Priority trade and competitiveness reforms for Sri Lanka – Part 1

As unilateral tariff liberalisation occurs, there would be impacts on domestic industries. Therefore, trade adjustment support is a critical consideration. But it must be underpinned by a rational and evidence-based approach

A recent Policy Note published by the Centre for a Smart Future (CSF) outlined eight priority trade and competitiveness reforms for Sri Lanka, in responding to global economic challenges. In a three-part series of articles to this newspaper, we will recap key messages contained in the Policy Note. In this first article, we cover two of the eight priority areas – ‘Priority Area 1: Doubling down on tariff and para-tariff liberalisation’ and ‘Priority Area 2: Designing credible trade adjustment support’.

Priority Area 1: Doubling down on tariff and para-tariff liberalisation

Policy intent to reduce and/or remove para-tariffs is not new, but consistent implementation of this reform agenda has been lacking. Since the early 2000s, Sri Lanka progressively garnered the reputation of having a high and complex regime of para-tariffs (Pitigala and Singh 2020; Pursell 2011). Simplifying the tariff structure and phasing out para-tariffs have been a stated policy goal regularly over the past two decades. The letters of intent presented by the Government for the three most recent IMF Extended Fund Facilities (2003, 2016, and 2023) feature trade liberalisation. 

The most considerable effort was during the 2016-2018 period with duty rates of over 1,200 tariff lines being removed in 2017 and a time-bound pathway established to remove para-tariffs such as CESS and PAL. However, this process was not completed amidst the multiple and overlapping crises that followed since the October 2018 constitutional crisis. 

In June 2024, the Cabinet approved a ‘National Tariff Policy’ which was to be implemented in three phases from January 2025. Under this, Sri Lanka’s tariff regime would be progressively simplified to four bands – 0%, 10%, 20%, and 30%. This reform was a ‘Prior Action’ required under the second phase of Resilience, Stability, and Economic Turnaround (RESET) Development Policy Operation (DPO) by the World Bank. It was formulated by officials at the Ministry of Finance’s Trade and Investment Policy Department, supported by consultations with technical experts and the private sector. 

Although the progress of this was unclear amidst the change in government (and the 1 January 2025 implementation date was missed), in the aftermath of the Trump tariff announcement we see Ministers in the present Government also referring to it. This builds on the 2025 Budget Speech making reference to the National Tariff Policy and more recently, the Cabinet approval of the formulation of a National Tariff Policy Committee headed by a Deputy Secretary of the Treasury to oversee the implementation of the National Tariff Policy. 

Even though industrial policy may have been the more dominant consideration for the imposition of para-tariffs in the early years of their use, fiscal (revenue) implications have become a key factor in the continued existence of such tariffs. It is interesting that even in the newly formed Tariff Policy Committee, the Ministry of Finance is taking a lead role, as revenue considerations would necessarily need to be accounted for when formulating tariff liberalisation policies.

Priority Area 2: Designing credible trade adjustment support

As unilateral tariff liberalisation occurs there would be impacts on domestic industries. Therefore, trade adjustment support is a critical consideration. This was a key consideration in the past as well. In the previous 2016-2018 push for trade liberalisation, an accompanying Trade Adjustment Programme (TAP) was designed considering the potential impact to firms and workers. There are two salient points of that programme which are relevant today to designing credible trade adjustment support in the short- to medium- term. 

Firstly, trade adjustment support must be underpinned by a rational and evidence-based approach. The TAP benefited from international technical expertise in developing a model to review the situation for each product sector and to assess the likely impacts of liberalisation. For instance, the model assessed the level of protection enjoyed, alongside production dynamics, employment trends, and firm growth. Analysis of how product sectors have performed during the period under which they enjoyed para-tariff protection, the number of establishments that exist, the number of workers, and the level of production (and even exports) over that time, could be observed. It also facilitated assessing impacts along dimensions such as gender and geographical distribution.

Using tools such as this, it was expected that the Government would engage in credible and evidence-based discussions at the sector level, rather than simply reacting to individual firm or sector lobbying, and raising unfounded fears among politicians.

Secondly, the then Cabinet approved the formulation of a Trade and Productivity Commission and an accompanying Secretariat staffed with trade, industry and statistical experts, to deliver on the TAP. This commission, consisting of economic experts and industry professionals, was to review industry requests regarding the timing of the tariff reductions and related concerns from trade liberalisation, alongside the analysis from the analytical tool. This platform for public private dialogue facilitated the gathering of qualitative insights and ancillary considerations from the industry that may not be apparent from a purely data-driven exercise. 

As unilateral tariff liberalisation occurs, there would be impacts on domestic industries. Therefore, trade adjustment support is a critical consideration. But it must be underpinned by a rational and evidence-based approach.

The commission was empowered to then make informed recommendations to the Ministry of Finance on whether to adjust (e.g., a longer phase out) or retain the planned para-tariff liberalisation on a particular sector. The committee would also be empowered to identify regulatory and other barriers hindering an affected sector and make recommendations to the Government for their urgent resolution.

As Sri Lanka rushes to formulate its response and its short and medium-term trade strategy, legitimate industry concerns will arise due to shifts in tariff policies. Unlike economies such as South Korea, Sri Lanka does not have the fiscal space to provide broad-ranging financial support to at-risk sectors such as Textile and Garments. Therefore, leveraging evidence-based and objective criteria, accompanied by a systematic approach to industry consultation, will help to design and implement more meaningful and fiscally-responsible trade adjustment support. 

In the next article in this series, we will discuss Priority Area 3: Implementing a focused national export strategy and Priority Area 8: Accelerating trade facilitation.

Prioritising growth-oriented reforms

Many of the reforms and strategic initiatives discussed in this series are ripe for refocusing and prioritising today for Sri Lanka to build resilience amidst global trade tensions, and boost entrepreneurship and trade-led growth. At the outset, we note that a) many of these are not new, were initiated in the past but remain an unfinished agenda, b) the present Government must recognise the purpose and objectives with which they were crafted, identify their use today, and adapt them as necessary to suit the present context; and c) ensure focused and holistic implementation, with appropriate sequencing, and with meaningful and inclusive private-public consultation.

(Anushka Wijesinha is Co-founder/Director and Senith Abeyanayake is a Research Associate at Centre for a Smart Future (CSF). CSF is an interdisciplinary public policy think tank, with researchers and advisors based in Sri Lanka and around the world. The Policy Note on which this article is based – ‘Responding to Global Economic Challenges: Eight Priority Trade and Competitiveness Reforms for Sri Lanka’ (April 2025) – is available at www.csf-asia.org/knowledge-insights.)