Sri Lanka’s global competitiveness at risk: Economic cost of cargo clearance delays

Efficient border agency operations are crucial for any economy, especially for island nations like Sri Lanka, where trade significantly contributes to economic growth. The delays in cargo clearance disrupt the flow of goods, increase costs and undermine the country’s competitiveness in global trade. These delays impose substantial economic costs that adversely affect Sri Lanka’s gross domestic product (GDP), leading to higher operational expenses for businesses and limiting foreign direct investment opportunities. 

This article will explore the importance of efficient border agency operations in Sri Lanka, provide an overview of the delays in cargo clearance and examine their broader economic impacts.

Need for efficient border agency operations

The economic ramifications are profound; the cargo clearance delays result in lost foreign direct investment (FDI) opportunities and diminished GDP growth. Studies indicate that digitising trade transactions could enhance processing times by 30-40 percent, significantly improving trade efficiency and bolstering economic output. Furthermore, these delays negatively impact the government revenue collection by creating opportunities for misclassifications and under-declarations.

To address these challenges, streamlining the cargo clearance procedures through efficient border agency operations are essential. Implementing digitisation across the trade activities can facilitate better monitoring of trade and compliance with regulations, ultimately strengthening Sri Lanka’s position in the global marketplace. By modernising trade infrastructure and enhancing operational efficiency at border agencies, Sri Lanka can unlock its full potential as a competitive player in international trade.

Overview of cargo clearance delays

In recent times, the importers, exporters and most other stakeholders involved in import and export operations, have faced significant challenges, due to the cargo clearance delays. Containers are often stuck in the customs examination yards for days or even weeks, primarily due to congestion. This issue gained tragic prominence when a container truck driver, who had reportedly been waiting in line for three days, succumbed to exhaustion and dehydration. Such incidents highlight the severe human and economic toll of these delays.

Reports indicate that at times, many hundreds of containers are stuck at ports, obstructing prime commercial land and disrupting port operations. Long queues of container trucks extend for kilometres as they wait to enter the customs examination yards located in Colombo’s busiest areas. 

Despite the media coverage and public outcry from the affected parties, the relevant government officials have largely remained unresponsive. It is disheartening to observe that the agencies involved and responsible for these congestions engage in a blame game on each other rather than addressing the root causes of the problem expediting the clearance processes.

One possible solution is to create a large, automated container examination yard away from the busy areas. However, the successive governments in Sri Lanka have not taken the necessary steps to implement this or other feasible options. This lack of action has allowed the existing container examination yards to continue operating without facilitating trade effectively.

This inefficiency not only exacerbates the delays but also creates opportunities for corruption, ultimately inflating the consumer prices on the imported goods for local consumption while losing the export competitiveness on the imported inputs for exports.

The cargo clearance delays have become a significant bottleneck at Sri Lanka’s Customs examination yards from time to time.  These delays stem from several interrelated factors, including bureaucratic inefficiencies and outdated processes. The inadequate infrastructure at the customs clearance yards, including access roads, exacerbates the situation. 

The limited space for inspections, insufficient modern scanning equipment and a reliance on the outdated manual inspection processes by the relevant border agencies contribute to these substantial delays.

Economic impact of delays in cargo clearances

The economic repercussions of these delays are widespread, affecting multiple facets of the Sri Lankan economy. 
Below are some of the most significant constraints faced by trade.

1. Slow border clearances: The longer processing times at the border agencies hinder the ease of doing business.

2. Regulatory confusion: Multiple government agencies, with overlapping responsibilities, create confusion for businesses, complicating compliance efforts

3. Frequent policy changes: The constant adjustments in trade policies create instability, making it difficult for businesses to plan effectively.

4. Lack of real-time information: The delays in information sharing between the agencies lead to uncertainty and slow decision-making.

5. Lost business opportunities: The delays result in missed opportunities for production, distribution and re-export, reducing the timely tax revenue for the government.

6. Rising trade costs: The additional handling and clearance delays drive up the overall trade expenses.

7. Demurrage costs: The accumulated charges for keeping containers at the ports and examination yards strain foreign exchange reserves.

8. Container shortages and high transport rates: The delays cause a shortage of empty containers required for exports and limit the availability of trucks and drivers, increasing the transport costs.

9. Wasted productive time: The extended waiting times reduce the effective working hours of the personnel involved in cargo clearance.

10. Traffic congestion: The delays contribute to heavy traffic, affecting the public.

11. Increased fuel costs: The trucks burn unnecessary fuel while idling in lengthy queues, further escalating the costs.

12. Environmental pollution: The idling truck engines contribute to increased air pollution.

13. Container driver and helper hardships: The truck drivers often endure long waits without access to basic facilities, including restrooms. This situation adds to their challenges and poses potential health risks, as the lack of proper sanitation can lead to serious health issues.

