Sri Lanka: Danger of Closed Economy: Lesson learned from Pre-1977

The quantity of exchange on each import control licence was totally inadequate. Industries, for instance, operated at 40 per cent capacity. Importers of watch spares, for example, pooled their exchange quota allocations and each importer agreed to import one or two items so as to make an economic unit, for otherwise suppliers would not entertain small quantities where it was not economical to supply.

by Elmo de Silva

( September 10, 2017, Colombo, Sri Lanka Guardian) This article is composed from what the writer could recollect when functioning as the Deputy Controller Imports and Exports during the pre-1977 period. It is intended to draw attention to the negative effects of a closed Economy which we may be heading for. The need to have a strategy to balance between liberalisation and control, with adjustments from time to time, and close monitoring, has to be recognized.

This is to place on record some aspects of the Closed Economy prior to 1977 when I was Deputy Controller in the Department of Import and Export Control : 1970 – 1975. I was subsequently Deputy Director General Customs (earlier referred to as Senior Deputy Collector), where till 1977 I witnessed the effects of the Closed Economy. As Dy, Controller I was also responsible for the disbursement of Forex on the Quota system to traders who imported goods and for issue of Direct user Licenses for import of ‘non industrial items’ , subject to the overall direction of the Controller of Imports and Exports.

The Scarcity 0f Foreign Exchange (Forex ): Implications:

Forex was released to the Department of Import and Export Control and the Ministry of Industries by the Department of External Resources. At one stage the country’s Forex was so precarious that Sri Lankan Letters of Credit had to be underwritten by foreign banks. There were situations when there was the bunching of letters of credit, as these had to be realised within the same period, causing a forex crisis. Due to the acute shortage of Forex, General Imports were subject to a Quota system. Forex for local industries was allocated by the Ministry of Industries, also on a Quota system, determined by the Ministry, based on past performance, whatever the performance, and therefore no scope for expansion. There was a situation when the country ran short of rice but had no Forex to import same. Pakistan gifted us with rice.

For General Imports, Forex was released to Traders by the Department of Import and Export Control, based on import quotas, which were determined for groups of allied items, based on the World Customs Organization (formerly known as the Customs Co-operation Council). Goods classification nomenclature: now known as the Harmonized System (The Harmonized Goods Nomenclature and Classification System).The quantum of exchange was based on the performance in the previous year which in any case did not amount to much.

The quantity of exchange on each import control licence was totally inadequate. Industries, for instance, operated at 40 per cent capacity. Importers of watch spares, for example, pooled their exchange quota allocations and each importer agreed to import one or two items so as to make an economic unit, for otherwise suppliers would not entertain small quantities where it was not economical to supply. Once imports were effected, the importers of watch spare parts distributed these parts among themselves, on an agreed basis. Exporters, such as coconut fibre exporters, who required spares for their machinery, had to obtain Direct User licences from a block quota of foreign exchange held with the department of Import and Export Control. Due to the scarcity of exchange such exporters had to apply for direct user licences only when the machines broke down for exchange could not be provided in advance, due to the acute scarcity of exchange. Of course this resulted in a loss of production time and a delay in meeting export schedules.

Locally Produced Goods and Shortage of Essentials

Then there was a ban on several imports, as there was local production. For instance cream mounting board, required by the photography industry, had to be obtained from a single, so-called local manufacturer, who maintained a stranglehold on the photography industry .But this cream mounting board industry was a farce as the so- called manufacturer imported large boards, cut them to different sizes, embossed the border and supplied the market with no value addition. Likewise the paper serviette manufacturing industry imported blank paper serviettes and printed designs, with no value addition. Textiles produced locally were of a very low quality leaving consumers with no choice. Blades for shaving produced locally either did not cut at all or resulted in cuts on the face. Thus people returning from abroad brought packets of blades and gifted one blade to each friend. Match sticks manufactured locally did not strike; given the multiplicity of strikes then it was said that the only thing that did not strike was a locally manufactured match stick! This pun was made by Mr Tarzie Vittachi, who wrote under the pseudonym of Fly-by- Night. Apart, from the shortage of practically every essential item the classic shortage was the non availability of toilet paper, and tourists were advised to bring their own toilet paper. Scarcity of food was unbelievable. A Lankan visiting Sri Lanka from abroad could not find any food one night, and had to be satisfied with jak seeds for a meal.

