‘Licence Raj’ will worsen economic woes and lead to black markets, corruption: Advocata

• Calls for immediate revocation of rence Extraordinary Gazette imposing import restriction on 367 goods determined as ‘non-essential’
• Points out no evidence to suggest the move will address  trade deficit problem  
• Says import restrictions have caused market power to become concentrated among few players

The ‘Licence Raj’ created by the recent Extraordinary Gazette imposing import restrictions on 367 goods determined as ;non-essential’ by the Finance Ministry will add to the country’s economic woes and lead to new black markets and corruption, according to the Colombo-based free market think tank Advocata Institute. 
As per the Extraordinary Gazette No 2270/18 of March 2022, the so-called non-essential goods can now only be importerd under a licence issued by the Controller General of Imports and Exports Control. 

“This step is the latest in an ever-tightening list of restrictions that have been imposed over the past two years. There is no evidence to suggest that this latest move will address the problem of the trade deficit any better than the previous policies in the same vein,” Advocata noted.  

It also pointed out that this policy change comes into effect in a market that is already facing acute shortages of essential goods.  “Imposing such a system of licensing will have a significant negative impact on an economy facing a severe crisis,” it said.

The think tank also stressed that the proposed license regime will add to the costs of doing business. 
“Net economic losses in the wider economy will increase as this restricts competition. These economic inefficiencies will be transferred as costs that will have to be borne by consumers through higher prices, fewer jobs and reduced economic activity. 

This will add to the country’s economic woes and lead to new black markets and corruption. The introduction of a licensing regime on imports has a negative impact on exports. This is due to some important items needed to produce exports that has to be imported and because the profitability of import substitutes increases due to scarcity,” it said.

Commenting on the recent development, Advocata’s Academic Chair Dr. Sarath Rajapatirana said, “Research done by Jagdish Bhagwati shows that a country’s trade strategy must be an export-oriented trade strategy. Implying equal incentives for export promotion as for import substitution”. 

“Therefore the current policy is counter-intuitive.  Investments will move away from exports to import substitutes and non-tradable goods sectors. Those who get import license will make high profits that will also induce what is called rent-seeking, a negative aspect of import licensing,” he added.

Advocata also pointed out that import restrictions have caused market power to concentrate among a few players in the supply of commodities such as tiles, rice, maize etc. allowing them to enjoy supernormal profits, to the detriment of SME’s and consumers. 

“Costs of creating an import licensing regime include losses in jobs as enterprises will be put out of business, losses in output and misallocated resources,” it noted.

Hence, the Advocata Institute called for the immediate revocation of the policy decision, while highlighting that macroeconomic reforms remain the key to addressing the on-going foreign exchange crisis.