17 September, 2019

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Is ETCA Good Or Bad For Sri Lanka?

By Hema Senanayake

Hema Senanayake

Hema Senanayake

It seems that the government, at least Ranil’s faction in the government, is desperate in signing the proposed Economic and Technology Corporation Agreement (ETCA) with India. Some people support it and some people oppose it. They have their own arguments either to support or to oppose it. Some are economic arguments and some are not.

In this article, I intend to discuss only economic reasons as to why anybody must support or oppose to ETCA. Since, the ETCA is not finalized yet, we only can discuss as to how we can determine whether any particular economic and trade agreement is beneficial for the country. Such analysis might pave the way to prepare a better frame work or as GMOA has proposed to prepare a national policy in signing any trade agreement. In general if ETCA brings win-win situation for both Sri Lanka and India, we may agree that the agreement is good.

There are two vital economic reasons as to why economic and trade agreements are signed between and among countries. In fact one reason is broader economic objective and the other is a determinant reason, in other words it is the second reason through which we can determine whether any particular agreement is good or bad.

The first reason to sign economic and trade agreement is that such agreements usually help in utilizing what is known as “comparative economic advantage” in achieving partnering countries economic development objectives. Let us learn the importance of this point from the world’s largest trading nation which is the United States.

“The United States is the world’s largest economy and the largest exporter and importer of goods and services. Trade is critical to America’s prosperity – fueling economic growth, supporting good jobs at home, raising living standards and helping Americans provide for their families with affordable goods and services” (Official website of the Executive Office of President of the U.S.).

Globally, this is the same thing or goal that the World Trade Organization professes to achieve through the principle known as “free trade.” Yet, all free trade agreements are not good.

Sometimes, these agreements do more harm than good for particular countries immaterial of whether the country is developed or developing one. This means that such agreements do not make or create win-win situation for all partnering countries. This is where that the above said second reason or a criterion comes into play. Let me explain this point as follows so as to explain it as simple as possible.

There are two important national accounts maintained or posted by the Central Bank of Sri Lanka. One is the National Current Account and the other is Balance of Payment (BoP). With any trade agreement entered into with any country these two particular accounts are changed positively or negatively. Therefore in general if the change happened in these two accounts are positive, the trade agreement is good and if the change occurs is negative then the agreement is bad. This statement or conclusion is true for any country which uses some other country’s domestic currency as its international reserve currency, which is the case for both Sri Lanka and India. This conclusion is not fully accurate for those countries whose currencies are used as international reserve currencies such as U.S. dollar or euro.

Now, let us take an example. Let us assume that Sri Lanka would have a negative impact on its current account after signing ETCA. What does this mean? This means that Sri Lanka would be posting an increasing current account deficit due to ETCA. However, if this current account deficit is not balanced off with the inflow of non-credit based dollars (or any other reserve currency) posted in the Balance of Payment account, ETCA is bad for Sri Lanka. It is bad for India in the long term as the agreement could create financial/monetary instability in Sri Lanka.

I heard that one time Dr. Wickramabahu Karunaratne was questioning as to why people or professional groups are not opposing when Sri Lanka is signing trade agreements with Germany and why do they oppose when the same thing is done with India. I do not know why professional groups are doing it. But what I know is that Sri Lanka has a current account surplus with Germany, but with India, Sri Lanka already has a current account deficit with no significant positive effect on non-credit based currency inflows posted in BoP. Now, I guess, Wickramabahu himself could figure out the answer for his own question raised before media.

If ETCA is bad for Sri Lanka under the above premise, then there is a particular reason for the said determination and that is why we say it is bad. What is that reason? Let me explain it as follows;

Let us assume that the BoP stays as it is. Let us now assume that after signing the ETCA, Sri Lanka has to post an increasing deficit or widening deficit in the national current account. If this happened, Sri Lanka has to borrow in foreign currencies (dollars) in each accounting cycle in order to prevent monetary instability. This means the effect is very quick. If this happens, the final conclusion is that Sri Lanka would be borrowing dollars to support India’s economic development.

