Pros and cons of loans on lines of credit

by Neville Ladduwahetty

An MP is reported to have claimed that several types of vegetables and yams have been imported at a cost of $293 million. Following this disclosure, Minister Mahinda Amaraweera has instructed the Department of Agriculture to investigate the allegation and submit a report.

The country from which vegetables and yams were imported has not been disclosed. Furthermore, although serious attempts have been made and continue to be made to restrict imports to ease pressure on the country’s foreign reserves, the fact remains that items listed in Agreements relating to Lines of Credit continue to be imported despite its impact on local production due to systemic shortcomings. This aspect is reflected with regard to items listed in the Lines of Credit extended by India.

INDIAN LINE of CREDIT

The document of the Ministry of Finance titled “Importation of Essential Items under Indian Credit Facility Operating Guidelines” prepared by the Indian Credit Facility Coordinating Unit (ICFCU) Ministry of Finance Sri Lanka 2022 in its Introduction states:

Introduction

1.” The Government of India has agreed to provide a USD 1,000,000,000 (United States Dollar one billion) credit to the GOSL. Accordingly, a credit facility agreement was signed with the State Bank of India (SBI) to obtain up to an aggregate sum of USD 1 billion for the purpose of importation of essential items from India. This facility will enable registered importers to import essential food items, essential pharmaceuticals and raw materials for local industries from India. The Ministry of Finance together with the Ministry of Trade will take necessary steps to implement this facility.

Once the importers are selected by the Ministry of Trade to import assigned quantities of selected items, they can place orders with the identified Indian suppliers. The importers are required to secure their order by placing a deposit at the General Treasury through their respective banks and once the imports are arrived and cleared by the customs, the Indian suppliers shall be paid with equal Indian Rupees through the SBI.

2. Objectives of the Facility 2.1.1 Cater the demand for essential items. 2.1.2 Supply of essential items in the market without a shortage. 2.1.3 Minimize the pressure on foreign exchange reserves.

SCOPE of ITEMS to be IMPORTED

It is evident from the foregoing that while the Finance Ministry expects to minimize the pressure on foreign exchange, it is the Trade Ministry that identifies the essential items and the supply of these to the market without shortage.

Referring to the Indian Credit Facility a report by the GLOBAL TRADE ALERT identifies the items to be imported and states:

“On 17 March 2022, the State Bank of India signed an agreement with the government of Sri Lanka to provide the latter with a credit facility of USD 1 billion. The credit will be used for the procurement of food, medicine, and other essential commodities. The Indian Finance Minister, Minister of External Affairs, and the Ministry of Finance shared this information on Twitter after the ministers had had a meeting with the Sri Lankan Finance Minister”.

According to some news reports, the credit will be used to procure the above goods from India (see related intervention). The State Bank of India is an Indian government-owned bank.

AGRICULTURAL PRODUCTS IMPORTED as per GLOBAL TRADE ALERT

Cereals; Vegetables; Fruits & nuts; Oilseeds & oleaginous fruits; 015Edible roots & tubers with high starch or inulin content; Stimulant, spice & aromatic crops; Pulses (dried leguminous vegetables); Sugar crops;

Raw milk; Eggs of hens or other birds in shell, fresh Meat & meat products

Prepared & preserved fish, crustaceans, molluscs; Prepared & preserved vegetables, pulses & potatoes; Prepared & preserved fruits & nuts; Animal fats; Vegetable oils; Margarine & similar preparations; Processed liquid milk, cream & whey; Other dairy products; Eggs, in shell, preserved or cooked; Grain mill products; Starches & starch products; sugars & sugar syrups n.e.c; Bakery products; Sugar & molasses; Cocoa, chocolate & sugar confectionery; Macaroni, noodles, couscous & similar farinaceous products; Food products n.e.c.

PROCEDURAL SHORTCOMINGS

Although the Introduction to the Indian Line of Credit states that it is to “import essential food items, essential pharmaceuticals and raw materials for local industries from India”, the task of identifying the items to be imported is left to the “Ministry of Finance together with the Ministry of Trade”.

However, it is the Ministry of Trade under Section 3.2 that “sets out the Committees Established under the Ministry of Trade for this facility a) Main Committee to select importers and Imports 3 b) Subcommittee to provide recommendations to the main committee on essential food items/ animal feed c) Subcommittee to provide recommendations to the main committee on essential pharmaceuticals d) Subcommittee to provide recommendations to the main committee on cement, apparel, special fertilizers and raw material for industries”.

The arrangement under Section 3.2 confirms that the task of identifying the items to be imported it left entirely to the Ministry of Trade. Furthermore, judging from the few sample items cited above by Global Trade Alert relating to Agriculture, it is clearly evident that Ministry of Trade has determined the items to be imported from India without consulting the interests of affected Ministries such as Agriculture, Health, Tourism etc.

