Import cuts lead to surge in trafficking – Revenue impacted

Recent economic pressures centred around the foreign exchange crisis prompted the government to impose strict import controls. The unpopular yet obligatory measures helped ease burgeoning pressure on the rupee but inadvertently led to the serious issue of a rise in illegal trafficking.

Lockdowns and clamps on domestic and foreign travel have done little to stem the rot, as authorities step up measures to net perpetrators. Despite the best efforts of the Sri Lanka Customs, Police, STF and other agencies, smugglers are relentless to their cause with increasing domestic prices fuelling a growth in smuggled good entering the country. 

The government must identify the dangers of the growth in smuggling and pursue innovative strategies to combat the mounting risk, which will have far-reaching consequences on Sri Lanka’s socioeconomic situation. 

A recipe for disaster
The import ban conjured a host of new entrants to the list of items smuggled into Sri Lanka, with turmeric leading the way. In December 2020, police seized 20,000 kilograms of turmeric powder from the southern coastline, with shipments brought in aboard fishing vessels. The Navy seized 2022 kilograms of turmeric in June and July this year in Achchanakulam and a further 2023 kilograms in Negombo last week. 

Turmeric was a simple commodity for Sri Lankas until things lost flavour last year. The island nation spent just US $ 7 million annually to import its requirement from India, which poses questions regarding the purpose of such a ban, given its significant fallout. Today, 100 grams of the common yellow spice is over Rs.1,200, whilst efforts to produce domestic demand locally is yet to bear fruit. 

As opposed to a ban, what was required is an orderly plan to identify farmers with sufficient land to produce the domestic requirement, provide them structural inputs and phase out imports over a determined period of time. Ad hoc blanket bans similar to now only offer a farcical interlude, besides dulling dishes across dinner tables. 

Revenue caught in smoke screen
Cigarette smuggling has been growing in Sri Lanka over the past five years and has been the cause of massive loss to the government, at a time revenue collection has become critical. With over 700 million sticks smuggled annually, this represents a loss of over Rs.38 billion to state coffers. Sri Lanka’s high price of cigarettes sit at the heart of the issue. With cigarettes being smuggled into the country costing as little as Rs.5, the country remains a top destination for smugglers globally. The price of locally manufactured legal cigarettes is the highest in the world as per the 2021 WHO report on the Global Tobacco Epidemic. 

In June this year, Sri Lanka Customs seized a container from China with a stock of over 276,000 illegally imported Chinese cigarettes worth over Rs.25 million. A further 150,000 cigarettes manufactured in China worth Rs.9 million was discovered in a container yard in March this year. Perhaps most alarmingly, in May this year, over 200 million cigarettes were seized by Customs at the Colombo Port, valued at over Rs.9 billion. 

When policy is politics 
Historically, cigarette pricing in Sri Lanka has been politically motivated as opposed to relying on science or moralistic issues. Between 2016 and 2019, Sri Lanka hiked cigarette prices exponentially ignoring market conditions and this gave rise to graver social issues than what they purported to solve. Cigarette smuggling erodes billions in government revenue, fashioning networks of racketeers islandwide and diminishes public health by giving easy access to cheaper, inferior products that are not governed by any laws specifically designed to discourage smoking. 

The practiced pricing model has desecrated the very objectives governments hoped to deliver with its policy and thus requires a significant rethink by strategists. Cheaper, inferior products with no health warnings are easily accessed by youth, a segment the health authority has worked hard over the years to protect from the ills of smoking. 

Glass is half full
The local alcohol industry too is out of flavour as limited operations and restrictions on raw material and product imparts have hampered sales and diverted tipplers towards illicit outlets. Sri Lanka is one of the largest per capita consumers of alcohol in the world, with the vast majority of that illicit. With tipplers unable to access licensed outlets, consumption of illicit alcohol has skyrocketed, including in the city. 

Illicit alcohol is significantly cheaper than legal product, akin to the status of cigarette industry. With a bottle of illegal brew costing as low as Rs.400 in some areas, the sales ban imposed during lockdown has sent prices staggering high.

Accordingly, Sri Lankans are consuming more alcohol per litre than before, with no revenue to government whatsoever and once again the social and physical harms to society from this menace is immeasurable. The government loses over Rs.25 billion every month as a result of short-sighted policy. 

Geographical pressures
Whilst India, the UAE and China have led the way with contraband destined for Sri Lanka, the Maldives is now joining the fray with recent detections from fishing boats along the southern and eastern coasts. These include electronic items, clothing, perfume and food shipped aboard boats from the atoll, which were listed under the recent restrictions announced by the Central Bank. 

Sri Lanka must pursue a strategy for fair trade. Import bans can be of use as stop-gap measures; perseverance can lead to deterioration in global trade relations, competitiveness drops amongst local products and the burgeoning issue of smuggling, which leads to breakdowns in governance and revenue. 

What began as a three-month exercise has now extended to the end of 2021 and some regions have already shouted ‘foul’. However, the Central Bank is seemingly of the view it is better to risk trade retaliation versus losing foreign exchange to finance imports and defaulting debt repayments. But that does not provide solutions to the excess of smuggling. 

Combat virus
Nations that chose to ignore the scourge of trafficking have done so to their own peril. The tastes and pleasures driven by such profiteering are contagious, mutating into organised networks pervading all levels of society, eroding social fabric, law and order. 

Sri Lanka cannot afford to turn a blind eye on its impacts. Unofficial estimates points to over a US $ 1 billion in revenue lost to the government annually due to smuggling, notwithstanding the social fallout. Smuggling is growing rapidly in this COVID-19 milieu, due to the economic pressures exacerbated by the pandemic. Excessive controls offer no cures. Prevention could be done through right-priced and placed policy. 

(Nadeesha Fernando is a corporate affairs professional consulting on marketing, product policy and research for several leading corporates in Sri Lanka and the region)