Therefore, entering into a trade and service sector agreement with another country is a serious business. This is a job to be done carefully by the Ministry of Finance. The CBSL, as the official economic advisor to the government must express its independent opinion on the subject. So far we have never heard anything from CBSL on this particular issue.

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Latest comments

  • 9
    7

    Sri Lanka is mostly an importing country. Even with India, Sri lanka’s Trade imbalance is hugh. So, economic pact with india without considering well what we are getting into is just committing suicide.

    Germans won’t be coming to Sri lanka looking jobs in Sri lanka except in specific cases.

    but, Indians will flood Sri lanka with their Onions, chillie, potato as well as with cheap skilled and unskilled lavobour. So, Sri lanka can only lose.

    • 14
      2

      Jim Softy:
      You say:”Sri Lanka is mostly an importing country. Even with India, Sri lanka’s Trade imbalance is hugh. So, economic pact with india without considering well what we are getting into is just committing suicide.”
      Okay. What is the cause of the current account deficit with India? Is it not largely from imports of buses, cars, motorbikes, three-wheelers, etc, which are not covered by the existing FTA?
      So, logically, the way to reduce the imbalance would be to import these items from another country, say Germany. So we would be paying 5 times the price of a Leyland to get down Benz buses from Germany?
      Even a Benz assembled here would cost more than an Indian bus
      One doesn’t have to be an economist to see that this is ridiculous.
      Why do you object to cheap Indian potatoes, onions,etc? Do you prefer European ones, and if so why?
      It seems you object to ETCA simply because the partner is India.

      • 4
        7

        One item in this agreement is establishing IT industry in Sri lanka. Once the signing of thea agreement is finished, things will change. They might establish an IT company or may buy out Sri Lankan Telecom in order t eves drop on Sri lanka. Rest may be flooding sri lankan IT industry with their unemployed graduates. So, the sri lankan unemployed graduates lose the opportunity to get trained and find jobs.

        As long as sri lanka is only an importing country Sri lanka will never win.

        India can hit even the Sri lankan Tea industry with their Chai and Assam Tea.

        See how Basmati is the major rice in Sri lanka when Sri lanka has better fragrant and tasty varieties which Sri lanka is not using.

        • 4
          1

          Jim softy,
          You say:”They might establish an IT company or may buy out Sri Lankan Telecom in order t eves drop on Sri lanka”

          A lot of people objected when the Indians bought the Tyre Corporation. Do you think that was a bad deal now, 20 years later?
          Please name one Sri Lankan rice which is better than Basmati.
          If the ETCA is signed, maybe the Indians will let us grow Basmati.

          • 0
            0

            @Old Codger

            What is the definition of a “better” rice ? That’s purely subjective and an individual preference. You like Basmati. I don’t

            Anyway, which Basmati do you mean ? Indian ? Pakistani ? Or any of their innumerable sub-types ? American ? the so-called ‘Brown Basmati’ ? Ah!! Must be American, right ?

            I say my Samba is “better” than your Basmati

            • 1
              0

              Hello Maalumiris
              You might find this disappointing, but I like red Samba myself. The point is that nobody outside SL seems to like it.We can’t seem to export our rice except as animal feed. Basmati has the market. Or Jasmine rice.

        • 3
          0

          @Jim Softy How are you so familiar with what is in the agreement when the agreement has not even been drafted yet?

          I suggest you look up the definition of ‘trade in services’ before running your mouth.

          Also, I suggest the GMOA go on the streets to stop the import of Leyland buses, Bajaj three wheelers, Hero Honda bikes etc. or go back to practicing medicine and try and operate on the correct knee first. Hope the suggestion doesn’t cost me a kydney.

      • 4
        0

        Old Codger

        This discussion about ETCA cannot be furthered simply for two reasons. Economists who should be actively engaged in this discussion are completely absent from the scene. In the absence of such specialists, it is now left to Tom, Dick, Harry and Dimwit who are uninformed and ill-informed to dump down the discussion to their level.

