Sri Lanka: November 1995
Despite civil war in parts of the country, Sri Lanka's economy has responded well to economic reforms since the late 1970s. Motivated especially by changing the import-substituting activities of state-owned firms, the reforms were initially aimed at promoting exports in manufacturing, especially textiles and clothing.
Sri lanka continues reforms but needs support from its main trading partners
Despite civil war in parts of the country, Sri Lanka's economy has responded well to economic reforms since the late 1970s. Motivated especially by changing the import-substituting activities of state-owned firms, the reforms were initially aimed at promoting exports in manufacturing, especially textiles and clothing.
According to a WTO Secretariat report on Sri Lanka's trade policies and practices, reforms have gradually shifted towards broader-based economic liberalization. During the past decade, market opening to manufactured imports has been accompanied by internal deregulation and privatization, affecting a large number of state-owned companies. Foreign direct investment is welcomed and has played an important rôle in developing the clothing and tourism industries. Equity shares of up to 40 per cent are generally given automatic approval; investors receive national treatment. New initiatives aim at exposing long-protected service sectors to competition and reducing and harmonizing tariff protection.
The pace of Sri Lanka's reforms, however, has varied over time, reflecting difficulties in macroeconomic management and a severe balance of payments crisis in the late 1980s. According to the report, Sri Lanka's trade balance has remained in substantial deficit in goods and services combined, amounting to $1.1 billion or around 10 percent of GDP in 1993. However, stimulated by more favourable conditions for adjustment and growth, Sri Lanka's economy expanded at an annual rate of almost five per cent between 1990 and 1994.
The report states that the recent WTO Agreements have secured and are likely to widen the institutional framework for continued international market integration. While Sri Lanka has bound all tariffs on agricultural products, like other WTO members, the scope of tariff bindings for industrial products is small; the ceiling rates are at the same level as for agricultural products (50 per cent). Sri Lanka's commitments under the General Agreement on Trade in Services (GATS) are limited to tourism, although market access conditions have also been improved for banking and other service sectors. Amendments are now underway to align domestic legislation with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs) and new laws are being considered to conform with the WTO Agreements on Safeguards, Anti-Dumping and Subsidies and Countervailing Measures.
The report concludes that given Sri Lanka's current export basket, it is essential that continued liberalization efforts be supported by open and predictable access conditions to the country's large export markets outside the region.
Notes to Editors
The WTO Secretariat's report, together with a report prepared by Sri Lanka will be discussed by the WTO Trade Policy Review Body (TPRB) on 7 and 8 November 1995.
The WTO Trade Policy Review Body conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system.
The two reports, together with a record of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of Sri Lanka and will be available from the WTO Secretariat, Centre William, Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover developments of all aspects of Sri Lanka's trade policies, including domestic laws and regulations, the institutional framework, trade practices by measure and by sector. Since the WTO came into force, the "new areas" of services trade and the trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992), Cameroon (1995), Canada (1990, 1992 & 1994), Chile (1991), Colombia (1990), Costa Rica (1995), Côte d'Ivoire (1995), Egypt (1992), the European Communities (1991, 1993 & 1995), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 and 1995), Kenya (1993), Korea, Rep. of (1992), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989), New Zealand (1990), Nigeria (1991), Norway (1991), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992), South Africa (1993), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uganda (1995), Uruguay (1992) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: SRI LANKA
Report by the Secretariat Summary Observations
Until the late 1970s, Sri Lanka's economic development centred on import-substituting activities performed mainly by State-owned firms. The results were disappointing, and economic expansion lagged significantly behind other countries in the region. Encouraged by strong export-driven growth in east and south-east Asian economies, economic and trade reforms were initiated in 1977. Their initial focus was on export expansion in manufacturing, particularly clothing, although emphasis has shifted recently to broader-based liberalization. The pace of change has varied over time, inter alia, because of difficulties in macroeconomic management and a severe balance-of-payments crisis in the late 1980s.
Sri Lanka's economic ascent has relied heavily on labour-intensive export industries, principally clothing and gem finishing, that take advantage of the country's low-cost, relatively well educated labour force as well as generous tariff exemption schemes. While the internal supply links of these industries remain weak, ongoing economic liberalization and deregulation may help to promote greater domestic content.
