• Says consumer durables sector to have biggest impact
• Import substitution and essential goods sector be become beneficiaries 
• Ban on chemical fertilizer credit negative for plantation sector 

Further tightening of import controls will have divergent impact across industries, depending on their reliance on imports for daily business, the extent to which they engage in import substitution and their essential nature as designated by the government, Fitch Ratings said as it looked at the potential impact if the import controls were further tightened amid depleting reserves. 

“Fitch does not rule out a re-imposition of import restrictions, as foreign-reserves import cover had deteriorated to 2.5 months by May 2021 from 6.5 months in May 2020,” the rating agency said in a new report.

Fitch identified that the companies in the consumer durables industry to become a direct casualty if the import controls are tightened further due to their discretionary and non-essential nature. 

However, the companies engaged in import substitution industries such as manufacturing of tyre, footwear and electric cables could become beneficiaries as they get unrestricted access to imported raw materials as they will be required to scale up their production to meet the gap in the market created by the restrictions in place for their finished goods substitutes. 

Import substitution is one of the main thrusts in the government’s economic policy, and hence the intermediate goods imports required for large-scale value addition could happen unabated, although reasonable doubts remain about the ability of this policy to deliver economic wellbeing. 

The Central Bank has reiterated that they prioritise the import of essential intermediate and capital goods despite the pressure on the currency, which according to them was caused by front-loading of imports due to widespread uncertainty over further weakening of the rupee and the government’s future moves on import controls. 

For instance Fitch Rating said any restrictions on steel cable imports would work in favour of Sierra Cables PLC, a large-scale producer of electric cables and a firm it rates. The company’s entire portfolio consists of locally manufactured goods using imported raw materials, which accounts for 80 percent of total inputs.   

Also, current conditions could also bode favourably with firms in industries such as pharmaceutical, food and clothing as they are designated as essential by the government, hence their imports happen seamlessly. 
Sri Lanka was forced to resort to controlling imports, which the government designated as non-essential from the onset of the pandemic in March last year to stem the pressure on the exchange rate amid weakening inflows from tourism and FDIs.

While the situation was seen ameliorating during the first three and half months this year prompting easing of certain restrictions on imports, barring big ticket items such as automobiles, the government was again forced to tighten the exchange controls for a further six months, effective July 2 due to fresh pressures stemming from the restrictions came into effect from the April third week, which blunted the export earnings momentum and further delayed the recovery in tourism trade. 

Assessing the impact on the alcoholic beverage industry represented by two key producing firms—Mestacorp PLC which owns Distilleries Company, and Lion Brewery Ceylon PLC— the rating agency expects a neutral impact from import controls when sourcing imported raw materials given the sector being a heavier tax payer by way of excise duties to the government.

Meanwhile, the ban, which came into effect on chemical fertilizer imports, is viewed by Fitch Ratings as credit negative on the plantation sector given the expectation that the move could weigh on the industry’s productivity in the near term. Despite the supplier credit and buffer stocks may provide some comfort, the rating agency identified the consumer durables sector as the, “most vulnerable,” to a possible tightening of import controls because local manufacturing of the two leading players in the industry—Singer Sri Lanka PLC and Abans PLC—account for only 25 percent and 10 percent of their cost of goods sold, respectively. However the rating agency estimated that the duo’s existing inventory should be enough for 130 to 150 days of sales, enabling them to fend off near term squeeze in their operating cash flows. 

Further, the rating agency is of the view that Singer is better placed than Abans in the event of a dollar rationalisation because the firm being a subsidiary of Hayleys PLC, which generates 50 percent of its earnings from exports, a quality which may be perceived positively by banks when extending trade credit facilities to Singer.