Import Demand Elasticities of Sri Lanka from January 2010 to March 2021 and the Change in Elasticities during the COVID-19 Pandemic

Abstract

Elasticity of demand for imports of Sri Lanka in the post-Civil War period up to March 2021 and the change in them during the COVID-19 pandemic were estimated. (Relative) price elasticity, (production) activity elasticity and exchange rate elasticity were estimated for aggregate and disaggregated imports using Ordinary Least Squares (OLS) techniques with and without dummies, Autoregressive Distributed Lag (ARDL), and Error Correction Modeling. We found that price elasticity of aggregate import demand is inelastic. With the removal of fuel from aggregate imports, elasticities increase marginally. Activity elasticities of aggregate import demand, non-food consumer goods, intermediate goods and investment goods are inelastic over the short run and elastic over the long run while short run elasticity declined during the pandemic. Demand for food is elastic with respect to relative prices and the exchange rate and price elasticity declined during the pandemic. Intermediate goods are not significantly related to prices and exchange rates but are related to production activity. Our results are important for implementation of monetary, exchange-rate, fiscal, and trade policies of Sri Lanka.