Business
Has Sri Lanka’s crisis-driven import controls incentivised import substitution?
By Dr Asanka Wijesinghe and Nilupulee Rathnayake
In response to the economic crisis, Sri Lanka implemented import controls that expanded significantly by the end of 2022, accounting for approximately 30% of the country’s total import value (Figure 1). The controls affected various categories, including consumption goods (46%), intermediate goods (31%), and capital goods (24%). As Sri Lanka gradually eases these controls, questions arise about the necessity of this strategy and its impact on economic growth.
Was implementing import controls a necessary strategy or the easiest option available to the government?
Were import controls applied optimally to limit damaging effects on growth?
Did they distort incentives, thereby promoting domestic production of substitutable products?
To shed light on these concerns, a comprehensive analysis was conducted using a unique dataset comprising eight waves of import controls. These controls encompassed quantitative and price restrictions at a disaggregated product level using a range of Gazette notifications issued between April 2020 to September 2022.
Were Import Controls Necessary? Unravelling the Policy Objectives
The objective behind the successive rounds of controls remains unclear, with the government declaring different goals at different times. These ranged from reducing foreign currency outflows to promoting domestic production as import substitutes. As such, assessing their longer-term impacts in distorting the incentive structures is crucial. Interestingly, implementing import controls may have inadvertently encouraged import substitution, even without a protectionist intent. The complexity of the measures employed, including credit-based requirements, import licenses, suspensions, and bans, highlights the intricacies of controlling imports.
Several hypotheses prevail in determining the government’s import control preferences.
Sri Lanka’s heavy reliance on imported intermediate and capital goods for domestic consumption and export-oriented production means that these are more likely to be exempted from minimising adverse impacts on domestic production.
The large agricultural labour force has significant electoral importance, and to gain political support, the government may seize the opportunity to protect domestic food production.
If import substitution is the goal, the government will prioritise less complex products, which are easily substitutable given resource endowments and technical know-how. Thus, food items, for instance, are more likely to face import controls over highly complex products. It is worth noting that if subsequent rounds of import controls consistently include less complex food products without exemptions, it could indicate an underlying incentive structure that promotes import substitution.
Even without a protectionist motive, the import control design could inadvertently incentivise import substitution.
Our analysis revealed that the government’s import control policy preference favoured less complex products, consumer goods, and food items. This unintentionally created an incentive structure for import substitution, even without a protectionist intent. Persistent import controls on food products and low-tech manufacturing products like consumer electronics inflate domestic prices and create opportunities for higher profit margins. As these products are within the set of products that are easily substitutable for a country like Sri Lanka, which has a comparative advantage in low-tech manufacturing and a significant labour force in agriculture, import substitution might happen even without a policy intent.
The quantitative analysis identified eight waves of import controls, which tightened over time and increased in coverage. The government’s targeting of food products, consumption goods, and less complex items was not always successful, particularly in the later waves of import controls. This can be attributed to a shrinking choice set available as control measures progressed. In some import control waves, the government extended import controls to encompass more intermediate and capital goods.
The process of import substitution typically follows a sequential pattern, starting with substituting easily replaceable products before moving on to more complex ones. Therefore, irrespective of the policy objective, the distortions introduced to the incentive structure align with observations from import substitution scenarios seen in countries like Sri Lanka.
Recommendations for Prioritising Import Control Revisions
As Sri Lanka gradually eases the import controls implemented during the economic crisis, it becomes crucial to prioritise the revision process. The deciding factors may be influenced by lobbying from industries reliant on restricted imports and feedback from industry and consumers. Our analysis suggests that revisions appear to prioritise intermediate and exempted food products, reflecting a policy preference for exempting intermediate imports .
To foster innovation and enable participation in global value chains, it is economically sensible to phase out import controls on intermediate goods. However, revisions should also target consumption goods, including food. Import controls inflate domestic prices, leading to the production of less complex consumer goods and food items for domestic consumption. This diverts resources away from export industries, impeding the country’s growth in the vital export sector.
To be Continued
Business
ADB-funded Thalaiyadi plant serves as blueprint for vulnerable dry zones in Sri Lanka
Sri Lanka should adopt a diversified water-security strategy, says chief engineer
By Sanath Nanayakkare
For generations, the Jaffna Peninsula has relied almost entirely on an underground freshwater lens. With no major perennial rivers to lean on, the region has long walked a tightrope between water scarcity, seasonal droughts, and a creeping groundwater salinity that has challenged communities across the North. Today, however, a monumental shift is underway along the windswept Vadamaradchi coast.
To understand how Sri Lanka is rewriting its water security playbook, one need only look to the Thalaiyadi Seawater Reverse Osmosis (SWRO) Plant.
V. Vijayakanth, Chief Engineer of the Jaffna Kilinochchi Water Supply and Sanitation Project (JKWSSP), recently explained the engineering marvels, environmental safeguards, and long-term vision driving this landmark infrastructure project.