Despite civil war in parts of the country, the economy has responded well to recent reforms, with real GDP growth of about 5 per cent (1990-94), mounting foreign exchange reserves and increasing shortages of certain skills. However, Sri Lanka's trade balance has remained in substantial deficit in goods and services combined, amounting to US$1.1 billion or around 10 per cent of GDP in 1993. Remittances from Sri Lankans working overseas and government-to-government grants cover more than half of the deficit.
Formidable challenges remain. Persistent budget deficits tend to drive up real interest rates and hamper long-term private investment decisions. Fiscal retrenchment has proved difficult in view of a narrow tax base, the fiscal drain of civil war and, more recently, substantial consumer subsidies on socially sensitive items, in particular bread. Traditional public sector activities have been curbed and restructured; however, significant investment is needed to upgrade the country's infrastructure, in particular transport and electricity, and ease bottlenecks to further economic expansion. A value-added tax, scheduled for introduction in late 1995, may contribute to reducing the share of the budget deficit in GDP.
Sri Lanka in World Trade
Traditionally, Sri Lanka's merchandise exports were dominated by tea and tea products, while rice and other food items were the main imports. Since the late 1970s, the tea sector has maintained its share in world production and trade, relying on countries in the Middle East as the principal outlet. The share of rice, the main food crop, in total imports has declined as domestic production has expanded.
Since 1980, the clothing industry has emerged as the country's main export earner. Substantial foreign investments, including from countries facing quotas under the Multifibre Arrangement (MFA), created a strong production base and eased access to international marketing channels. The ascent of the clothing industry is reflected in a reorientation of imports towards textile suppliers in east and south-east Asia, such as Hong Kong, Chinese Taipei and the Republic of Korea. Clothing exports have expanded rapidly, while now also subject to quotas on certain items in main markets, including the United States and the European Union. At present, the share of clothing in merchandise exports is close to 50 per cent, with almost two thirds destined for the United States.
Semi-precious stones contribute some 10 per cent of merchandise exports; shipments of processed gems have expanded particularly rapidly since 1990. Despite specific incentives for the electronics industry, its share in production and exports has remained limited.
Mirroring developments in manufacturing, services sector growth initially relied on areas contributing directly to foreign exchange earnings, such as trans-shipment and tourism. While the tourist sector has suffered from uncertainties related to the civil war, arrivals recently picked up again to reach 400,000 in 1994. Although no detailed data are available, the geographical distribution of both imports and exports of services appears dominated by trading partners outside the region.
Legal and Institutional Framework
Sri Lanka's present Constitution, promulgated in 1978, provides for a strong executive President who is elected for a six-year term. The current President holds several portfolios, including those of Finance, Planning and Defence. Policy competence in main trade-related areas lies with the Minister of Finance and the Minister of Internal and External Trade, Commerce and Food. While the Minister of Finance is in charge of revenue-related aspects, including tariffs, surcharges, subsidies and government procurement, responsibilities of the Minister of Trade include the administration of import and export licensing and intellectual property legislation. The Board of Investment (BOI), under the Minister of Finance, is mandated to approve, administer and facilitate inward foreign investment. Since the late 1970s, three Presidential Tariff Commissions have tabled reports on the impact of alternative trade policy options, preparing the ground, inside and outside Government, for subsequent liberalization initiatives.
Trade Policy Features and Trends
Sri Lanka has been a contracting party to the General Agreement on Tariffs and Trade (GATT) since 1948. It ratified the Marrakesh Agreement in June 1994 to become a founding member of the World Trade Organization (WTO).
Like other WTO Members, Sri Lanka has bound all tariffs on agricultural products. Although well above applied rates, the bound rates - 50 per cent - may constrain the use of surcharges during harvest seasons. The scope of tariff bindings in the industrial sphere has remained small, with the same ceiling rates as in agriculture. Sri Lanka's commitments under the General Agreement on Trade in Services (GATS) are limited to tourism, although access conditions have, in practice, also been improved in other areas such as banking. Amendments are in preparation to align domestic legislation with the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS).
Sri Lanka's involvement in regional trade agreements is limited. It is a signatory to the Bangkok Agreement and participates in the South Asian Preferential Trade Area (SAPTA), which is to become effective from November 1995. The scope of these arrangements is confined mainly to duty reductions and exemptions on a relatively small range of items; services are not covered. Consequently, Sri Lanka has not notified m.f.n. exemptions under Article II of the GATS.
