Sri Lanka’s FTA allergies
View(s):Or to put it differently, as we know Sri Lanka had to suspend its external debt payment in April 2022; why couldn’t Sri Lanka mobilise even $6–7 billion to meet its annual external debt obligations?
The country remained dependent too long on a narrow export base—mainly apparel— without significant diversification. Sri Lanka’s high-tech exports are among the lowest in Asia. According to World Bank data, they made up only 1.4 per cent of total manufactured exports in 2023. In contrast, high-tech exports accounted for 30 per cent in South Korea, 59 per cent in Malaysia, 56 per cent in Singapore, 26 per cent in Thailand, 43 per cent in Vietnam, and 15 per cent in India.
Garment exports is one area an enhanced FTA with India would help.
Foreign investors largely bypassed Sri Lanka, while its neighbours attracted billions in FDI. Sri Lanka rarely exceeded $1 billion in annual FDI inflows while that is also with government-to-government negotiations. In 2024, the top five FDI recipients in Asia were Singapore ($175 billion), Hong Kong ($111 billion), China ($43 billion), India ($28 billion), and Indonesia ($22 billion).
For free and fair trade
Technically, Sri Lanka has long championed the principles of free and fair trade—but its actions haven’t always matched its rhetoric. The country joined the World Trade Organization (WTO) at its inception in 1995. And even earlier, Sri Lanka signed onto the General Agreement on Tariffs and Trade (GATT) in 1948, just a year after its creation.
In 1961, Sri Lanka became a founding member of the Non-Aligned Movement, which promoted self-reliance and South-South trade among developing nations. However, this alignment arguably weakened ties with the West and excluded Sri Lanka from becoming a founding member of ASEAN in 1967. Sri Lanka also helped establish the Bangkok Agreement in 1975—later renamed the Asia-Pacific Trade Agreement (APTA) in 2005. Despite the presence of major economies like India, China, and South Korea, APTA remained limited to preferential trade, falling short of the deeper integration seen in ASEAN.
Regionally, Sri Lanka joined six other nations to form the South Asian Association for Regional Cooperation (SAARC) in 1985. Yet SAARC’s momentum stalled after the launch of the South Asian Free Trade Area (SAFTA) in 2005.
Looking ahead, SAARC had ambitious plans: a South Asian Customs Union (SACU) by 2015 and a South Asian Economic Union (SAEU) by 2020. Modelled after the European Union, SAEU envisioned free movement of goods, capital, and people, along with harmonised macroeconomic policies and even a common currency. Despite these aspirations, South Asia remains one of the least integrated regions in the world.
Sri Lanka’s FTAs
Sri Lanka’s bilateral Free Trade Agreements (FTAs) with India and Pakistan mark significant milestones in its regional trade strategy, offering deeper integration than broader SAARC frameworks like SAFTA.
The India–Sri Lanka Free Trade Agreement (ISLFTA), signed in 1999, was South Asia’s first bilateral FTA and was also Sri Lanka’s first FTA. A similar bilateral FTA was also signed with Pakistan in 2005. Given the narrow scope, by today’s standards both these FTAs appear to be quite basic.
Ideally, a bilateral FTA means achieving “free trade in both goods and services” between the two nations. However, Sri Lanka’s two bilateral FTAs were limited to trade in goods only. However, a large number of tradeable items were kept outside the FTAs in a “negative list” for normal trading arrangements.
Secondly, another portion of Sri Lanka’s tradeable goods failed to qualify under the FTA due to a stringent regulation mandating a minimum domestic content of 35 per cent. For a small economy reliant on imported inputs to sustain production and participate in global value chains, this threshold effectively disqualified a wide array of potential exports, undermining the intended benefits of the agreement.
Efforts to deepen regional integration through Comprehensive Economic Partnership Agreements (CEPA) with India (2003) and Pakistan (2008) were derailed by public protests and political opposition. CEPA sought to broaden the scope of cooperation beyond goods, encompassing services, investment, and economic collaboration. However, domestic apprehensions over perceived asymmetries in benefit distribution led to prolonged delays and eventual abandonment.
