Beyond GSP+

Sri Lanka's return to upper-middle-income status, as recently recognised by the World Bank, is an important indicator of the country’s recovery since the economic collapse of 2022, which saw it demoted to lower-middle-income status just three years after first attaining the higher classification in 2019. The latest upgrade is a testament to the country's hard-fought macroeconomic stabilisation and a welcome signal to investors and international partners that Sri Lanka is once again on the path to recovery.

Yet, beneath the optimism lies a significant challenge that policymakers cannot afford to overlook. Graduation to upper-middle-income status fundamentally alters the nature of a country's relationship with development partners. Concessional financing becomes scarcer, development assistance changes in character, and, perhaps most critically for Sri Lanka, preferential trade arrangements come under scrutiny.

The most immediate concern is the future of the European Union's Generalised Scheme of Preferences Plus (GSP+) trade concession. The scheme, which grants Sri Lanka preferential access to the EU market through duty-free or highly concessional tariffs, has been one of the cornerstones of the country's export success, particularly in the apparel sector. The EU remains Sri Lanka's single most important export destination, and GSP+ has played a pivotal role in maintaining the competitiveness of Sri Lankan products.

However, GSP+ is intended primarily for low- and lower-middle-income countries. If Sri Lanka retains its upper-middle-income classification for three consecutive years, it is likely to lose eligibility for the concession under the current framework. While such a transition would reflect economic progress, it would also expose Sri Lankan exporters to higher tariffs precisely when many of their regional competitors continue to enjoy preferential access.

Waiting until GSP+ eligibility is lost before seeking alternatives would leave Sri Lanka dangerously exposed and could erode export market share that has taken decades to build. The response must therefore begin now.

First, the Government should establish a dedicated, high-level task force comprising officials from relevant ministries, trade experts, diplomats, and representatives from the private sector. Such a body should be mandated to assess the implications of losing GSP+, develop contingency plans, and coordinate a national strategy for maintaining competitiveness in European markets.

Second, Sri Lanka's export sector must prepare for a future in which competitiveness is driven less by tariff preferences and more by productivity, innovation, quality, sustainability, and value addition. Preferential market access should never become a substitute for structural competitiveness. Investments in technology, logistics, skills development, and regulatory efficiency will be essential if Sri Lankan exporters are to compete successfully on equal terms.

At the same time, the Government must pursue alternative mechanisms to preserve favourable access to the European market. This should include exploring the negotiation of either a comprehensive Free Trade Agreement or, at the very least, a Preferential Trade Agreement with the European Union. While such agreements are complex and require substantial political commitment from both sides, they represent the most viable long-term solution to safeguarding Sri Lanka's export interests after GSP+.

Crucially, negotiations of this nature require sustained diplomatic engagement and often take several years to conclude. The first and most important step is for the country's political leadership to publicly express its commitment to pursuing a deeper trade partnership with the European Union and formally initiate discussions at the earliest opportunity. It is also crucial to have the right people with the necessary competence at the right places, especially at the Department of Commerce and the Embassy in Brussels.

Economic graduation brings greater opportunities, but it also demands greater responsibility and foresight. The country cannot allow today's success to become tomorrow's vulnerability.