“Building a multi-million-gallon desalination plant on an open, deep-sea coastline facing the Indian Ocean was no small feat,” he said.
Vijayakanth noted that the project required extensive marine, geotechnical, and ecological investigations before a single pipe was laid.
“The scale of the marine installation was striking: an intake and outfall system featuring roughly 1,300 metres of large-diameter pipeline, buried two metres beneath the seabed in water depths reaching up to 12 metres. Because ocean work is strictly dictated by nature, the team had to mobilise an excavator-mounted barge from India and execute a complex offshore operation within a very tight window before the onset of the monsoon.”
“One of the greatest historical hurdles of reverse osmosis technology has been its heavy appetite for electricity. To keep operational costs in check, the Thalaiyady plant integrates state-of-the-art isobaric pressure-exchanger energy recovery systems. These devices capture hydraulic energy from the high-pressure brine reject stream and transfer it directly back to the incoming seawater feed – recovering roughly 95% of available energy and slashing power requirements.”
“Environmental stewardship was equally central to the design. To prevent high-salinity discharge from harming the marine ecosystem, the plant utilizes an offshore outfall equipped with specialized diffusers positioned more than 500 metres from the shore. This ensures rapid mixing within a tightly monitored zone, safeguarding local marine life,” he said.
The impact of the plant is already tangible on the ground. Producing water that meets rigorous national quality standards (SLS 614:2013), the facility feeds into a vast transmission network linked to elevated service reservoirs. These tanks regulate hydraulic pressure across sprawling distribution routes, bringing relief to areas historically plagued by hard, brackish water.
Currently, about 1,600 households in the Karaveddi Zone are actively connected to the desalinated supply, with water flowing across a regional network stretching from Kodikamam and Jaffna City down to distant island communities like Delft, Kayts and Punguduthivu.
The peninsula’s total daily drinking water demand hovers around 50,000 cubic metres for a population of roughly 600,000. Operating at full capacity, the Thalaiyadi plant yields 24,000 cubic metres per day – meeting nearly half of the region’s current needs.
Yet, planners are already looking decades ahead. Driven by economic development, tourism, and proposed industrial zones like Kankesanthurai, projected potable water requirements for domestic, commercial, and industrial needs are expected to climb from 95,000 cubic metres per day in 2025 to 135,000 by 2045, and 175,000 by 2065. Meeting this future trajectory will require a diversified national strategy combining desalination with surface-water preservation and rainwater harvesting.
When asked whether Sri Lanka should lean exclusively on seawater conversion amid intensifying climate volatility, Vijayakanth emphasised the need for a balanced approach: “Sri Lanka should adopt a diversified water-security strategy, prioritising sustainable surface-water development, groundwater protection, rainwater harvesting, water conservation, treated wastewater reuse and catchment protection. Desalination can complement these sources as a valuable climate-resilient and drought-proof option where appropriate.”
Backed by financial and technical collaboration from the Asian Development Bank (ADB), the project has given the National Water Supply and Drainage Board (NWSDB) invaluable expertise in advanced desalination management. Crucially, a two-year hands-on training program is ensuring that local technical staff master everything from membrane upkeep to preventive maintenance.
As climate variability accelerates, Thalaiyadi serves as a vital proof-of-concept. While energy-intensive desalination cannot replace conventional freshwater sources everywhere, Vijayakanth emphasises that it stands as an indispensable, drought-proof shield for Sri Lanka’s vulnerable dry zones – turning the ocean itself into a secure foundation for the nation’s future.
Business
Tropic Of Linen takes new form at The Shoppes at City of Dreams
Sri Lankan fashion label Tropic Of Linen recently opened the doors to its second boutique, located at The Shoppes at City of Dreams.
For over a decade, linen has formed the core of the brand’s inspiration and business ethos. Its textures, movement, and natural irregularities carry through the striking interior of Tropic Of Linen’s newly opened second store. Large sculptural forms in wind-worn sandstone sit against softer curves, while a grand olive tree anchors the heart of the store, reaching up toward a skylight and giving life to the entire space.
Drawing on her background in fine art and design, co-founder Minha Akram envisioned a layered, sensory interior intended to draw people into the world of Tropic Of Linen and invite them to linger.
Business
ANC Education celebrates ‘Class of 2026’ at graduation ceremony in Colombo
ANC Education held its 2026 graduation ceremony at BMICH, Colombo, celebrating graduates across multiple programmes. The cohort included 53 BBA graduates from Northwood University, 22 Psychological Sciences graduates from Northern Arizona University, 320 Pearson BTEC HND graduates, and 29 BTEC Level 7 graduates, alongside foundation, diploma, and transfer pathway students. Senior representatives from partner institutions attended.
Best Performer Awards recognised outstanding academic achievement. The event honoured years of hard work and support from families and educators. Since 2002, ANC has provided local and international pathways. Graduates now pursue careers, further studies, or international opportunities.
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