Type and incidence of trade policy instruments
Past liberalization initiatives have reinforced the rôle of tariffs as the central instrument regulating Sri Lanka's merchandise trade. In turn, the tariff régime has become less distortive during subsequent rounds of reform. It currently relies on a three-pronged structure with rates of 10, 20 and 35 per cent; the unweighted average is in the order of 20 per cent. Following the tariffication of most quantitative restrictions, apart from some remaining measures maintained for balance-of-payments reasons, remaining controls and licensing requirements are motivated mainly by health, safety and security concerns. Licences are issued only to Sri Lankan nationals or companies majority owned by them.
Although tariff escalation has been reduced over time, it is still considerable. Effective rates of protection currently exceed 100 per cent in areas such as paper and metal products. While further tariff reduction and harmonization would help to reduce economic distortions - the Government envisages introducing a uniform tariff of 15 per cent in the medium term - fiscal constraints may be an impediment. Revenue considerations have already led to the introduction, and subsequent increase, of a defence levy on all imports destined for domestic consumption; the current rate is 4.5 per cent. In addition, such imports are subject to a 2 per cent stamp duty on compulsory letters of credit.
With a view to insulating exporters from the direct cost of import protection, various schemes are used to provide access to traded inputs at close to world market prices. While export-processing zones were initially set up in specific geographic areas, the whole country was declared an export-processing zone in 1992. Although this may have encouraged export production in rural areas, in line with original intentions, it may also have facilitated leakages of duty-free imports into the domestic economy as movement of supplies for eligible companies is difficult to monitor. In addition, while promoting exports, such imports may have hampered the emergence of intermediate industries and, thus, of a broader industrial base.
Exports of a range of natural-resource-based products, as well as certain steel items, are subject to royalties, duties and cesses. These are generally applied at moderate levels. The funds are destined for either the general budget or export promotion activities, including start-up subsidies for new exporters. Sri Lankan exports of certain textile and clothing items to the United States and of coconut products to Brazil have been subject to countervailing duty actions.
Gradual import liberalization, and the ensuing adjustment pressures, may have encouraged requests for temporary protection through import surcharges. Applications are decided by the Minister of Finance, who has considerable scope for discretion. No injury test is required. There were 17 cases in 1994, covering a range of products from onions to razor blades and bicycles; however, all measures have now expired. The authorities are considering new legislation to conform with the WTO Agreements on Safeguards, Anti-dumping, and Subsidies and Countervailing Measures.
Since the 1970s, foreign direct investment in export-oriented activities has been welcomed. Such investment played a particularly important rôle in the development of the clothing and tourist industries. Commitments up to an equity share of 40 per cent are generally given automatic approval, and investors receive national treatment. Larger commitments are examined case-by-case. Structural deficiencies in the insurance sector and the Government's preferential claim on certain funds, reflecting fiscal straits, appear to have delayed liberalization in this area. Partial reforms, allowing for minority foreign shareholdings, are, however, under consideration.
Sectoral policy patterns
Sri Lanka's plantation-based tea sector co-exists with significant levels of subsistence farming, predominantly of rice. Large-scale public investments in irrigation facilities benefited rice growers during the 1980s, and have contributed to Sri Lanka's high level of self-sufficiency. Today, emphasis is being placed on cultivation of high value-added crops and related processing activities. Market-oriented seed improvement schemes, special credit facilities and the privatization of plantation management are major initiatives in this context. However, for social and regional policy reasons, rice farming is likely to attract strong continued policy attention.
External liberalization in manufacturing has been accompanied by internal deregulation and privatization, affecting a large number of State-owned companies. Exceptions are limited mainly to "security-sensitive" areas such as petroleum and gas production. The declining share of publicly-owned enterprises in manufacturing value added - from almost 60 per cent in 1981 to less than 15 per cent in 1991 - may be attributable both to these initiatives and to strong growth in the private sector, especially in clothing.
