The World Trade Organisation (WTO) says structural reforms are necessary for speedier growth in Sri Lanka, to take advantage of new trade and investment opportunities following the end of conflict.
WTO Director General Pascal Lamy, told the Business Times, that although Sri Lanka’s average tariff level is low compared to other South Asian countries, import duties and charges are still a trade barrier. Sri Lanka’s manufacturing sector is still heavily reliant on imports but improving infrastructure, like electricity and transport, will help reduce production costs, he said.
Mr Lamy was responding to questions, via email, on the country’s post-war trade and investment prospects, in the wake of a WTO Trade Policy Review of Sri Lanka. All WTO member countries face such Trade Policy Reviews and the WTO review of Sri Lanka, conducted this week, from November 4, follows a previous review in 2004.
On the issue of human rights and/or labour rights, he said WTO is not a forum to discuss human rights or labour rights. “Our mandate is trade. Having said that, it is obvious that a country with good human and labour rights record and a good regulatory framework is more attractive and predictable for foreign investors and trade partners,” he added.
Mr Lamy said the Sri Lankan authorities had noted that the loss of the EU’s GSP+ scheme could hurt the apparel industry, but also felt that non-reciprocal trade preferences were unsustainable. Therefore, the focus will be on increasing trade flows among South Asian countries and improving competitiveness.
Here are responses from the WTO to questions posed:
What are Sri Lanka’s trade and investment prospects since the end of nearly 30-years of armed conflict ?
The end of the conflict has opened up new trade and investment opportunities for Sri Lanka. Firstly, because it has improved the business environment, and secondly because the Government will be able to free resources previously used in the conflict to foster investment and enhance economic growth. During the period of the internal strife, Sri Lanka relied on several import taxes and surcharges for revenue purposes; with the end of the conflict the Government has started a gradual reduction of these taxes and surcharges. For example, in June 2010 the Government announced an overall reduction in tariffs, lowering many rates to zero, and eliminated a 15% import surcharge.
Overall, I think that Sri Lanka's growth prospects are positive as economic expansion may be boosted by the reconstruction effort. To achieve sustained growth, however, the authorities would need to maintain and reinforce macroeconomic stability and complete pending structural reforms such as tax reform, changes in the labour market to make it more flexible, restructuring of state-owned enterprises, and strengthening investment in education and research and development.
What was the impact of the global recession on Sri Lanka?
Although the global economic crisis had a limited impact on Sri Lanka's GDP growth, it had a considerable effect on the country's external trade, particularly owing to a drop in demand from its major trade partners, the European Union and the United States, and also due to the relatively high concentration of its exports in a few products, mainly garments. FDI inflows, on the other hand, were not severely affected by the global economic crisis. All and all Sri Lanka has been able to weather the crisis. The efforts must now be focused on sustaining growth.
How does Sri Lanka’s tariff regime compare with the rest of South Asia? Has the tariff system improved since the last trade review?
The average tariff increased from 9.8%, that we reported in the last review, to 11.5% in 2010. This reflects the use of tariffs as a source of fiscal revenue. However, as I have said, tariff reductions were introduced in June 2010, apparently signalling an end to this policy. We note that Sri Lanka's average tariff level is some 2 to 3 percentage points lower than that of other countries in the region.
What does the WTO see as the main trade barriers in Sri Lanka?
The report prepared by the WTO Secretariat for the Trade Policy Review, shows that some of the main barriers to trade include the still large number and scope of duties and charges applied on imports. Although Sri Lanka's use of non-tariff barriers is relatively limited, there is active use of non-automatic import licensing requirements which are applied on some 500 tariff lines, including some of Sri Lanka's main import goods, such as motor vehicles, petroleum, chemicals and grains.
How effective is Sri Lanka’s investment regime in attracting foreign direct investments (FDI)?
Sri Lanka allows full foreign ownership in most industrial areas and in a number of service activities, including banking, insurance and telecommunications. It has put in place a full array of incentive schemes to attract FDI. The schemes were considered necessary to offset the disincentives created by the armed conflict, and they were relatively successful in this respect since the stock of FDI more than doubled between 2004 and 2009 to US$4.3 billion. In the context of this review, the authorities noted that they intend to streamline and unify their incentives regime.
How successful has Sri Lanka been in industrialising?
For over three decades Sri Lanka has pursued an export-oriented strategy aimed at diversifying the industrial base, and offering a wide range of incentives to encourage local and foreign investment in the manufacturing sector. While the strategy has allowed some diversification of the country's export structure from traditional plantation crops into labour-intensive manufactured exports, manufacturing still remains concentrated in a few products and export markets. The sector also relies heavily on imported inputs, although measures to strengthen backward integration are under way. There is also scope for increased growth in the manufacturing sector through the upgrading of infrastructure such as electricity and transport. This would reduce production costs, improving productivity and helping diversify export markets and products.
What has been the contribution by Sri Lanka’s free trade agreements (India and Pakistan) towards trade diversification and value addition?
The value of trade with India has increased significantly between 2004 and 2010. However, while imports from India have gained market share (21%), the share of exports to India, compared with the total Sri Lankan exports, has declined from 7% in 2004 to 5.1% in 2008. This reflects mainly an increase in export shares to Europe and the Middle East. Despite the existence of a Free Trade Agreement, trade with Pakistan remains modest. Exports to Pakistan amount to less than 1% of Sri Lanka's total exports, while imports from Pakistan cover around 1.5% of Sri Lanka's total imports.
Will the loss of the European Union’s Generalised System of Preferences Plus scheme (GSP+), have an impact on trade and investment?
Under the European Union's "GSP plus" scheme, some 7,200 Sri Lankan export items were eligible for enhanced preferential tariff treatment in the EU market. This scheme benefited mostly apparel exports to the EU, which increased at an annual average rate of 14% during 2004-2009. In the context of the Trade Policy Review, the Sri Lankan authorities noted that the withdrawal of the GSP+ tariff benefits, as of 15 August 2010, could have a negative impact on the apparel industry. The authorities also consider, however, that excessive reliance on non-reciprocal trade preferences is not sustainable and, therefore, seek to enhance the industry's competitiveness and increase intra-South Asian investment and trade flows.
If any, what are the recommendations of the WTO Review Body
We will know the result of the discussions among our Members once the Trade Policy Review is over. But we already know that work on a number of areas would benefit Sri Lanka's external trade. Diversification of both products and markets so as to reduce its vulnerability to changes in global demand is one. Streamlining investment incentives could help boost the country's international competitiveness. As would taking forward a number of on-going structural reforms. This is all work in progress that I hope to see advanced for Sri Lanka's next Trade Policy Review.
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