With the scarcity of forex the Govt. resorted to lines of credit but aid for imports was not forthcoming. In one instance aid was given, on an Italian line of credit for the import of spares. Since most of machinery used in Sri Lanka were from the United Kingdom or Japan ,this aid line could not be utilized.

The Import Restriction Committee (I.R.C.): (not Island Reconvicted Criminal )

This Committee met regularly with the sole intention of restricting imports in the erroneous belief that Sri Lanka could produce all its consumables and requirements of raw materials and even some types of machinery. The Committee comprised officials of the Ministry of Industries, Import and Export Control and Members from the Private Sector. To illustrate the extreme control mindset of the then Policy Makers, the IRC was asked to consider the banning of paint used on tooth paste tubes manufactured locally. The import of margarine was not permitted as one firm manufactured this locally which was described as solidified coconut oil.

The Control Mindset

This control policy even affected the thinking of public officers. A person receiving a gift had to undergo torture. In one instance, the parent of a recipient of a saree was asked by the Import Control Officer for whom the saree was sent as a gift. He honestly stated it was a wedding saree for his daughter. The import control officer wanted the parent to prove that he had a daughter. When proof of parentage was produced, proof of the intended marriage of the daughter was asked for. Proof of the registration of marriage was then produced. Thereafter more questions regarding the sender, value of the article etc were raised with the recipient. In desperation the recipient walked into my office and related his tale of woe. I had to ask that particular officer to stop his nonsensical harassment and ordered the release of the saree. Gifts were permitted in non commercial quantities only. Non commercial was strictly interpreted to mean one shirt or one saree etc. This restriction was imposed despite the articles been dutiable. This restriction was circumvented by the Pettah merchants by several persons obtaining one shirt each as a gift and pooling these for sale. White sugar was a luxury, so that people returning from abroad brought sugar as gifts.

Obtaining Food and Other Essentials

The Ration Book : Almost every item of food had to be obtained from the assigned co-operative store on the coupons in this book. These included rice, wheat flour, chillies, onions etc. The ration book became of such importance in one’s existence, that if anyone risked his life in crossing the road or in some dangerous situation, onlookers would ask the person, who risked his life, whether he did so because the coupons in his ration book were over as obtaining another book was torture. Begging for bread : A family was permitted only two 12-ounce loaves of bread a day. To obtain this one had to almost worship a local political stooge of the government. In my area this character was known as Paan Gamini. There is a junction named Bakery Handiya( bakery junction). This place was thus named as this was the only Bakery in this area. From where this bakery obtained the wheat flour is anyone’s guess. The case of calcium carbide: Since the government, during the time under review, was Marxist aligned, importers were given import licences to import calcium carbide only from North Korea. The 1973 J.V.P Insurrection then broke out. The J.V.P. was suspected of obtaining support from North Korea. Imports of calcium carbide from North Korea were banned. The result was an acute shortage of this commodity island wide. This was required at that time by car repair workshops. The Controller of Imports and Exports was directed, by the concerned Ministry, to seize the calcium carbide stocks from Ceylon Oxygen Ltd and issue limited quantities to car repair workshops Island wide.

Travel Abroad.

The Ration Book had to be surrendered to the Food Commissioner’s Department: No easy task. The B Slip had to be retrieved from the Food Commissioners Department: This together with the ration book had to be surrendered to the Food Commissioner’s Department. Police clearance had to be obtained. Forex given per person was Sterling Pounds Three and Ten Shillings.