Access to a number of services sectors, including telecommunications and banking, has gradually been deregulated. While Sri Lanka Telecom (SLT) continues to operate as the exclusive provider of basic voice services, linked to its network monopoly, activities such as mobile telephony and data transmission are open to competition. Efforts are underway to rein in internal cross-subsidization within SLT and further rationalize its tariff structure. Continued liberalization may encourage the development of outward-oriented services, underpin the competitiveness of user industries and reinforce their internal supply links.
Trade Policies and Trading Partners
Sri Lanka's economic reforms were launched in response to widespread public dissatisfaction with poor industrial performance and rampant rent-seeking within a distorted incentive system. While there have been some slippages over time, strong growth in recent years has helped to broaden the internal political support for change. On the external front, the WTO Agreements have secured and widened the institutional framework for international market integration. The signs are thus positive for new initiatives aimed at exposing long-protected services sectors to competition, further reducing and harmonizing tariff protection, rationalizing duty drawback and exemption schemes and developing alternative, less distortive sources of government revenue. Given Sri Lanka's current export basket, it is essential that such efforts be supported by liberal and predictable access conditions to large export markets outside the region.Back to top
TRADE POLICY REVIEW BODY: SRI LANKA
Report by the Government
FORMULATION AND IMPLEMENTATION
OF EXTERNAL TRADE POLICIES
Trade policy measures
For many years import duties have been used both - as a source of government revenue and a means of influencing the speed and direction of economic growth by protecting selected local industries. However in line with the objective of promoting trade liberalization, the tariff structure was modified from time to time by a Presidential Tariff Commission which was established for the purpose.
A major step in rationalization of the tariff was taken in 1985 when the maximum nominal rate was reduced from 100 per cent to 60 per cent. Subsequently, the Tariff Commission recommended a four band tariff structure with rates of 50 per cent, 35 per cent, 20 per cent and 10 per cent, which was implemented in the budget for 1992. A further tariff change was introduced in 1993 when the maximum nominal tariff was reduced to 45 per cent with accompanying liberalization of items under import control. These recommendations were incorporated in the budget for 1994 and implemented. These rates have been further reduced by the 1995 budget by introducing a three band tariff system 35 per cent, 20 per cent and 10 per cent from February 1995, with the ultimate objective of moving to a lower uniform single tariff by 1997.
The overall objective of reduction of import duties was to improve economic activities to generate more employment and make industries more competitive. Sri Lanka is now working towards a lower uniform import duty rate in the near future, incorporating three band tariff now in operation. However, high import duties will continue to be applied on liquor, tobacco, passenger cars and luxury goods for revenue and social reasons.
Import and export control
As discussed before Sri Lanka has almost fully liberalized the import/export trade in keeping with the GATT objectives.
Import of plants, fruits, vegetables and other crops must be accompanied by an import permit issued in terms of Plant Protection Ordinance No. 10 of 1924, amended by Act No. 6 of 1950 and No. 22 of 1955.
All consignments shall be subject to inspection by the plant quarantine officers of the Department of Agriculture. In order to provide a better and improved service in this field, a plant pathology and plant quarantine centre with the latest laboratory apparatus was opened at the premises of the Katunayake International Airport this year, manned by the Department of Agriculture.
In regard to the import of live animals an import permit must be obtained from the Director of Animal Production and Health.
Sri Lanka standards are formulated for application in all sectors of the national economy and promote standardization in industry and trade with a view to improving the quality of goods and services. National standards are developed through the cooperative effort and consensus reached of all interests concerned, comprising representatives from interest groups which include government departments, trade and manufacturing organizations, professional institutions, purchasers and users.
In the formulation of Sri Lanka standards, reference is made to international standards and any deviation from it is attributed to the process capabilities, indigenous technology of the local industry, availability of testing facilities etc.
Where appropriate international standards are also adopted as National standards and among them are standards on accepted codes of practices, terminology etc. In the absence of international standards other foreign national standards are also consulted.
Sri Lanka Standards Institution is the national standards body responsible for integrated standardization activities at national level. National standards established by the SLSI are generally voluntary in nature unless declared compulsory under other laws and statutes.
There are at present a total of 1,334 Sri Lanka Standards (SLS) in force.
