’ than imports, the structure of the agreement clearly provides Sri Lanka meaningful access. Removing or weakening it would likely hurt Sri Lankan exporters more than Indian ones.

A similar pattern can be observed under the Pakistan-Sri Lanka Free Trade Agreement.

In this context, the Government’s proposal to remove para-tariffs such as cess and the Ports and Airport Development Levy (PAL) and move towards a four-band tariff structure is commendable. Rationalisation is long overdue. But reform must be consistent. While simplifying tariffs, we must avoid expanding negative lists, the products and services excluded from trade agreements. Expanding exclusions defeats the purpose of liberalisation.

India, for all its political rhetoric, has gradually opened its economy with limited and clearly defined sensitive sectors such as agriculture. In fact, India’s former Chief Economic Adviser recently wrote in The Economist that the country may be on the verge of becoming one of the world’s most open major economies.

For Sri Lanka, the lesson is simple. In a small island economy with limited domestic scale, there is no sustainable alternative to trade reform. Protection may feel safe in the short term, but isolation shrinks opportunity. The solution is not hesitation. The solution is faster, deeper, and more predictable integration into the global economy.

Trade is not a luxury for Sri Lanka. It is a necessity. And the reforms cannot wait.

Tourism, like cricket, needs better fundamentals

By Dhananath Fernando

Originally appeared on The Morning

Sri Lanka tourism is a lot like Sri Lanka cricket. For cricket, everyone has an opinion. Who should be captain, what the team should look like, what the game plan should be. Tourism is the same. Almost everyone has a different idea of how to ‘fix’ it.

And, like cricket, tourism is emotionally connected to the hearts and minds of people. That is why we get disappointed so easily after even a small setback, and why we bounce back so quickly too. The love for the game and the industry is real.

Tourist arrivals are now picking up and we are hitting record highs. But estimated earnings are declining. We need to remember that ‘earnings’ are an estimate. We calculate earnings by multiplying the number of arrivals by average length of stay, and then by average spending per night. The most sensitive part of that equation is average spending, which is based on surveys of tourists, on what they spend on categories such as accommodation, travel, shopping, and so on.

A few months ago, the Sri Lanka Tourism Development Authority (SLTDA) with Australia’s Market Development Facility (MDF) launched results of a survey with a sample of about 11,000 inbound travellers and 5,000 outbound travellers, covering about 50 countries.

According to those results, average spending per tourist is now $ 148, down from the earlier $ 171. That shift alone helps explain why earnings can fall even while arrivals rise. The same survey shows that about 18% of visitors are repeat visitors and 58% are women. Of total spending, 55% goes to accommodation. Interestingly, 46% of travellers booked through Online Travel Agents (OTAs) and 62% are non-package travellers.

In this context, another SLTDA study has made headlines: out of about $ 3 billion in earnings in 2024, around $ 900 million is said to have “leaked,” and the Government is now trying to prevent this leakage. According to the study, around $ 500 million is leaking through inbound travel operators and another $ 250 million through accommodation. Based on these findings, there is a renewed push for measures to minimise leakage.

The obsession with leakage

The intentions are good. But the problem is the way we are diagnosing the disease. In my view, there is a poor understanding of monetary economics behind this obsession with ‘leakage.’

Yes, OTAs charge commissions. Yes, some payments are settled overseas, so not every tourism dollar will enter Sri Lanka through our banking system. But the idea that regulating OTAs or tightening rules on parts of the tourism value chain will meaningfully ‘save’ dollars is not first principles thinking. Oversight matters. Compliance matters. But oversight is not a monetary strategy.

Here is why.

Leakage of dollars is largely a function of excess rupees in the system, not simply the behaviour of tourism stakeholders. When we create excess rupees, people will try to convert those rupees into dollars. The most common way this happens is through imports.

Let’s simplify it. When we buy a mobile phone, we are effectively buying dollars with rupees. We pay the shop in rupees. The shopkeeper goes to the bank, buys dollars using those rupees, and pays the overseas supplier. The transaction is initiated by rupees. If we have excess rupees the demand for USD is higher.

Now imagine we ban mobile phones, thinking those dollars will stay in the country. They will not. The bank will sell those dollars to someone else who wants to import something else, because banks are in the business of converting currencies, and because demand for dollars does not disappear simply because one item is restricted. If there is excess rupee liquidity, the dollars will find a way out through whatever channel is available.

The same logic applies to tourism. Even if you restrict OTAs or tighten certain import segments, there will be no ‘dollar saving’ if the rupee side remains loose. Any dollars entering the market will still leave as long as there is excess rupee liquidity chasing foreign exchange. Restrictions shift routes. They do not remove the pressure.

At the same time, we should be honest about why some businesses prefer to keep foreign currency outside Sri Lanka. It is not only about commissions or convenience. It is also about the difficulty of moving money across borders when regulations are heavy, approvals are unclear, and conversion rules are tight. If you are running a cross-border business, you will naturally park funds where transactions are smoother and risk is lower. That is exactly what is happening.

There is another reality we cannot ignore: there is a limit to how much import content we can cut in tourism without damaging the product.

A visitor expects a basic standard. Rooms need air-conditioning. Air-conditioners are imported. Tourism transport needs reliable vehicles and fuel. Vehicles and fuel are imported. There is a minimum quality bar in a competitive global market, and trying to cut our way below that bar will not save us; it will simply push tourists elsewhere.

Even in services, ‘local only’ is not always practical. World-class restaurants and wellness experiences often depend on specialised inputs and, sometimes, specialised talent. In some cases, salaries have to be paid in foreign currency.

You cannot run a top-tier Japanese restaurant or a great Thai experience with good intentions alone. We need talent from those countries to be located here for an authentic experience. If we attempt to ‘save dollars’ by lowering quality, we will end up losing the very customers who bring the dollars in the first place.

So what should we focus on?

Instead of hunting ‘leakage’ like it is the main villain, we should focus on value creation. If tourists see value, they spend more. Higher spend improves earnings, supports better jobs, and creates stronger businesses that can invest in quality.

The path to stronger tourism earnings is not to squeeze the system tighter; it is to make Sri Lanka a place where people are happy to spend, and businesses are confident to bring money in and reinvest.

And this is where monetary stability becomes central. If we stabilise the monetary system, avoid excess rupee creation, and reduce unnecessary friction in capital flows, tourism earnings will naturally improve. Yes, there will always be some money that is paid abroad, just as Sri Lankans will always spend money abroad too. That is normal in an open economy.

The solution is not to treat tourism stakeholders as the problem. The real fix is to get the monetary foundations right and make Sri Lanka easy to do business with. Otherwise, we will keep arguing about captains and game plans while losing the match in the middle overs.