        It seems paranoid anti-Indians would want to make the decision over economic life and death of this island. The people who voted for 8 measures of free rice from the moon cannot be relied upon for good, rational, … economic arguments.

        Hema Senanayake has failed in his objective whatever that may be, in explaining how free trade can increase demand for domestically produced goods and services, which usually increases employment opportunities for the exporting country.

        The discussion centres around narrowly defined dated concepts.

        The process of value addition is completely or deliberately ignored.

        In the absence of endogenous growth factors (due to lack of investment in human capital, innovation, and knowledge) the country needs to import resources (capital, labour and raw material) until such time it is ready to take off.

        • 1
          0

          ” it is now left to Pro-Indian / Anti Indian Tom, Dick, Harry and Dimwit who are uninformed and ill-informed to dump down the discussion to their level.”

          How true!

  • 3
    3

    The ECTA is a medium-long term concern. There are some short-term immediate concerns.

    The trade deficit is widening. The exports are taking a dive downwards. The exports should increase with the depreciating LKR. Although the opposite is taking place.

    The Finance minister keeps delivering what is normally called “motherhood statements”. i.e. things that make you feel good. All the while all the economic indicators are getting worse after he took over from Rajapaske.

    After stuffing up the budget he should have been replaced. He should be replaced by someone like Eran Wickramanayake.

    • 2
      0

      who is managing the economy RK, RW or MS. No one knows. even they do not know for sure. According to RW India will invest in SL and develop SL, their professionals wont come here, this agreement is a unilateral agreement. Learn fro EU, in the UK EU members are give preference over other nationals for jobs, as a result UK is full of inefficient EU professionals. Now UK wants to pull out. Once you sign an agreement you had it. What happened when Appolo Hospital was started (BOI) underqualified specialist came into SL, because SL is the only country where there is no law to prevent under qualified people practicing as specialist.

      HongKong may have prospered from trade agreement with china , that is amily due to the language issue, western market can easily access China via HK. This trade agreement needs to be thought out clearly. Comparative advantage will be there when we have the means of production, when donot have then we are at comparative disadvantage.

  • 0
    2

    “Sri Lanka already has a current account deficit with no significant positive effect on non-credit based currency inflows posted in BoP.”

    “Sri Lanka has a current account surplus with Germany.”

    That says it all! That should seal the deal!

    • 3
      0

      ramona mother therese fernando

      ““Sri Lanka has a current account surplus with Germany.” That says it all! That should seal the deal!”

      What does it mean in monetary term?

      • 0
        0

        For every +Rs.100 we make with Germany, is a -Rs.100,000 we make with India :(

        • 1
          0

          It seems Ramona mother theresa’s stupidity knows no bounds.

          We import next to nothing from Germany, save for a few BMWs. Even the Benz cars are manufactured in India, and the Siemens products in China.

          On the other hand, all of the Bajaj threewheelers, Leyland bus components, Hero Honda motorbikes etc. are imported from India. What are you going to do about it?

          Incidentally, you may not be aware that the trade deficit with India has reduced by 40% since 2000. Of course you wouldn’t since you don’t seem to be aware of anything anyway.

          • 0
            0

            We export a hellava lot to Germany. What do we export to India?…..Oh No! We’d have to GMO our ancient grains to force trade relations.

            • 3
              0

              ramona grandma therese fernando

              Export in Million rupees to

              Germany 2012 – 57,704 2013 – 60,000

              India 2012 – 72,271 2013 – 78,154

              I suppose in your head 57,704 > 72,271 and 60,000 > 78,154

              • 0
                1

                I was speaking in terms of proportionality, Native Vedda.

                Considering India is just a stone’s throw away, it is natural that we should trade with them. But you won’t find that number going up much further with extra coddling. It will plateau at a level far lower than we would expect. Now if was China…..but of course we mustn’t go overboard with that either.