Food and agriculture 259
Chemical products 338
Civil engineering 84
Mechanical engineering 230
Electrical engineering 154
Of the above a total of 61 standards are mandatory in nature. The SLSI operates a Compulsory Import Inspection Scheme covering 56 items. The SLSI operated a mandatory Pre-shipment Inspection Scheme prior to 1989. This scheme was subsequently withdrawn.
Customs valuation was operative in Sri Lanka from the very inception of the Customs Ordinance in 1869 with "True Wholesale Market Value" as the basis for such valuation. With the introduction of the Amendment Act No. 35 of 1974, and the amendment of Section 52 of the Customs Ordinance, the value for imported goods for customs purposes was based on "True Value" which was defined as the price at which such goods are sold or offered for sale at the time and place of importation. The concept of the price for imported goods that would fetch in the open market, between the buyer and the seller independent of each other as defined in the Brussels Definition of value was embodied in Schedule E, when it was introduced. In 1988 simultaneously, Sections 51 and 52 of the Custom ordinance, were amended and Schedule E was introduced.
Meanwhile, the Customs Tariff will be revised on the basis of the World Customs Organization (WCO) Recommendation on amendment to the Harmonized Commodity Descriptions and Coding System (HS). This will come into force on 1 January 1996. Revision to the HS have been made mainly in the light of changes that have taken place in technology or in the pattern of international trade.
Sri Lanka also intends to frame legislation in regard to customs valuation in keeping with the WTO provisions by 1 January 2000.
Preshipment Inspection Scheme
In terms of the Agreement on Preshipment Inspection as embodied in the Final Act of the Uruguay Round Negotiation, preshipment inspection activities are all activities relating to the verification of the quality, the quantity, the price, including currency exchange rate and financial terms, and/or the customs classification of goods to be exported to the territory of the user country. As it is this inspection is carried out on the territory of the exporting country.
Preshipment Inspection Scheme has been adopted by several developing countries. Under this scheme, International Surveyors carry out inspection at the point of shipment of goods to Sri Lanka in respect of the quantity, value and quality of merchandize according to the description and specifications supplied by the importer.
Authorities have recommended the implementation of this scheme provided it is cost effective. However, it has been observed that the implementation of this scheme will benefit Sri Lanka as follows:
1. Under the scheme, with the "Clean Report of Findings" of the International Surveyors, importers/exporters will achieve the required speed of clearance at the Customs. The importer will pay customs duties and taxes to an approved bank and clear his goods without further examination by the Customs. As a result this scheme would reduce the cost of delays in the Port and Airport.
2. It could enhance the Government revenue significantly as experienced in other developing countries where this scheme has already been implemented.
3. Incidence of under valuation by importers and exporters could be sharply reduced by implementing this scheme. Government revenue collection will consequently rise.
4. The implementation for this scheme can prevent duty- and tax-free goods imported for processing for exports from leaking into the domestic market due to the monitoring system envisaged under this scheme. This would also increase the Government revenue considerably. Introduction of this scheme could also significantly minimize "dumping" import of substandard goods and also leakages of duty free goods imported by the exporters.
Sri Lanka has in principle agreed to implement this scheme in the near future.
Sri Lanka is not a signatory to the agreement on Government procurement under the Tokyo Round Negotiations of the GATT. However, the Government of Sri Lanka practices open tender system in government procurement. As provided in the Financial Regulations administered by the Ministry of Finance, Tender Boards of different levels up to Cabinet appointed Tender Boards are appointed depending on the value of the tender concerned.
Import of petroleum and arms and explosives are currently handled exclusively by government-owned corporations. However, import of lubricants, LP gas and industrial gas have now been liberalized.
While the Paddy Marketing Board (PMB) implements the guaranteed price scheme in respect of paddy local purchases, the CWE undertakes local purchasing of chillies and onions. These semi-government organizations handle trading activities whenever market intervention is considered necessary in order to protect both the consumer and the producer from the fluctuating prices due to market imperfections.
Import/export taxes and cesses
In addition to the custom duty the following taxes and cesses are also levied on imports.
1.Turnover tax - Manufacturing 10 per cent, -20 per cent, services 6 per cent
2.Defence levy - 4.5 per cent on all imports
3.E.D.B. Cess - On imports where the applicable duty is 45 per cent or more of the c.i.f. value
4.Excise Duty - Around 200 items are covered. Duty ranges from the minimum of 5 per cent to 200 per cent
Please see Annex IX for tax bases in respect of above taxes and cesses.
