Trade policy review of Sri Lanka

The WTO reviews the trade policy of member countries regularly. It is a comprehensive review which combines input from the member country, international agencies and the WTO Secretariat.

The latest Trade Policy Review of Sri Lanka was released recently. The report notes that Sri Lanka’s trade policy continues to be aimed at achieving greater integration into the world economy. In particular, Sri Lanka is seeking to attract foreign direct investment into the country to expand output and employment, and to enhance foreign market access for its products.

These objectives have been pursued through multilateral, regional, and bilateral trade negotiations, through an incentives regime geared at fostering production for export and encouraging investment, and through a number of development programmes to enhance productivity and improve infrastructure.

Sri Lanka is progressing towards simplifying its business and trade regime with the objective of establishing a more business friendly environment. Sri Lanka has been an active participant in the Doha Development Agenda and in WTO activities in general.

Between 2004 and 2008 Sri Lanka is reported to have received $ 1.77 billion in assistance in the form of aid-for-trade, of which Japan and multilateral donors were the major providers. Since of late, South-South partnerships have increased in importance with India and China becoming increasingly active in providing development finance for the Government’s ambitious infrastructure development programme. One potential issue to manage as noted in the Review is the negative impact on long-term debt sustainability and balance of payments of this large injection of loan finance.

Sri Lanka’s Ten-Year Horizon Development Framework 2006-16 (TYHDF) aims to accelerate economic growth with special consideration given to pro-poor growth strategies. In the Plan, the Government seeks to enhance productivity and improve the links between rural and urban areas and the global economy.

The plan seeks to improve international competitiveness in the industrial sector by fostering technological innovation, facilitating private investment in new industrial zones, upgrading public service delivery, and promoting the development of Small and Medium-sized Enterprises (SMEs).

The strategy targets a sustainable rate of 6-8% growth in real income. Achieving an investment rate of around 35% of GDP from both domestic (public and private) and foreign sources underpins this target. The ultimate objective is for Sri Lanka to progress towards upper-middle-income country status by 2016.

The review notes that while the end of the conflict offered new opportunities and economic expansion may be boosted by the reconstruction efforts in the north and the east, sustained growth will require macroeconomic stability and completion of the pending structural reforms including tax reform, restructuring of state enterprises and taking steps towards a more flexible labour market.

With regard to the Government’s view that the country has the potential to expand its industrial base by focusing on industries with higher value, the review notes the need to invest in new technologies and in human resources to achieve this.

With regard to the area of investment, it is stated that a more predictable and transparent trade and investment regime would help to enhance investor confidence. The rationalisation of the incentives and lower reliance on imports could help improve resource allocation and overall economic efficiency, thereby increasing Sri Lanka’s international competitiveness. The review notes that the first steps in this direction were made in 2010 with the reduction of tariff rates and elimination of import surcharge.

To avert a balance of payments crisis, a stand-by arrangement was secured from the IMF. While this helped avert a crisis and improved investor confidence, certain tax reform measures envisaged under the arrangement and necessary to pave the way for sustainable growth are still pending.

Noting the surge in business confidence ,rebound in capital inflows and the revival of economic activities in the north and east with substantial increases in agriculture, trade, transport and tourism related sectors, which offers considerable potential for growth, it is pointed out that the reconstruction effort including humanitarian assistance and resettlement of IDPs will require considerable spending over the next several years and would weigh heavily on efforts to consolidate public finances, although the Government expects to meet the costs through revenue enhancement, savings in defence spending and concessionary financing from development partners.

Although per capita GDP almost doubled between 2006-2009 from $ 1,062 to $ 2,053 and the population between the official poverty line declined considerably, the substantial inequalities in income between the Western Province and rest of the country have been noted.

One of the major challenges facing Sri Lanka’s economic growth is achieving consolidation of its public finances. Several years of expansionary fiscal policies are reported to have resulted in large and persistent budget deficits which have been increasingly financed through short term domestic borrowings. Reaching a balanced budget for the two State utilities – CEB and CPC – is noted as another challenge.

(Manel de Silva holds an Honours Degree in Political Science from the University of Ceylon, Peradeniya and has engaged in professional training in Commercial Diplomacy at ITC and GATT. She has served as a trade diplomat in several Sri Lankan Missions overseas and was the first female Head of the Department of Commerce as Director General of Commerce.)