Other Restrictions and Scarcities

Serving of food at Social Gatherings: If lunch was served for instance, the number of guests could not exceed 50. This was circumvented by inviting batches of fifty guests at predetermined times. The Rice Barricades : Rice from the production areas could not be freely brought to the major urban areas as government had a tight control on distribution. This created a severe shortage. Butter and Jumping Fish textiles : If one wanted to purchase a highly controlled item such as butter, one had to purchase six yards of Jumping Fish synthetic textiles from the co-operative shop. This type of textiles was completely outdated worldwide and had no demand. Belek Kade : The Tin Joint: This is a small mixed market place at Ratmalana. This place got its name as belek kade as all the scrap tins from the area and beyond found their way to this place . From this scrap tin numerous household items were turned out, such as plates ,mugs, pittu bamboo, spoons etc. This was because glassware, ceramic ware etc were in very short supply as no imports were permitted. Besides whatever was manufactured locally was of very poor quality. Eg. glass tumblers where the bottom was not flat used to sway as in tumbler talk. Textiles were in short supply because no textiles could be imported as there was a domestic textile industry, which manufactured inferior quality textiles in quantities not sufficient to supply a reluctant market. When there was a death, before the funeral arrangements were made, by the women folk in particular, who went to and fro in search of white textiles to stitch their funeral wear, or had to make their funeral wear in advance in anticipation of the death. If I remember correct,. the late Hon W Dahanayke once stood in a queue to purchase textiles dressed in a span cloth (amude) to register his protest regarding the shortage. Priests robes dye : At the period under review Rev. Monks were given robes dyed with a particular type of dye during the Katina Pinkama season. The State Trading Co-operation which was the sole authorised institution for all imports could not find a foreign supplier. The Import Controller therefore had to request Hayleys Ltd, the former agents, to have this product air freighted from their principals.

Consequent Corrupt Practices.

Licensing and corruption : Once exchange was allocated for each importer for the category of items he was entitled to import Licences were issued. These were written by the clerical staff and submitted to the relevant Assistant Controller for verification and signature. The licences were then returned to the clerical staff for posting. The clerks posted the blank envelopes, the message been “pay us a standard consideration (bribe) and collect your licence.” Normal Delivery and Caesarean Delivery from the port : The shortage of goods was such that apart from the legal delivery through the Customs and Port Authority, warehouses were broken open and goods removed, as at this time our imports were not containerized. This helped avoid payment of Customs duty and other port charges applicable to the normal goods clearance procedures. This was called a Caesarean delivery. Workers who smuggled shirts out of the port, it was reported, broke open the packages and put on about five to six shirts. Every time they met customs security, port security or police security personnel, they would take off a shirt and give it to these persons to avoid prosecution.

Health Restrictions

Doctors’ private practice was banned: Obtaining hospital treatment was torture. All private practice by Govt doctors was banned and all patients were compelled to seek treatment from Govt hospitals. In fact sleuths were sent by the Govt to check and report any errant doctors. As my father was a cardiac patient, I (then as deputy controller of imports) had to seek treatment on his behalf. When one goes for treatment one has to present a small piece of paper to a discourteous attendant on whose mercy the file will be produced or not. If this attendant could not trace the file then one would have to come once more to have a new file opened, a tortuous process.

Exchange for medical treatment abroad: Forex was not permitted for treatment abroad. However a well known Marxist minister was permitted this privilege. Some circumvented this by requesting friends abroad to meet the foreign expenses, and paying for these in local currency. There was a acute shortage of drugs. Doctors were ordered to prescribe medicines only for one week, compelling the patient to come again. Some doctors , known to the patient, would prescribe a double quantity to help the patient out of the time wasting inconvenience of repeated visits. With the doctors’ prescription one had to stand in a long queue to obtain the medicines from the hospital. The wait was longer, as attendants who were bribed obtained medicines for those who bribed them, through the back door. Besides imports of drugs from western countries were not permitted and had to be imported from communist countries such as the then Czechoslovakia, in keeping with the government’s alignment to communist countries. Such drugs were inferior in quality as they did not conform to internationally acceptable standards. There were hardly any private hospitals at that time and with the restrictions on imports such hospitals could not be established.