                Considering that Germany is so far, far, away, we have done superbly with them.

                • 1
                  0

                  Ramona, Ramona,
                  Trade is just that. You export and you import. Not necessarily both to the same place. We export garments to Germany and use the money to import Tatas from India. It would be very foolish, don’t you think, to export garments to India and get BMW’s from Germany?
                  Why is it we export practically nothing to China but get all our electronics (and road workers) from there?

                  • 0
                    0

                    Old Codger,

                    Yawn……and that’s the way it should remain…..there’s no need to force trade exports onto India and build a land bridge is there? Tata busses and three-wheelers should be enough. They can come via ships.

                • 2
                  0

                  ramona grandma therese fernando

                  “Considering India is just a stone’s throw away, it is natural that we should trade with them.”

                  Do you have a basket of quality products and unique services that India cannot produce cost effectively, but India needs desperately?

                  Why don’t you just bury your anti Indian head wherever you find convenient so that the informed can have a free discussion on this subject.

                  • 0
                    0

                    No, no, name-calling-Native-Vedda, I am not anti-India- I LOVE great-grandmother India!

                    But it is exactly as you say: “Do you have a basket of quality products and unique services that India cannot produce cost effectively, but India needs desperately? ”

                    Indeed we do not. So why force the trade? We have lots of quality products to sell to Germany, on the other hand.

                    (and we SHOULD NOT GMO our ancient grains to feed the teaming millions of Indians who lost their farms to Indian industrialization!)

  • 1
    0

    Please study the progress of the 15 year old Free Trade Agreement. Sri Lanka has not succeeded in exporting goods to India because of the Federal government taxes and the non-tariff barriers. Implementation of any more agreements with India must be if and only if the Indian Government includes limits on Federal government taxes and shows an improvement in removing the non- tariff barriers and there is growth in exports of manufactured goods to India exceeding the GDP growth rate of India.

    What happened to the budget can happen to this ETCA with India creating serious damage to Indio-Lanka relations. A step by step implementation plan is the prudent course of action.

    • 2
      0

      Truth

      “Please study the progress of the 15 year old Free Trade Agreement. Sri Lanka has not succeeded in exporting goods to India because of the Federal government taxes and the non-tariff barriers.”

      Could we have some statistics on bilateral trade and investment with India, and let us know the trend in the 15 years you mentioned.

      I suppose one does not need to be wise to read the statistics. Any stupid can read the trade figures and plot trend.

  • 1
    0

    The draft ECTA is here.

    https://d3dz4rogqkqh6r.cloudfront.net/uploads/files/2016/01/yimg_ZwYnLb.pdf

    I think issues relating to Sri Lankas goods getting stonewalled in India is yet to be addressed.

    There are many goods on the FTA list when they are exported suffer from various trade barriers.

    The trade balance is way too much in Indian flavor at the moment.

    Just fix those issues before engaging in more agreements.

    • 2
      2

      Vibhushana,
      You say:”There are many goods on the FTA list when they are exported suffer from various trade barriers. The trade balance is way too much in Indian flavor at the moment”
      Does it matter with whom we have a trade imbalance?
      Please answer the following:
      1.Did we not have a trade imbalance with UK when we imported British cars and lorries?
      3.Is it not possible that the above trade imbalances have been transferred to India because India is a cheaper source for goods now?

      Why blame the Indians ? We are not being forced to buy from them. You can always buy a BMW if you don’t like Maruti.

      • 2
        0

        Hello Old Codger,

        I little more complex than you may think. Perhaps if you have time watch the interview here.

        https://www.youtube.com/watch?v=cV5pvYIDgWM

        The imbalance is more or less forced on Sri Lanka. They agree to item in the contract but when the goods are shipped all kinds of barriers are encountered there.