In regard to export duties, royalties and cesses applicable to exports, please see Annex X.
Goods and Services Tax (GST)
Goods and Services Tax (GST) when implemented will replace the Turnover Tax (TT), which has been in existence in Sri Lanka since 1964. GST is a tax on the domestic consumption of goods or services. It is a tax on spending, and is not paid when money is saved and invested in a productive capacity. It is ultimately a tax on final consumption including imports but is levied on the incremental value or value added at every stage in the production and distribution chain. In short, GST is chargeable:
(a) On the supply in Sri Lanka of goods and services by a registered person carrying on a taxable activity; and
(b) on the importation of goods into Sri Lanka.
Exported goods will be taxed at a zero rate which simply means that there is no GST payable in respect of exports, i.e., there is no output tax. Any input tax would also be refundable. In view of the economic significance of exports, the GST provides preferential treatment for exports where refunds are due.
Similarly, it is envisaged that the following items considered essential for mass consumption would be exempted from GST:
- primary agricultural produce;
- fertilizer and animal feed;
- pharmaceutical products;
- passenger transport;
- certain educational services;
- financial services;
- essential agricultural implements;
The Government of Sri Lanka intends to implement GST in the near future as part of her taxation reforms.
The Government of Sri Lanka enacted a new Arbitration Law in May 1995. Before this Law was enacted the two principal statutes that govern arbitration were the Arbitration Ordinance of 1866 and the Civil Procedure Code of 1889. While the Civil Procedure Code deals with both compulsory and voluntary arbitration, the Arbitration Ordinance deals only with compulsory arbitration. Apart from these statutes, both of which have been enacted over a century ago, there were a few other enactments, such as Industrial Disputes Act and Co-op Societies ordinance which provided for arbitration in limited situations. The legal framework under these laws which was both cumbersome and dilatory had prevented arbitration being used as an effective method of speedy dispute resolution. This had resulted in cases involving commercial disputes pending in counts for long periods, thereby discouraging foreign investment and trade.
The New Arbitration Law of Sri Lanka is based on the United Nations Commission on International Trade Law (UNCITRAL) model law which is designed to assist countries in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of International Commercial Arbitration.
The Infrastructure provided by the new Law will encourage parties to commercial disputes that arise in the region to have disputes resolved by arbitration in Sri Lanka.
Local content requirements
Sri Lanka does not discriminate imports as well as foreign investments into Sri Lanka by way of insisting on local content requirements.
This has been discussed elsewhere.
Sri Lanka became environmentally conscious much ahead of her neighbours in the South Asian Region, having established a fully fledged Central Environmental Authority in 1980 with wide ranging enforcement powers. In addition to the preservation of ecosystem from direct damage done through irresponsible exploitation of natural resources such as forests, watersheds, soil and air, more stringent regulations have been framed in respect of development activities by making environment impact assessments obligatory for new projects in order to harmonize the need for economic development with the necessities of a sustainable environment.
In the sphere of trade within the country environmental concerns have up to very recent times been centred around the conservation of endangered species of fauna and flora. In order to achieve this objective import and export of such vulnerable items have been banned, restricted or controlled by legal enactments.
As far as toxic and hazardous chemicals are concerned, trade in these materials is covered by the Control of Pesticides Act No. 282 of 1980, and administered by the Registrar of Pesticides of the Department of Agriculture.
Sri Lanka is also a party to the following four major environment related International Instruments which have an impact on her external trade:
(a) The Basel Convention, which was ratified by Sri Lanka in 1992, deals with transboundary movements of hazardous wastes and their disposal. Sri Lanka has already prepared draft regulations for the control of import, use and disposal of these identified wastes which are likely to present risks to human health and to the environment.
(b) The Montreal Protocol, which has been ratified by Sri Lanka, deals with specific ozone depleting substances and requires the country to phase out the use of such substances. This is of particular significance to Sri Lanka being a country committed to export led growth as it involves change over to new technologies which minimizes the damage to the ozone layer.
(c) The Framework Convention on Climate Change (FCCC) places further restrictions on Sri Lanka's ability to export since it brings in more industrially used substances on the prohibited list.