Restrictions on Trade

Saving on freight Costs. Importers and exporters were asked to ship goods only on Ceylon Shipping Corporation vessels to save on Forex freight costs, and to promote the Corporation. There was subsequently a tortuous process of obtaining clearance from the Freight Bureau which had to ensure that cargo could be shipped on any other vessel, only if there was no space available on Corporation vessels. Needless to say the freedom to select the shipping lines and the delays in shipment, was an additional crippling factor to Sri Lanka’s External Trade. Note : In external trade importers and exporters establish ties with foreign importers, exporters and transporters, where these companies offer discounted rates to buyers and sellers for longstanding trade or freight connections . As an illustration, at later point of time, when I was employed in a private sector industrial institution we had very large imports from the United Kingdom. At this time due to the internal strife a 1,000 US dollar surcharge per container on cargo containers imported to Sri Lank was imposed by the ships agents. As the U.K .Shipper only shipped his cargo on American President Line vessels, on the institution’s request the shipper negotiated with the shipping lines to reduce the surcharge to US dollars 500 per container.Obtaining a car permit . The inquisition : If one applied for a permit to import a car subsequent to a stay abroad , normally on a Colombo Plan scholarship, one had to show how the foreign exchange was saved. There was one officer at the Central Bank who had a sadistic pleasure in harassing applicants which was nothing but an inquisition. After a long inquiry this one officer decided whether a import licence could be issued or not to import a car. There was no appeal

The Housing Dilemma.

Loans to construct houses could only be obtained from the Housing Department. Only a floor area of 1,200 Sq Ft was allowed to be built, the argument being that available resources should be spread out as far as possible. Approval of plans by the housing dept, took several months. All items required for house construction had to be obtained from govt corporations : cement from the Building Materials Corporation (BMC), all timber from the Timber Corporation, all fittings such as hinges, locks etc from the Hardware Corporation which manufactured very low quality products, and all electrical items from the State Trading Corporation, which could not satisfy the demand. There were corporations for practically everything including one for jute hessian gunny bags, which attracted a comment in 1977 by the late Hon J.R.Jayawardene, who stated that there were govt. corporations for everything, including gunny bags and that Chairman of this corporation was a Goni Billa.

There was another disastrous piece of legislation, which permitted those who had lived in rented houses to purchase the house and deduct from the sum to be paid the amount of rent already paid to the owner. This together with the restrictions on the floor area permitted per house and shortage of building materials brought the construction of houses to a grinding halt.

The State Trading Corporation and Other State Corporations

The State Trading Corporation (S.T.C. ) was entrusted with importing almost every item other than pharmaceuticals, building materials, the requirements of local industries and any items locally produced such as textiles, ceramic ware, glassware etc. This policy was based on the erroneous belief that the private sector was over invoicing and keeping forex abroad. This of course resulted in a shortage of several items. The STC had no idea of imports, and we in the Import Control dept. had to provide the STC with information and previous invoices. To highlight one instance was the case of baling hoop. These were at that time required by exporters of coconut fibre for baling fibre for export. Each exporter was at first given an import control licence to import this item. This policy was changed and the STC was given the monopoly to import this item in the belief that forex could be saved. The STC had no foreign contacts and they had to follow tender procedure. The corporation therefore called for worldwide quotations. Since all the requirements of the exporters were pooled the quantity was large. As a result the world commodity market reacted and world prices went up as the impression given was that there was a large demand for this commodity in the world market. The STC therefore had to pay a higher price . The Ceramics Corporation(C.C.). As referred to earlier this Corporation produced inferior ceramic ware and only these products were available since no imports were permitted. The Textile Corporation (T.C.) produced textiles of poor quality which had to be bought by consumers. Exporters of garments were permitted to import textiles which were normally arranged by the buyer of the garments to suit his requirements. These textiles were given duty free customs clearance, with a bank guarantee, for the manufacture of garments for export under the then existing textile quota scheme. There was therefore an inevitable leakage of these textiles to the local market. There was also a leakage of garments which were for export on the pretext that these were seconds. All requirements for fittings and other uses in house building and other areas had to be purchased from the Hardware Corporation, but these were of very low quality. A case in point was the manufacture of mammoties. The mammoties produced by the corporation did not cut and farmers called for the crocodile brand mammoties produced in Chilliton U.K., as these mammoties sharpen the more one cuts the sod. To challenge the imported mammoties The Hardware Corporation produced a GEKKO brand which could not fool the farmers.


I have tried to refer to the restrictions and controls that that prevailed during the period under review, as far as I could recollect. The balancing of Forex liberalization, trade liberalization, protection of domestic industries, promotion of foreign investment etc needs intelligent planning and constant monitoring with the necessary adjustments from time to time. A sensible liberalization Policy should prevail.

Author: Sri Lanka Guardian

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