        • 2
          1

          Vibhushana,
          Samantha Kumarasinghe is a notorious protectionist. You might as well ask the thief’s mother her opinion about the thief!
          That aside, Samantha himself says India has a trade imbalance of 45 billion dollars with China. Are the Indians complaining?
          Why don’t you go have a look at the Damro showrooms in practically every major city in S. India? Their raw material is imported, but they still manage to compete. Kumarasinga was unable to sell his purported natural products in India. He even had trouble with his local labour force.
          I can tell you one thing from personal experience: Australian apples, Chinese electronics, and Austrian cheese are cheaper in Chennai than in Colombo. So which market is closed?
          A case of incompetency again.

          • 0
            0

            Old Codger,

            Now that you mention, I have seen Damro showrooms in Kerala and Andra Pradesh too. They have expanded to Australia as well. Damro is in a class above all others.

            Chennai is a bigger market and more competitive. I would imagine its the scale that is driving the prices down there.

            Well, there is certainly a bottleneck somewhere that is making harder to enter the Indian market.

            Maybe our guys can enlist Damro CEO to share his experiences with other business leaders.

            • 0
              0

              Vibhushana,
              It’s nice to see a person putting forth arguments based on facts, not ancient prejudices.

              There is certainly a bottleneck which makes it difficult for SOME businesses to enter India. Damro seems to have found a way through. I believe the secret is in how they work with their Indian partners.
              Keells and Cargills too seem to quietly do well with their meat products. I have seen items from these 2 companies under Indian brand names.
              I heard Samantha K complaining about Indians converting our surplus rice to animal feed. Now, instead of griping about it, why didn’t he think about this himself?

  • 0
    0

    The agreement has not been drawn up yet, according to the PM. Yet there appear to be countless BS discussions on it.

  • 3
    0

    Hema senanayake,
    You say:”But what I know is that Sri Lanka has a current account surplus with Germany, but with India, Sri Lanka already has a current account deficit with no significant positive effect on non-credit based currency inflows posted in BoP.”
    Okay. What is the cause of the current account deficit with India? Is it not largely from imports of buses, cars, motorbikes, three-wheelers, etc, which are not covered by the existing FTA?
    So, logically, the way to reduce the imbalance would be to import these items from another country, say Germany. So we would be paying 5 times the price of a Leyland to get down Benz buses from Germany?
    Even a Benz assembled here would cost more than an Indian bus
    One doesn’t have to be an economist to see that this is ridiculous.

    “why people or professional groups are not opposing when Sri Lanka is signing trade agreements with Germany and why do they oppose when the same thing is done with India. I do not know why professional groups are doing it”
    Of course German welders/doctors/ IT specialists wouldn’t want to come here would they? Indians would undercut the overpaid and less-than-competent locals.

    • 1
      3

      With respect to buses, Sri lanka should have a plan and should start assembling buses domestically.

      Sri lankan is an small island. It does not have much space to fill with cars and pollute the air as it is now and increases cancers.

      Instead, Sri lanka should have a good infrastructure plan, should reorganize and increase train and bus services.

      but, politicians are not doing. Cars are flooding the country.

  • 2
    0

    Senanayake has only given an overview in the broadest sense. Let’s hope he goes in to the nitty gritties in a follow up.

    Every impact of this agreement cannot be measured in economic terms only. It is not only about National Current Account(NCA) and Balance of Payments (BoP) though it is agreed that the ultimate economic results will be reflected in these data.

    For instance what is the impact on the people of Sri Lanka in respect of employment, family earnings, savings, education, health and medical benefits, poverty eradication and general wellbeing? Are we going to be better off and how soon?

    Most trade greements such as GATT, WTO, and now TPPA, are heavily weighted in favour of the economically powerful countries. Such agreements have historically shown to be detrimental to the people of the poorer countries.

    In the case of this agreement with India we need to study how the agreements signed with Nepal, Bangladesh,and any other have benefited the countries concerned. To what degree has technology transfer been successful?

    Our history with India does not lend to establishing trust. We cannot easily forget the great harm India did to us by unleashing terrorism. I for one cannot forget India’s perfidy. Why is the Indian government failing to take action against blatant poaching by Indian fishermen in our territorial waters? Is it another form of arm-twisting?

