Many countries, including Sri Lanka, started practicing mobility restrictions from March of last year. As a result, along with the slowdown in global merchandise production, trade volume also contracted from the second quarter of 2020. However, the World Trade Organization (WTO) estimates that the trade contraction achieved in 2020 was only 5.3%, unlike the 2020 forecast of a sharp contraction from 13% to 32%.
Meanwhile, countries have used trade policy to ensure essential food, medicines and medical supplies are available nationally. In addition, countries like Sri Lanka have used trade policy tools to contain imports in order to ease pressures on the national currency.
This article discusses global and Sri Lankan trade during this pandemic, the impact of the pandemic and trade policy on Sri Lanka’s food trade and imports, and policy options for sustained growth in trade and commerce. national food security.
Global trade recovered faster than expected
The contraction of world trade induced by Covid-19 has renewed the dialogue on a world order in the process of de-globalization. However, new data and estimates show that world trade has rebounded to the level of the beginning of 2019. The trade volume returned to the average levels of 2017-2019 in the beginning of 2021 after a sharp drop in May-2020.
A notable drop in exports induced by the pandemic is visible around May-June 2020. Declining demand and government import restrictions may have caused the contraction in imports. Monthly trade data released by the Central Bank of Sri Lanka also illustrates similar trade patterns (see figure).
Sri Lanka’s commercial sector
A basic analysis of the export trend shows that Sri Lanka has yet to regain its 2016-2018 trend level. Critical sectors such as textiles and tea exports are still below pre-pandemic levels. Some sectors faced subsequent drops after the sharp drop around May 2020. The reason should be the effect of different waves of Covid-19 on global demand and domestic supply of goods. However, the resumption of textile and agricultural exports, braving the pandemic, is reassuring, and the credit goes to management and the workforce. Since these sectors are the driving force behind Sri Lanka’s exports, accelerating the vaccination of the workforce is imperative to ensure sustained trade growth. With the rise of the third wave of Covid-19 in the country, the importance of rapid vaccine deployment cannot be overstated.
Analysis of import patterns shows that imports are contained below the pre-pandemic level. Imports of vehicles and non-food consumer goods experience larger contractions, implying the effect of import controls. Although these categories can be classified as non-essential goods, the effect of import controls extends to essential intermediate goods. Intermediate non-fuel goods and capital goods recovered slowly. The resumption of these imports at the start of the year is promising, but trade policy should favor continued growth.
Import controls and food security
World food prices are on the rise although production prospects are encouraging. In Sri Lanka, too, food inflation is on the rise. However, Sri Lanka continues to impose restrictions on the importation of food products. Although the trade value of food and beverages shows that imports have returned to pre-pandemic levels, trade volume data for the top ten imported food products show a downward trend. Imports of food products such as onions, sugar, canned fish and dried fish are lower than the 2017/19 averages. Special commodity levies are periodically imposed on food products. In addition, basic credit requirements are believed to delay outflows of foreign currency, although trade volume data shows that the credit base has not significantly affected trade volume.
The proposed ban on chemical fertilizers must be seen in the context of these restrictive trade policies. Economists predict a significant drop in rice production if the proposed ban on chemical fertilizers forces farmers to use only organic fertilizers. Therefore, a drastic food shortage can only be avoided through imports.
The path to follow
Contrary to the expectations of critics of globalization, world trade is recovering. Sri Lanka’s imports and exports are also increasing. However, the slow recovery in imports of intermediate goods other than fuels, capital goods and the phasing out of essential food imports require the attention of policymakers.
The rapid recovery of exports to pre-pandemic levels and continued growth from this point require integration into the global market. Current import controls are hostile to such integration. While the exchange rate crisis is a valid concern from a policymaker’s perspective, the short-term remedies should not be worse than the problem. Upstream and downstream participation in global value chains will ease pressure on the national currency in the long run. In the context of national food security, the government will need to reassess existing import controls for two reasons. First, the third wave of Covid-19 can result in a substantial loss of income for workers in the informal sector, reducing their purchasing power. Food inflation can push them below the poverty line. Second, ambitious green agriculture policies can create a national food shortage if imports do not compensate for production losses in the meantime.
The author is a research economist at the Institute of Policy Studies, Sri Lanka.