Remember the Vanaspathi factories that were put up here some time ago? Indian businessmen set up factories to process and re-export Vanaspathi to India. It was a lucrative market and provided value addition in foreign exchange for our country. Then, because of protests from Indian manufacturers, the Indian Government clamped down on the duty free exports of the product from Sri Lanka.

These factories had borrowed funds from local banks and when the sudden clamp down took place they had to close down and some of them defaulted on their debts to our banks. Who suffered ultimately? What would a more commercial minded country have done? The government should have stood firm and explained the position to India. It should have also discussed with the Vanaspathi factories how to tackle the problem. But that didn’t happen.

Some years ago there were quotas for export of coffee and although Singapore does not produce coffee, it too obtained a quota. Traders in Singapore imported coffee from Indonesia and re-exported under the Singapore quota. The Singapore government took no action against these importers and to the extent that there were complaints they merely went through the formalities and promised to enforce the law. Since these were commercial crimes the importers were not threatened with imprisonment or other dire consequences.

A parallel situation arose with regard to shrimp exports from Vietnam.  Sri Lanka had a quota and since we were not producing prawns owing to a virus, enterprising traders imported from Vietnam and re-exported prawns. But our Customs clamped down and treated the traders as criminals, confiscating the prawns and heaping huge losses on them, which were ruinous to those concerned. These are commercial crimes and the punishment should have been a commercial punishment such as a fine rather than detaining the shrimp containers for days until the product went bad and had to be thrown away.

I was told that a similar episode took place with regard to import of pepper. India imports pepper and Sri Lanka could re-export spices since our production is not adequate to supply large orders. We cannot increase production in the short run but we can exploit the economic opportunity for re-export through further processing here.  The Customs was again the fly in the ointment.

Some time ago I remember a Committee headed by the late N. U Jayawardena (where I too was a member) which went into regulatory problems and suggested liberalization of Customs and Exchange Control procedures. But nothing really happened. The Customs is the biggest obstacle to exploit opportunities in the re-export trade which can generate considerable foreign exchange for the country. I think the Customs is the biggest obstacle to the development of our export and re-export trade.

President Premadasa toyed with the idea of outsourcing the Customs to an International firm such as General Superintendence. But the Customs officials lobbied and stopped it. A similar outsourcing in Indonesia and I think Philippines too, succeeded in streamlining export procedures and reducing corruption. The Customs Department is an example of the practice of organized corruption. A fixed illegal fee may be levied for every entry passed and goods may be detained to cause losses to traders.

Consider the potato trade for example. A few big importers effectively prevent the entry of newcomers into the trade by the simple device of informing the Customs of some purported irregularity which would mean the detention of the perishable cargo. This happened to a new entrant to the trade recently who imported potatoes from Pakistan during the season. He lost hugely because the detention meant the perishable cargo had to be thrown away.

Attracting Foreign Direct Investment

The government is seeking to attract direct foreign investment into the country. What we should do is to encourage long term investments where factories are constructed and machinery and equipment installed to increase domestic production. But one cannot put up factories unless the land is made available. The foreigners have to pay a 100% tax if they buy local property. One can buy property anywhere in the developed world without such a pernicious tax. The Arabs bought property in London and Japanese investors bought several skyscrapers in USA. But here we don’t allow foreigners to buy property freely.

The government is the largest owner of land in the country and won’t part with land. It says it wants direct foreign investment in the Eastern Province but how much land has it alienated to foreign or even local businesses interested in investing in the Eastern Province? I have only heard of some land being alienated to CIC for agricultural purposes. Why not liberalize the land alienation laws and allow foreigners land so that they can put up factories and the necessary infrastructure.

Power is very important for business. But owing to the monopoly enjoyed by the CEB foreign capital cannot enter the field of power generation. Recently the CEB Act was amended to split the power generation and distribution functions. But so far the reform has not been implemented. Foreigners invested in power generation in Thailand and there was foreign capital available prior to the present global economic downturn. We missed the opportunity and will now have to wait for better times.

There are very few economic opportunities available in the country since the land and labor are limited. Even the available land is not being put to productive use owing to too many restrictive regulations. We have to make drastic changes in policies and even overhaul some regulatory agencies like the Customs and the Exchange Control.

I referred to an earlier article the Money Laundering Laws. The negotiable Certificates of Deposit were a fine instrument to tap the black money which is huge in our economy. With the introduction of the Money Laundering Laws the CB insisted that the banks should obtain the National identity Card numbers of the holders. I think there are much savings that can be tapped into the official economy if these unduly restrictive laws are abolished or at least not enforced.

There is plenty of foreign exchange held by Sri Lankans abroad. How many residents have flats in Singapore and London? How many have foreign exchange holdings abroad? We are now in a foreign exchange crisis and if we relax the Exchange Control laws and even abolish them there would be enough foreign exchange in official channels to fund our balance of payments deficits.

I work for a foreign stock brokerage firm. There are unduly restrictive laws about the remittances to buy shares in the stock market. The money must come into special accounts only through the banking channels. Why not allow foreign currency accounts to be opened freely by foreigners provided they produce foreign currency?

There are restrictions on persons bringing in foreign currency. They have to declare if they bring in more than $10,000. They cannot take out foreign currency unless they have declared it on arrival. When we need foreign exchange so badly why bother with such restrictive rules? Why not allow foreigners to deposit foreign currency into foreign currency accounts held in local banks and why not allow them to invest such moneys in the stock and bond markets? Won’t it help to relieve our foreign exchange shortage? Someone will say it would lead to money laundering. Perhaps, but isn’t our need so pressing that we have to go with the begging bowl for loans from foreign countries.

We should have a sense of priorities and our priority right now is to gather in all the possible foreign exchange that we can. Also why give the monopoly of foreign exchange business to the banks? This was done during the Second World War under Defense Regulations in order to monitor the foreign exchange control regulations when foreign exchange was scarce.

Interference in the Foreign Exchange market

The IMF would insist that the exchange rate be left to be determined by market forces and CB intervention limited to ironing out extreme volatility only. Last week the rupee strengthened. According to market participants the CB is twisting the arms of the foreign banks holding supplies of foreign exchange as a buffer to sell to the market in order to run down such holdings. Such interferences are unlikely to influence the rupee for long. The CB argues that the banks are speculating. Maybe, but what is wrong with speculating?

George Soros was accused of breaking the Bank of England in the early 1990s. But Soros is not a villain. He was motivated by a perfectly acceptable goal, to make profits for himself and his investors.  He did not break the Bank of England. Rather, the bank tried to break the laws of supply and demand. In free markets, the price is determined by the interaction of supply and demand, not by central bankers. Speculation is not a feature only of currency markets. Everybody does it when engaging in market transactions.