The pre-1977 closed economy: Lest we forget

This article is composed of 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 to. The need to have a strategy to balance liberalisation and control, with adjustments from time to time, and close monitoring, has to be recognised

By Elmo De Silva

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 Deputy Controller, I was also responsible for the disbursement of forex on the quota system to traders who imported goods and for the 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 of foreign 

exchange: 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 there was no scope for expansion. There was a situation when the country ran short of rice but had no forex to import it. Pakistan gifted us 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% 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, otherwise suppliers would not entertain small quantities where it was not economical to supply. 

Once imports were affected, 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 the 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 gashes on the face. Thus people returning from abroad brought packets of blades and gifted one blade to each friend. Matchsticks manufactured locally did not strike, so with all the trade unions striking it was said that the only thing that did not strike was a locally-manufactured matchstick. This pun was made by 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 Sri 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 Government 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 was from the United Kingdom or Japan, this aid line could not be utilised.

The Import Restriction Committee: this committee met regularly with the sole intention of restricting imports in the erroneous belief that Sri Lanka could produce all its consumables and raw material requirements 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 extremely control mindset of the then policymakers, the IRC was asked to consider banning paint used on toothpaste tubes, which were manufactured locally. The import of margarine was not permitted as one firm manufactured this locally, which was described as just 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 one saree was asked by the Import Control Officer for whom the saree was sent as a gift, and he honestly stated that the saree 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 being 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 JVP insurrection then broke out. The JVP 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 Commissioners Department, which was 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 Commissioners Department. Police clearance had to be obtained. The forex given per person was three pounds 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 50 guests at predetermined times. 

The Rice Barricades: rice from the production areas could not be freely brought to the major urban areas as the 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 textile was completely outdated worldwide and had no demand.

Belekkade, the tin joint: This is a small mixed market place at Ratmalana. This place got its name as belekkade 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. E.g. glass tumblers, where the bottom was not flatused 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, the women folk in particular, went to and fro in search of white textiles to stitch there funeral wear or had to make their funeral wear in advance, in anticipation of the death. 

If I remember correctly, the late 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 monks were given robes dyed witha particular type of dye during the Katina Pinkama season. The State Trading Cooperation, which was the sole authorised institution for all imports, could not find a foreign supplier. The import controller therefore had to request Hayleys Ltd, who were 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, ware houses were cut open and goods removed, as at this time our imports were not containerised, and to avoid payment of Customs duty and other port chargesapplicable 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 people to avoid prosecution. 

Health restrictions 

Doctors’ private practice was banned: Obtaining hospital treatment was a torture. All private practice by Government doctors was banned and all patients were compelled to seek treatment at Government hospitals. In fact sleuths were sent by the Government 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, which was 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 asking friends abroad to meet the foreign expenses and paying for these in local currency. 

There was an 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, the import of drugs from western countries was not permitted and they had to be imported from communist countries such as then Czechoslovakia, in keeping with the Government’s alignment with 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 line vessels to save on forex freight costs and to promote the Ceylon Shipping lines. 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 Ceylon Shipping line vessels. Needless to say the freedom to select the shipping lines and the delays in shipment were an additional crippling factor to Sri Lanka’s external trade. Note: In external trade importers and exporters established 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 a later point in 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 surcharge per container on cargo containers imported to Sri Lanka was imposed by the ship agents. As the UK 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 $ 500 per container. 

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 an import licence could be issued or not to import a car. There was no appeal.

The housing dilemma

Loans to constructhouses 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 department took several months. All items required for house construction had to be obtained from government 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 J.R. Jayawardene, who stated that there were Government corporations for everything, including gunny bags, and that the Chairman of this corporation was a Gony 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 (STC) 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 Department had to provide the STC with information and previous invoices. 

One instance was the case of bailing hoop. The baling hoop was, 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 a 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 (CC) produced inferior ceramic ware and only these products were available since no imports were permitted. The Textile Corporation (TC) produced textiles of poor quality which had to be bought by consumers. Exporters of garments were permitted to import textiles, which normally were 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, UK, 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.

Conclusion

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 liberalisation, trade liberalisation, 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 liberalisation policy should prevail.

(The writer can be reached via e-mail at [email protected]).