In 2015, CEPA was rebranded as the Economic and Technical Cooperation Agreement (ETCA) with India, aiming to revive momentum. Yet, it too encountered intense public scrutiny and remains unsigned. These episodes underscore the persistent tension between the strategic imperatives of regional economic integration and the political sensitivities surrounding national economic sovereignty.
Sri Lanka’s stagnancy
Despite the early momentum generated by Sri Lanka’s bilateral Free Trade Agreements (FTAs) with India (2000) and Pakistan (2005), the country’s trade integration efforts largely stagnated in the years that followed. In effect, little progress was made—up to and including the present.
Although numerous discussions were held regarding potential FTAs with countries such as China, no tangible outcomes materialised until 2018. After years of policy inertia and limited reform, Sri Lanka signed a comprehensive FTA with Singapore in 2018, followed by a similar agreement with Thailand in 2024. These agreements encompassed trade in goods and services, investment facilitation, and technical and economic cooperation, among other areas.
Yet, implementation has remained elusive. The Sri Lanka–Singapore FTA, for instance, has languished for over six years—mired in political indecision and institutional inertia. Such prolonged dormancy inevitably raises questions about Sri Lanka’s credibility as a trade partner. From Singapore’s vantage point, Sri Lanka may appear as a country with latent potential but lacking the policy coherence and execution capacity that modern trade diplomacy demands.
Following the economic crisis of 2022–2023, there was a renewed push to re-engage in trade negotiations. This included efforts to operationalise the Thailand FTA, expand the existing agreement with India, and initiate discussions with China. Sri Lanka also signalled its interest in joining the ASEAN+1 FTA bloc under the Regional Comprehensive Economic Partnership (RCEP). However, none of these initiatives has progressed meaningfully.
In the eyes of fast-moving economies, Sri Lanka risks being perceived as an unreliable partner—one whose strategic intent is undermined by domestic volatility and institutional drift.
India’s pathway
India’s trajectory following its initial FTA with Sri Lanka diverged markedly. While Sri Lanka remained relatively stagnant in its trade integration efforts, India embarked on an aggressive and outward-looking FTA strategy, positioning itself as a central node in the global and regional trade architecture.
India’s expanding network of FTAs includes agreements with Thailand (2003), Singapore (2005), Chile (2006), South Korea (2009), Japan (2011), Malaysia (2011), Mauritius (2011), Australia (2022), UAE (2022), and most recently, the United Kingdom (2025). In addition to bilateral agreements, India joined the Southern Common Market (Mercosur)—comprising Argentina, Brazil, Paraguay, and Uruguay—in 2009, and signed a landmark FTA with ASEAN’s 10 member states in 2010. It further consolidated its trade footprint by entering into an agreement with the European Free Trade Association (EFTA)—Iceland, Liechtenstein, Norway, and Switzerland—in 2024. An FTA with the European Union, encompassing 27 nations, remains under negotiation.
With the possible exception of Chile, all these agreements are comprehensive in scope—covering trade in goods and services, investment facilitation, and broader economic cooperation. This expansive FTA architecture, coupled with India’s liberalisation reforms initiated in 1991, has significantly enhanced its attractiveness to foreign direct investment (FDI). The strategic alignment of trade policy with investment promotion has enabled India to deepen its integration into global value chains while reinforcing its geopolitical and economic influence.
In contrast, Sri Lanka’s limited engagement and delayed implementation of trade agreements have left it increasingly peripheral in the region’s evolving trade landscape.
No surprise
If an investor starts a business in India, he/she has free trade access to a wide range of countries in the Asia Pacific, South America, and Europe. In fact, investors do so by carrying billions of FDI inflows to India and generating hundreds of billions of exports; in 2024, India’s merchandise exports accounted for $443 billion, and exports of goods and services both, $829 billion.
Compared with that, Sri Lanka has done nothing in terms of regional integration and entering FTAs over the past two decades. Neither did it perform in undertaking unilateral policy reforms as well. Accordingly, there is nothing to be surprised about Sri Lanka’s dismal performance in attracting independent FDI flows and in generating and diversifying the country’s exports.
(The writer is Emeritus Professor at the University of Colombo and Executive Director of the Centre for Poverty Analysis (CEPA) and can be reached at sirimal@econ.cmb.ac.lk and follow on Twitter @SirimalAshoka).
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