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Sri Lanka: November   1995

“ Particular reference was made to the phasing out of traditional import substitution policies, liberalization of the investment régime, and an ongoing process of deregulation and privatization in many areas. These efforts had contributed to economic growth averaging about 5 per cent in recent years, despite civil conflict.”

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  > Summary of Government report

14 November 1995

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The Trade Policy Review Body of the World Trade Organization (WTO) conducted its first review on 7 and 8 November of Sri Lanka's trade policies. The text of the Chairman's concluding remarks is attached as a summary of the salient points which emerged during the two days of discussion.

The review enables the TPRB to conduct a collective examination of the full range of trade policies and practices of each WTO member country at regular periodic intervals to monitor significant trends and developments which may have an impact on the global trading system.

The review is based on two reports which are prepared respectively by the WTO Secretariat and the government under review and which cover all aspects of the country's trade policies, including: its domestic laws and regulations; the institutional framework; bilateral, regional and other preferential agreements; the wider economic needs and the external environment.

A record of the discussion and the Chairman's summing-up, together with these two reports, 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.

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), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991), Thailand (1991), Tunisia (1994), Turkey (1994), the United States (1989, 1992 & 1994), Uganda (1995), Uruguay (1992) and Zimbabwe (1994).

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Over the past two days, the Trade Policy Review Body has conducted its first review of Sri Lanka's trade policies and practices. As usual, these remarks are intended to summarize the salient points; they are made on my own responsibility and do not substitute for the Body's collective evaluation and appreciation. The full discussion will be reflected in the minutes of the meeting.

The discussion developed under three main themes: (i) general policy direction; (ii) sectoral and regional trade patterns; and (iii) use of individual policy instruments.

General policy direction

Members commended Sri Lanka for significant economic reforms since the late 1970s, carried out mainly on an autonomous basis in difficult political circumstances. Particular reference was made to the phasing out of traditional import substitution policies, liberalization of the investment régime, and an ongoing process of deregulation and privatization in many areas. These efforts had contributed to economic growth averaging about 5 per cent in recent years, despite civil conflict. Attention was called, however, to the macroeconomic and structural adjustments required to underpin a liberal trade régime. These included the need to rein in the budget deficit, especially by widening the tax base, improving tax collection and reviewing subsidy programmes; control inflation; remove distortions in the incentive system and improve productivity; and mobilize private savings and investment. Further details were sought on the structure of the consumer price index; current monetary and exchange rate régimes; remaining investment controls; and the rôle of competition policy in the privatization process.

Noting the contribution of trade liberalization to overall economic performance, several participants enquired about the Government's future liberalization strategies and any institutional provisions, including advisory and consultative bodies, to enhance transparency and mobilize public support for continued reform.

The representative of Sri Lanka confirmed his country's commitment to trade liberalization, economic deregulation, privatization, and macroeconomic discipline. The Tariff Commission evaluated the impact of trade policies and prepared the ground for liberalization. Inflation had been brought down to an annual rate of 8.5 per cent by the end of 1994. While the medium-term objective was to contain the overall budget deficit to less than 7 per cent of GDP, election-related expenditure and the escalation of civil war had made this target elusive. However, a new goods and services tax (GST), scheduled for introduction in early 1996, was expected to broaden the Government's revenue base. Greater exchange rate convertibility was to be determined in the light of Sri Lanka's balance-of-payments position.

Although the escalation of defence expenditure had thwarted attempts to encourage private savings and investment, he expected that the privatization of the Colombo Gas Company and of plantation companies would encourage private sector activities. Telecommunications was not at present on the agenda for privatization. However, franchise holders were being appointed for the Co-operative Wholesale Establishment (CWE) as a first step towards bringing the organization to the stock exchange. He stressed that there were generally no limitations on foreign equity participation, although in certain sectors, such as freight forwarding, such participation was limited to 40 per cent. A new Labour Charter, clarifying employer/employee relations, was expected to improve industrial relations and, thus, productivity. The authorities were currently examining possible deficiencies of the consumer price index in consultations with the parties concerned.

Regional and sectoral trade patterns

While appreciating Sri Lanka's decade-long strong export performance, participants noted that both the range of products and of destinations had remained fairly limited. The European Union and the United States alone took about two thirds of Sri Lanka's exports, with a strong focus on clothing. Moreover, most export industries had few backward linkages into the domestic economy, possibly reflecting the operation of duty concessions on imported inputs. Several members saw a significant potential for economic diversification if market signals were allowed to apply more freely across sectors and production stages. The associated correction of allocative inefficiencies should spur productivity and employment.