14. Corruption risks: The urgency to move cargo quickly creates opportunities for corrupt practices. 

The impacts of the challenges mentioned above are as follows:

1. Cost escalation for businesses

One of the most immediate effects of the cargo clearance delays is the increase in costs for businesses. Goods that remain stuck in the clearance process accrue demurrage fees (charges for storage beyond the allotted free time) and other storage costs. For many businesses, these added expenses eat into their margins, which are often passed on to the consumers in the form of higher prices. This has inflationary effects on both the local retail goods, impacting the cost of living as well as on the imported items used for manufacturing goods for export, resulting in higher production costs.

Additionally, the longer lead times caused by the clearance delays disrupt production schedules, particularly in the export-oriented industries. Sri Lanka’s exporters, many of whom operate under tight timelines of international buyers, find themselves at a disadvantage when they cannot deliver the goods on time. This not only results in arranging shipments by air, instead of sea, incurring a huge cost and financial penalties for the exporter but also damages the exporters’ and Sri Lanka’s reputation in the global market.

2. Supply chain disruptions

Sri Lanka’s economy is highly dependent on the smooth functioning of the supply chains, particularly for sectors like apparel, agriculture and others, where the timely receipt of imported raw materials is essential. When the delays in clearing cargo create bottlenecks in these supply chains, it seriously leads to production halts and missed business opportunities.

For example, the manufacturers operating under the Board of Investment or others, often face production stoppages because the imported raw materials are delayed at the examination yards.  This disrupts the entire supply chains, affecting not only the manufacturers but also the downstream industries and consumers. In a globally competitive environment, such inefficiencies erode Sri Lanka’s standing as a reliable production and export base.

3. Diminished foreign investment

FDI plays a crucial role in the development of Sri Lanka’s economy. However, the inefficient border clearance, including the prolonged delays in cargo clearance, creates a perception of a cumbersome regulatory environment, which can deter the potential investors. The companies that rely on efficient supply chains may choose to invest in countries with more streamlined processes, leading to a loss of valuable investment opportunities for Sri Lanka.

Sri Lanka’s economic recovery efforts, particularly in the wake of the COVID-19 pandemic and economic crisis, require attracting FDIs to boost key sectors like manufacturing, logistics and technology. The prolonged delays in cargo clearance operations could hamper these efforts, making the country less attractive to the investors who seek efficiency and predictability.

The efficiency of the customs and border management is a key factor considered in the global logistics performance rankings, directly influencing the investor confidence. In the 2023 World Bank’s Logistics Performance Index (LPI), Sri Lanka ranked 73rd out of 139 countries. This index evaluates factors like customs clearance, infrastructure and logistics services, all of which are critical for smooth international trade operations. Improving the customs clearance efficiency would not only raise Sri Lanka’s LPI ranking but also create a more favourable investment climate.

By addressing these customs and border agencies’ inefficiencies, Sri Lanka could significantly improve its attractiveness to FDIs. A better LPI ranking would enhance investor confidence, as smoother trade processes signal a favourable business environment. 

In turn, this would stimulate economic growth, as increased FDI brings job creation, technological innovation and infrastructure development. Fixing these issues is critical to unlocking Sri Lanka’s potential as a regional logistics hub and driving future investments.

4. Weakening of Sri Lanka’s trade competitiveness

Due to the congestion in the customs examination yards, there could be a ripple effect on the Colombo Port, creating congestion, as the containers pile up and disrupt the smooth flow of goods out of the port. This situation could have adverse effects on the country, preventing it from capitalising on its geographic advantage. 

As the other countries in the region invest in modernising their trade infrastructure and improving the clearance processes, Sri Lanka must take proactive steps to address these issues, in order to remain competitive in the global market and avoid serious consequences.

5. Impact on fiscal revenue: Business losses  

The delays in cargo clearances significantly impact the government revenue, primarily because Sri Lanka Customs is the second largest revenue-collecting agency of the government, responsible for customs duties and taxes on imports and exports. In 2024, Sri Lanka Customs achieved a record revenue collection of over Rs.1 trillion, yet the ongoing cargo clearance delays have led to trade resulting in substantial business losses. 

Policy recommendations to address cargo clearance delays

The cargo clearance delays in Sri Lanka are a significant impediment to economic growth, necessitating urgent reforms to enhance the efficiency of the customs and border agency clearance procedures. The following policy recommendations aim to streamline the processes, improve inter-agency coordination and leverage technology for better trade facilitation.

1. Avoid frequent policy changes

Frequent changes in trade policies create an unstable environment that complicates planning for businesses. When policies are constantly shifting, companies struggle to develop long-term strategies, leading to uncertainty in investments and operations. This unpredictability can deter FDI, as the potential investors may view the environment as risky.

Moreover, frequent policy changes can result in increased compliance costs for businesses. Companies must continually adapt to new regulations, which can divert resources away from core activities and hinder growth. The lack of consistency also makes it challenging for businesses to build relationships with suppliers and customers, further impacting their competitiveness in the global market.

