Sri Lanka’s export industry is reliant on imported raw materials for its exports. According to statistics by the Central Bank, intermediate imports account for around 50-60% of total imports in the country. This makes the country’s exports relatively expensive due to the increased procuring cost of imported raw materials and increased shipping cost of exports. Even though exports such as apparel, which consists of a larger portion of the country’s export basket are exported Free-On-Board (FOB), this still increases the final price of the export as the buyer incorporates the freight cost into the final price of the product.
Factors that had supported Sri Lankan exporters to receive competitive freight rates prior to the pandemic such as the country’s strategic location (being the last port of call to destinations such as the UK, Europe and USA) and regulations such as “All in Freight Rate” where all charges of shipping had to be consolidated into one rate, too are no longer working favorably for Sri Lankan exports, given the current constraints in capacity.
Sri Lanka historically had an imbalance between the 20ft containers and 40ft containers. This imbalance was further aggravated by the imposition of the import ban on certain items such as vehicles, which limited the 40ft container imports to the country. Therefore, exporters in Sri Lanka are also facing a container shortage, which in return adds to the already high freight rates.
Importers usually pass on their freight costs to the consumers. Under almost every conceivable scenario (whether FOB, Cost and Freight – CNF, etc.), an importer will bear the cost of any increase in transportation costs including paying for insurance and other related costs, which too have increased. The higher freight costs also increase the duties and levies. All of these costs are eventually passed on to the consumers. This could further intensify the inflationary pressure in the economy given the expansionary monetary measures followed by the Government during the past year. The inflationary pressure will also affect consumer welfare with the unprecedented challenges posed by the current pandemic.
On top of exorbitant freight rates comes the limited availability of dollars in the country to settle import bills. This creates delays initially at the banks, which then in most cases lead to delays in the customs clearance process, adding further demurrage charges that have to be borne by the importer. These again exacerbate the cost of imports to the country and the price paid by consumers.
Full report can be accessed at – Navigating through High Maritime Freight Rates
This article is part of the Strategic Insight Series, which focuses on key contemporary topics that matter to the private sector. Topics such as Renewable Energy, REITS, State-Owned Enterprises and FinTech Regulatory Sandbox amongst others have been covered by the briefs to date.
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