    I say examine all issues first.

  • 1
    0

    Insightful explanation in just simple terms. Hope all of these points will be taken in to consideration very seriously.

  • 2
    2

    What ever Old Codger says, the ultimate result will be, because of the bribes from indian businessmen, because of the influence of indian politicians, Sri lankan politicians will allow indian business community to rape and destroy the country.

    • 0
      0

      Jim softy,
      This is soo disappointing. You have no answers to my arguments?

      Hey, I wouldn’t mind receiving a few bribes from Indian businessmen so that they can eavesdrop on my wife yakking away on her handphone.

      • 3
        0

        Old Codger

        ” This is soo disappointing. You have no answers to my arguments?”

        Dimwit is so stupid he never had an original argument.

        Please note he never disappoints me.

        • 0
          0

          NV,
          There are many people who write in English but don’t understand it. Go easy on them.

    • 1
      0

      Jimmy,
      You say: “With respect to buses, Sri lanka should have a plan and should start assembling buses domestically.”
      Do you not live in Sri Lanka and use the buses? Don’t you know that most of the buses ARE assembled here from Indian parts? Should we get Leyland parts from Germany?
      Perhaps you are one of those people who go around with escorted by 2 Defenders?

  • 1
    0

    For the attention of Jimmy softy, Old codger & co.
    ————————————————-

    You must always look at poor man’s pocket. Can he afford to buy a car,
    motor cycle, potatoes and onions from Germany. We hate communism but
    we buy goods from communist China because the price paid suits the common man’s purse. Indian goods are now competing in western markets as quality has certainly improved, compared to the previous years and we could buy those goods at lower prices due to lower freight charges. It is hate & suspicion that prevents good trade relations with India and no one is bothered about the economic impact if trade is shifted to Europe or China, specially the imports.

    It is our negotiators who should be sharp enough to judge whether ETCA is good for us or not the political critics. There is no pressure exerted by India to sign the contract.

    • 0
      0

      Lanka watch,

      Exactly what I have been saying all along. At least you have the sense to see it.

      • 0
        0

        @Old COdger

        Very good footwork !

        Congratulations !

        • 0
          0

          Dear Maalumiris,
          Thank you, thank you!
          (loud applause from gallery left)

  • 0
    0

    Native Veddah,Jim,Old Codger Et Al
    The history of Leyland is a factory in North England shifted lock stock and barrel because M vehicle industry is considered low tech and similarly with TATA Benz.India benefited due her low COP.We benefit from cheap Veh imports.

    In the case of tea we will loose on the deal because Indian teas are inferior. That means SL will get more exports of low quality tea branded as Ceylon tea specially because tea market is finished because low oil prices and therefore low demand for our tea.

    What is important is will SL get more deals with increased IT people coming here? If so go for it because its swings & roundabouts not BOP NCA.

    • 1
      0

      Liverpool,
      Yes you have part of the story. British Leyland closed down because it couldn’t compete with Japanese quality and price. Similarly the British TV industry survived as long as the Japanese were not allowed to export over 20″ screen sizes till the late 80’s.
      We have lost our advantage in tea because labour (Indian again)is no longer cheap.You cannot blame it on low oil prices because tea was our biggest export when oil was 3 dollars a barrel.We must find something else to export. The superiority or otherwise of our tea is subjective .. Lots of customers are not bothered where their tea comes from.
      We need investment, investment and more investment. Griping simply because it is Indian will not help.

  • 1
    0

    Old Codger,
    When tea was sold during 3USD /per barrel period it was only brown tea.After 1975 the tea exported is mostly Black tea and this is primarily bought by middle-east oil exporters and CAR countries.They purchase tea only with profits from oil sale which is now in the doldrums.
    We now have virtually 10,000,000 kg unsold inferior tea in our where houses.Import of more tea from India for “Blending” wont help.

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