(d) CITES - In the field of imports into the country, Sri Lanka is a party to the Convention on International Trade in Endangered Species (CITES) and as such does not permit the importation of the prohibited items covered by the convention.
Export credit insurance
The Sri Lanka Export Credit Insurance Corporation (SLECIC) which was established by the Government of Sri Lanka by the Sri Lanka Export Credit Insurance Corporation Act No.15 of 1978, commenced business operations in February 1979.
The objectives of this organization among other activities are:
(1) Issue of Export Payments Insurance Policies to exporters against non-payment by buyers abroad due to commercial and non-commercial (political) risks.
(2) Issue of Pre and Post-Shipment Credit Guarantees to commercial banks to facilitate granting of pre and post-shipment finance against letters of Credit/Confirmed Orders.
(3) Issue of Export performance Guarantees to commercial banks and recognised institutions favouring exporters when they are called upon to furnish guarantees in Sri Lanka in the course of their export business to foreign buyers in connection with the export of goods and services or foreign parties awarding contracts of construction works abroad.
To achieve these objectives the Corporation offers the following facilities to the exporters:
(1) Export Payments Insurance Policies; and
(2) Guarantees (Pre-shipment credit/post-shipment credit/export performance).
From the inception of the SLECIC, claims to the value of Rs. 97.1 million have been paid and Rs. 20.1 million of the claims paid had been recovered. The income of SLECIC being a nominal premium, investments income from treasury bills and recoveries, the Corporation has built a reserve for payment of future claims of SL Rs. 255 million approximately.
Incentives to exporters
The export sector, which is considered as the leading sector in stimulating overall economic growth, continue to enjoy administrative, technical and fiscal support of the Government.
A programme of assistance to export oriented Small and Medium Enterprises (SMEs) was introduced by the Export Development Board (EDB) in 1994 with the objective of expanding production and promotion of entrepreneurship at the provincial level. This programme was aimed at improving managerial skills, market development, product development and providing financial, informational and other general assistance to exporters.
In addition to the support services, the EDB extended a wide range of other services, including the organization of several local and foreign seminars and workshops for exporters to enhance the awareness of export procedures, marketing, packaging and product development through technological improvements. moreover, selected exporters were assisted by the EDB to participate in trade fairs and exhibitions abroad.
Sri Lanka's second international trade fair "Expo-94" held in October 1994, provided a good opportunity for international exposure for Sri Lankan exports. "Expo-94" saw the participation of over 350 exhibitors and attracted approximately 1,732 overseas buyers and investors from 42 countries
Trade policy formulation and review
The Ministry of Internal and External Trade, Commerce and Food is responsible for formulation, recommendation and reviewing of trade policies. In doing so, the Ministry undertakes regular consultations with the line Ministries and organizations such as Ministries of Foreign Affairs, Finance and Industries, Central Bank of Sri Lanka, Sri Lanka Export Development Board, the Department of Commerce, and the Industrialization Commission.
In addition to the above agencies, the Government of Sri Lanka conducts regular and closer consultations with the Ceylon Chamber of Commerce, National Chamber of Commerce, Federation of Chambers of Commerce and exporters and traders associations.
The Department of Commerce which functions under the Ministry of Internal and External Trade, Commerce and Food is the focal point for GATT/WTO affairs, and both multilateral and bilateral trade negotiations.
Trading arrangements and trade relations
Sri Lanka continued to promote international trade and economic cooperation through active participation in several international and regional organizations. With a view to achieving the benefits of global trade expansion facilitated by lowering tariff and non-tariff barriers and strengthening rules and disciplines in international trade, Sri Lanka signed the Final Act of the Uruguay Round (UR) on 15 April 1994. The implementation of the rules of the UR is crucial for the Sri Lankan economy since it covers not only measures to lower tariff and non-tariff but also a wide spectrum of issues including the integration of textiles and clothing into the GATT, trade in agriculture and services, trade related investment measures and intellectual property rights. Sri Lanka's major export items are expected to considerably benefit from the implementation of the UR Act. The integration of agriculture into the UR would however, result in adverse consequences on food imports into Sri Lanka in the short and medium term due to projected increases in commodity prices, particularly prices of wheat flour, dairy products, sugar and rice.