To foster a more stable trade environment, it is essential for the policymakers to minimise unnecessary changes and focus on creating clear, consistent regulations. This approach will enable businesses to plan effectively, invest confidently and contribute positively to the economy.

2. One-stop shop concept for a new customs examination yard

The establishment of a one-stop shop concept in a new customs examination yard represents a significant advancement in trade facilitation for Sri Lanka. By centralising all border agencies in a single location, this initiative streamlines the cargo clearance process, reducing delays and inefficiencies. This integration allows the traders to interact with multiple authorities without needing to visit different offices, minimising redundancy and enhancing operational efficiency. 

A well-designed examination yard with ample space for handling container cargo will improve inspection capabilities, ensuring quicker processing times. Strategically located close to the Colombo Port but away from busy areas, the new yard will help prevent traffic congestion, facilitating smoother logistics operations while alleviating public traffic issues. Overall, this one-stop shop concept not only enhances trade efficiency but also fosters economic growth by creating a more favourable environment for businesses saving cost, positioning Sri Lanka as a competitive player in international trade.

3. Fast-track National Single Window initiative

The National Single Window (NSW) is essential for modernising cargo clearance. This integrated digital platform allows businesses to submit documentation once, enabling simultaneous access by all relevant government agencies. Despite being in discussion for over 30 years, accelerating the implementation of the NSW could significantly enhance trade efficiency and reduce clearance times. The establishment of this system is aligned with the international standards set by the World Trade Organisation and its successful implementation can serve as a catalyst for broader economic recovery in Sri Lanka.

Read the article on ‘National Single Window: Game Changer for Sri Lanka’s Trading Community’: https://www.chamber.lk/wp-content/uploads/2024/09/National-Single-Window_A-Game-Changer-for-Sri-Lankas-Trading-Community-2.pdf

4. Establish an advanced risk management system across all border agencies for cargo clearance 

Establishing an advanced risk management system for cargo clearance, incorporating artificial intelligence (AI), is essential for enhancing trade efficiency and security. This system would analyse vast amounts of data to identify the potential risks associated with shipments, allowing the customs authorities to prioritise inspections and streamline the clearance process. By leveraging AI, the system can detect the patterns and anomalies in trade data, improving the accuracy of risk assessments and reducing the likelihood of delays caused by unnecessary inspections. 

Furthermore, a sophisticated risk management approach can facilitate quicker decision-making and enhance collaboration among border agencies, ultimately leading to faster cargo movement and increased competitiveness in the global market. This modernisation not only boosts operational efficiency but also strengthens compliance and reduces opportunities for fraud, creating a more robust trade environment that eventually benefits the economy.

5. Capacity building for border agency officials and developing proper infrastructure

Investing in capacity building for the border agency officials is vital. Regular training programmes focusing on technological advancements, trade facilitation techniques and international best practices will equip the officials with the necessary skills to navigate the modern trade complexities effectively. Additionally, improving the work environment and fostering a positive attitude among the officials can lead to increased productivity and efficiency in cargo clearance operations.

While there have been attempts to introduce solutions, such as the construction of a new container examination yard in Kerawalapitiya, the bureaucratic delays have stalled the progress. The proposed facility, which could handle up to 3,000 containers, would significantly ease the current congestion at the existing multiple examination yards. Thus, the necessary infrastructure development is critical.

6. Encourage public-private partnerships

Engaging the private sector through public-private partnerships (PPPs) can drive innovation and improve infrastructure related to cargo handling. By incorporating private sector expertise in policy discussions, the government can create a more conducive business environment that addresses the concerns of the traders. PPPs can facilitate investments in infrastructure while allowing the government to maintain regulatory oversight, thus optimising resource allocation and enhancing service quality. 

7. Increase transparency and accountability in process

Establishing a transparent and accountable system is crucial for reducing the delays in cargo clearance. This includes publishing real-time data on clearance times and holding the regulatory bodies accountable for the inefficiencies. By enhancing transparency, businesses gain better visibility into their goods’ status, which minimises uncertainty and the potential delays.

In conclusion, the Colombo Port stands as a crucial hub for international trade, strategically positioned along key maritime routes and ranking among the world’s leading ports. Its advanced facilities and efficient operations enable quick turnaround times for vessels, while its deep-water capabilities accommodate large container ships, reinforcing its role as a transshipment centre for cargo destined for South Asia and beyond. 

However, to fully leverage these advantages, it is essential to address the domestic cargo clearance delays caused by the border agencies. Streamlining these processes is vital not only for enhancing trade competitiveness but also for securing Sri Lanka’s economic future. By implementing modern solutions such as the NSW, digitalising customs and other border agency operations and fostering PPPs, Sri Lanka can overcome the existing inefficiencies. This will unlock new growth opportunities, bolster its position in leading to export-led growth and ensure long-term economic prosperity for Sri Lanka.

(Dinesh de Silva is a Senior International Trade Facilitation Expert and Saumya Amarasiriwardane is an Economist at the Ceylon Chamber of Commerce)