Future of Sri Lanka-Iran bilateral trade

A high-level trade delegation led by Dr. Mahdi Ghazanfari, Minister of Commerce of the Islamic Republic of Iran visited Sri Lanka to attend the ninth session of Iran-Sri Lanka Joint Commission held on 13-15 September 2010.

The eight session was held in Teheran during 27-28 May 2006. The Joint Commission was set up to examine trade, economic and trade related issues between the two countries in particular with a view to enhance and expand the relations in such areas.

The Joint Commission also acts as the official platform to find solution on friendly and cordial atmosphere to enhance the overall relations between the two parties. The Joint Commission is generally being held alternatively in Tehran and Colombo between the senior officials of the both countries.

According to information available, the both delegations had discussions to explore and enhance cooperation between the two countries on wide variety of issues ranging from trade, commerce, energy and power, custom cooperation, cooperation in the field of air services, specific issues relating to promotion of Ceylon Tea in Iran, investment cooperation, banking and export credit guarantee scheme, cooperation on maritime and merchant shipping to investment cooperation.

Iran has been extending its goodwill toward Sri Lanka actively by assisting and participating in Sri Lanka’s development efforts by providing differed payment facilities (120 days) for purchase of crude petroleum, providing financial assistance on concessionary terms for development of Uma Oya multi- purpose project, Rural Electrification Scheme and Sapugaskanda Refinery Expansion Project. The operational issues pertaining to these projects would have also been figured in the discussion.

The trade between the two countries for a long period of time is concentrated in exchange of two commodities. i.e: Black Gold (Crude Petroleum) and Green Gold (Ceylon Tea). The total trade turnover between the two countries during the year 2009 stood at U.S. $ 1 billion representing U.S. $ 145 million exports from Sri Lanka to Iran and US$ 850 million imports from Iran to Sri Lanka.

The balance of trade between the two countries has always been in favour of Iran due to import of high valued petroleum products to Sri Lanka. Tea in bulk constitutes the major export item to Iran representing almost 90%of our exports while import of crude oil represented 99% of our total imports. Iran ranks as the fourth largest source of import to Sri Lanka in 2009.

It is estimated that Ceylon Tea contributes a share of approximately 60% of the total tea market in Iran. Iranian consumers prefer low grown Ceylon Tea for its unique taste, colour and the aroma over tea being imported from other sources and domestically produced Iranian Tea.

Unfortunately, import of value added tea i.e. tea bags and tea packets are restricted in Iran in order to protect the domestic Iranian tea processing industry. Only bulk tea is permitted to import and the import duty is at peak level of 30%.

Furthermore, according to Iranian custom practices, tea packages less than 10 kg are not allowed to be imported. However, the tea packages of less than three kg are considered as pre-packed teas by the internationally accepted standards. This requirement will effectively discourage import of value added tea to the Iranian market.

According to trade sources, some of the tea blenders and packers in Iran are frequently blending Ceylon Tea with teas of other origin and sell in the local market as Ceylon Tea, violating the intellectual property rights of Ceylon Tea. Iran itself is a producer of tea though the quality of the locally produced tea requires vast improvement.

If Iran considers favourably lifting the ban on import of value added tea from Sri Lanka, it would certainly enhance the consumer welfare of Iranian tea consumers and increase the custom revenue to the Iranian Government. It is learned that due to informal and indirect trade flows of tea, the Iranian Government is losing substantial portion of tariff revenue.

It would be recalled that Sri Lanka and Iran negotiated a framework agreement to examine the feasibility of entering in to Preferential Trade Agreement between the two countries as far back as 2005. In the event of finalising such arrangement, it is highly rational and logical for both parties to agree to include tea in the list of preferential products from Sri Lanka to Iran as this is the only commodity which we trade at present with our trading partner.

However, both parties should be sensitive to each other’s trading interests. While safeguarding the interests of the Iranian tea producers and processors, she may be able to satisfy the preference of the ordinary Iranian consumer of tea by allowing Sri Lanka to export value added tea at least under a certain quantitative limitations. These limitations however should reflect the market reality and the future trend of the trade.

This could strike a fine balance between the protection of Iranian tea industry and the consumer welfare of the Iranian tea consumer and the tariff revenue of the government. It is also advisable to examine whether Iranian tea blenders and packers can invest in Sri Lanka to establish joint ventures with Sri Lankan exporters to export the final product to Iran and the other central Asian countries in the region.

Iran can also explore the possibilities of diversifying their export basket to Sri Lanka such as edible fruits and nuts, fertiliser and other petroleum based chemicals, pharmaceutical products approved by the Sri Lankan authorities. Similarly, Sri Lanka can also diversify its exports by promoting rubber and rubber products, coconut based products, spices, ceramic and porcelain products, etc., in the Iranian market.

It is observed that both parties have entered into plethora of memorandum of understandings on many subjects during the eighth and even in the current ninth session of the joint commission meetings demonstrating a clear desire for further enhancement of cooperation not only on trade but also maritime, navigation, air services and even in the areas of culture, science, technology and health care. What is now important at this juncture is to translate those MoUs in to reality by taking concrete actions effectively.

In the sphere of development of private sector business contacts, the Iran Chamber of Commerce Industry and Mines entered in to memorandum of understanding with its counterparts in Sri Lanka to introduce trade and investment opportunities and to participate in the international exhibition.

The Federation of Chambers of Commerce and Industry of Sri Lanka which represented at the Joint Commission meeting expressed its willingness to organise a trade delegation to Iran to coincide with the delegation led by the President of Confederation of Asia-Pacific Chambers of Commerce and Industry (CACCI) to be held from 5-7 December 2010. The FCCISL also intends to organise a seminar in Sri Lanka in association with Iranian experts on business opportunities in Iran in November 2010. The activities of this nature would certainly expand the business contacts of the private sector of both countries.

The warm friendly relations existing between the two countries should be a good platform and opportunity to meet these challenges effectively in the future.

 (Source: Research and Policy Advocacy Unit – Federation of Chambers of Commerce and Industry of Sri Lanka. Comments – [email protected].)