With the implementation of the Agreement on Textiles and Clothing (ABC) of the UR, the Multi Fibre Arrangement (MFA), would be phased out within a period of 10 years from 1995. This may provide sufficient time for appropriate adjustments to be carried out in Sri Lanka's textile and clothing industry to enhance efficiency and productivity so as to face competition when textile quotas are removed.
On 1 June 1994, Sri Lanka ratified the agreement on the World Trade Organization (WTO), demonstrating Sri Lanka's commitment to the multilateral trade regime.
As a founder member of the SAARC Preferential Trading Arrangement (SAPTA), Sri Lanka actively participated in negotiations with a view to promoting trade through mutual concessions. In April 1995, bilateral consultations were held at the sixth meeting of the SAARC Inter-Governmental Group on Trade Liberalization, at which the national schedules of tariff concessions were agreed upon by the participants. The SAPTA Agreement is expected to become operational by December 1995, when all the member countries would have ratified it.
Sri Lanka continued to enjoy preferential access under the Generalized System of Preferences (GSP) in 1994. Sri Lanka has been a beneficiary under the different schemes implemented by 26 developed countries including the United States, Japan, Australia, Canada and the EC. The proposed changes for agricultural products in the new EU GSP scheme are not expected to seriously affect Sri Lanka's exports to the European Union. However, some industrial item from Sri Lanka wise continue to face limitations even under the new scheme, as they did under the previous scheme. For example, Sri Lanka's exports of garments to the EC are disadvantaged since the country does not have a fabric base. According to the revised GSP scheme, Sri Lanka's exports of textiles and garments are subject to an additional payment of 85 per cent over the EC's existing MFN tariffs, effective January 1995.
The new Cooperation Agreement between Sri Lanka and the EC on Partnership and Development was signed in July 1994 with a view to facilitating projects in the fields of energy, environment, investment and industrial cooperation, while activities under the ongoing and pipeline projects of the previous agreement continued in 1994. First EU - SL Joint Commission under the new Agreement was held in Brussels in June 1995 to evaluate progress made in regard to the ongoing projects and to discuss new proposals.
Sri Lanka is also a signatory to the Agreement on Generalized System of Trade Preferences (GSTP). Member countries of the GSTP would benefit in each others market in term of reduction in tariffs and elimination of non-tariff barriers. Sri Lanka's National Schedule of Concessions under GSTP contains 24 tariff lines. The margin of preference offered by Sri Lanka ranges from 4 per cent to 50 per cent as explained in Annex XI. Sri Lanka is participating in the Second Round of GSTP Negotiations which was launched with a view to enhancing product coverage, winding depth of tariff cuts and increasing the membership. Sri Lanka's "Request Lists" to other participating countries which were formulated in consultation with the Presidential Tariff Commission and the private sector were submitted to 18 participating countries and she has in turn received lists from nine member countries. The preliminary bilateral negotiations have been conducted with 13 member countries during 1994.
Sri Lanka continued to be a member of the United Nations Conference on Trade and Development (UNCTAD). Negotiations relating to a new Coffee Agreement, which was intended to replace the former coffee agreement, were held in 1994. However, Sri Lanka has decided not to become a signatory to the new coffee agreement which does not contain any economic clauses including export quotas. Sri Lanka has however, indicated its desire to join the International Natural Rubber Agreement (INRA).
Sri Lanka is also a member of the Bangkok Agreement which aims to promote trade among member countries through the grant of mutual concessions. Sri Lanka benefits from preferential tariffs for certain exports, and offers reciprocal concessions for certain imports from countries, i.e. India, Bangladesh, Laos, the Republic of Korea and Papua New Guinea. The reduction of the (MFN) rate of duty by India in 1994 resulted in an erosion of certain preferential margins offered under the Bangkok Agreement. Following representations made by Sri Lanka, India revised the preferential rates of duty applicable to products covered by the Bangkok Agreement.
Bilateral cooperation is an important element of Sri Lanka's foreign trade policy. Bilateral Cooperation agreements have been signed with several countries such as PR China, Pakistan, India, Romania, Iran, Bangladesh, Egypt, Turkey, Kuwait and Cyprus. Meetings of the bilateral Joint Commissions set up under these agreements are held at regular intervals to discuss issues of mutual interest, involving economic, trade and technical cooperation. Back to top