In response, the representative of Sri Lanka noted that both the narrow product range of exports and the concentration on relatively few markets were the result of a historical evolution; re-orientation might take some time. The Government had undertaken programmes to achieve diversification, bearing in mind comparative advantage. Taking into account Sri Lanka's labour skills and endowments of raw materials, sectors such as food processing, rubber goods and electronics had been identified in this context. On the matter of backward linkages, attractive incentives had been offered to foreign investors but the response had not been encouraging. Sri Lanka needed the support of its trading partners, particularly for the clear identification of future investments.

Use of individual policy instruments

Participants welcomed Sri Lanka's success in reducing trade barriers. In this context, reference was made to tariff liberalization and harmonization, abolition of virtually all quantitative restrictions, termination of most State-trading monopolies, and gradual opening of some services sectors to foreign suppliers and investors. Nevertheless, members expressed concern about certain elements of the trade régime, including the low level of tariff bindings in manufacturing; the spread between applied and bound rates; and the seemingly widespread use of duty exemptions and waivers. Details were sought on any initiatives to further rationalize the tariff system, eliminate specific duties, reduce remaining tariff peaks and lower tariff escalation. Other questions related to the current range of import licensing and import deposit requirements, any floor price arrangements for food products, and the administrative cost of a proposed new preshipment inspection (PSI) scheme. Concern was expressed that import licences were issued only to Sri Lankan nationals. One member felt that early adoption of the WTO Customs Valuation Agreement could obviate the need for PSI requirements.

Some members expressed concern at the current range of product-related duties and charges, including a defence levy, which might be biased against imports. The cumulative effect of these charges could be very protective. Certain members called for a review of government procurement rules, with a view to eliminating any discriminatory elements. It was widely felt that more scheduled commitments under GATS, including in telecommunications and financial services, would promote confidence in the reform agenda and improve conditions for investment. Participants encouraged swift implementation of WTO Agreements in areas such as safeguards, anti-dumping and intellectual property rights.

The representative of Sri Lanka noted that, in the Uruguay Round, his country had bound all agricultural tariffs at a uniform rate of 50 per cent; tariff bindings on industrial items, also at 50 per cent, covered about 11 per cent of the relevant lines. The highest standard duty rate was 35 per cent. This had been achieved despite significant fiscal constraints and painful adjustment requirements for socially weaker groups. The practice of granting duty exemptions and waivers had been abolished and the few remaining specific duties were scheduled for elimination, depending on the revenue situation. He noted that, if there were some cases of tariff escalation, these were explained by policy constraints. The impending introduction of preshipment inspection would not cause any delays in customs procedures or other impediments; the scheme would also be used for specified exports.

Sri Lanka currently maintained import licensing requirements only for security, health, environmental and moral reasons; they were fully justified under GATT Articles XX and XXI. Further details of the licensing régime would be provided in writing. He noted that the licensing requirements on six other HS lines were for balance-of-payments purposes, but that the GATT Balance-of-Payments Committee had recently recommended that Sri Lanka no longer apply these measures on such grounds. With the introduction of the goods and services tax, all other duties and charges would disappear. The defence levy would be maintained as long as required by the situation in the country; the levy was in full conformity with the relevant GATT provisions. He stressed that there was no deliberate policy to favour local suppliers through tax incentives. In the procurement area, the Government sought to ensure fair competition between suppliers, and high standards of transparency and legality. The selection process was in the hands of independent committees.

Although, under GATS, Sri Lanka had made commitments only with regard to tourism and travel services, its services markets were generally open and further liberalization was being considered. While the current level of economic development imposed certain constraints, Sri Lanka was nevertheless prepared to review its position in future negotiations with a view to assuming additional commitments. A decision on new legislation implementing the WTO Agreements on Anti-Dumping, Subsidies and Countervailing Measures would be taken by mid-1996; adjustments to Sri Lanka's intellectual property régime, including a prolongation of the patent period, were under active consideration.


It is my impression that Sri Lanka's trade policies and practices have evolved in a positive direction. Sri Lanka has made significant progress in undoing a legacy of import substitution policies and removing distortions in the incentive system. Trade liberalization, deregulation and privatization have improved conditions for employment and growth. Despite civil conflict, efforts are being made to further streamline the tax and tariff system, including through the introduction of a comprehensive goods and services tax, and inject competition into public sector domains. Given the scale and scope of remaining trade restrictions, the generally low level of tariff bindings and other uncertainties facing investors and traders, it is important for Sri Lanka to press ahead with its liberalization agenda, accept a higher level of multilateral commitments, and expeditiously implement WTO provisions. Back to top