In such a context the assurance given by the Minister of Agriculture to the Sri Lankan farmers that “the Government would not approve the import of any vegetables that can be grown in Sri Lanka”, should have been directed to the Ministry of Trade and not to the farmers. The unilateral action taken by the Ministry of Trade undermines not only the interests of local producers of agricultural products at a moment when Sri Lanka is desperately urging farmers to strengthen their efforts even further, but also sabotages efforts towards food security.

Under provisions of Section 4 “Implementation Mechanism”, once the ICFCU sends the supplier’s approved “Performa Invoice” to the Importer’s Bank, that Bank is expected to open an LC in INR with the Standard Bank of India (SBI). Therefore, according to the procedure stated above, if on arrival the goods fail quarantine clearance the Sri Lankan Importer would lose his deposit to secure his order according to the terms of the Line of Credit.

Had similar clearance criteria existed for items relating to pharmaceutical products that were supplied under the Indian Line of credit and diligently implemented, perhaps the deaths of some and for others to go blind could have been avoided; an issue that prompted the Medical Profession to protest against the quality of some of the medical products delivered under the Indian Line of Credit. Therefore, the agreement should contain provisions to check the quality of the products before they are shipped from India and deposits to secure orders to suppliers made refundable or for payment to the supplier to be withheld until quality assurance and clearance by Customs are completed.

IMPACT of LINES of CREDIT

There is no denying that goods imported from countries such as India and China are cheaper than what is produced locally. Furthermore, payment for goods imported is made in Indian rupees and dollars can be saved.

Their costs are low due to low costs of production, either due to lower wages or higher productivity or a combination of both. Whatever the reason may be, when goods from such countries are imported to countries with higher costs of production, the local producers are seriously disadvantaged because they lose their market share to low priced poorer quality imported products.

This is the case with Sri Lanka. Under such circumstances, the Lines of Credit become attractive mechanisms for countries with low production costs but whose product quality is such that meeting global competition is a challenge, to get rid of their products and win the gratitude and appreciation of countries such as Sri Lanka. This is no different to easing restrictions on imports of items such as tiles that are produced in Sri Lanka.

Therefore, when Lines of Credit on agricultural products that could be grown and processed in Sri Lanka become items to be imported under Lines of Credit from countries such as India, the development of the agricultural sector and its plans for expansion would be seriously impacted. On the other hand, if products that could be grown or produced locally are deleted from items to be imported under Lines of Credit, the government may not be in a position to not only meet the local consumer demands of the nation but to also to deal with the consequences of increase in the cost of living.

Notwithstanding such pros and cons inherent with Lines of Credit, the intention should be to treat them as interim measures with specified time bars, thus giving the local producers incentives and rewards to improve productivity. Therefore, since there is an urgent need to develop the agricultural sector, it is imperative that immediate measures be adopted by the committees and subcommittees appointed under Section 3.2 of the Indian Line of Credit to revise the agricultural products that were to be imported forthwith.

The need for such reviews and revisions apply to other products as well. The objective therefore should be that no item that could be grown, processed or produced in Sri Lanka should be imported from India if Sri Lanka is to not undermine the efforts of Sri Lankan farmers and the aspirations of entrepreneurs engaged in agriculture and overall economic development.

CONCLUSION

Lines of Credit such as those with India should be treated strictly as an interim measure to overcome a temporary crisis situation that Sri Lanka experienced if its long-term national interests are not to be undermined. On the other hand, if it is open ended as reflected with the 2022 Indian Line of Credit, it would be a fetter to ongoing and future economic growth and overall development. This is particularly so in the field of agriculture because it would not only dampen and discourage local efforts of nearly a third of Sri Lanka’s population engaged and committed to the field of agriculture, but also their very livelihoods. Furthermore, it is equally imperative that overall items to be imported under Lines of Credit be identified in a manner that does not hamper overall long-term growth plans.

Judging from the items listed by Global Trade Alert in respect of agricultural products to be imported as determined by the Committees and Subcommittees set up under Section 3.2 in the Indian Line of Credit, they appear to have been guided ONLY by the compulsion to meet demand without shortage. The fact that such narrow perspectives undermine the agendas of the Ministry of Agriculture does not appear to have occurred to the Ministry of Trade.

Equally, the Ministry of Finance has not realised any need for coordination between affected Ministries. What is starkly evident is the tendency for each Ministry to operate strictly within its respective domain regardless of the negative impact of such an attitude on the development plans of other Ministries.

Therefore, there is an urgent need to revisit the Indian Line of Credit developed in 2022 and to set up a coordinating body to identify the items to be imported including the relevant procedures if the national interests and development plans are to be protected. Such coordination should apply to other areas of economic activity as well. Failure to do so would amount to repaying another loan without an appropriate return to the country.