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FINANCIAL CHRONICLE™ » DAILY CHRONICLE™ » Trade policy challenges for Sri Lanka in the post-conflict Era

Trade policy challenges for Sri Lanka in the post-conflict Era

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Global Moderator
Focus on trade
By Gomi Senadhira ,Former Director General of Commerce
In economic terms no country is an island. The first time I first realized how closely Sri Lanka is linked to the outside world, was in the early eighties. I was the Second Secretary, in charge of Commercial affairs, in the newly opened Sri Lanka Embassy in Kuwait. I was Sri Lanka’s very first official trade representative in the Gulf. In Kuwait and the rest of the Gulf, Sri Lanka was only known for Chai and Khadama (tea and Housemaids).

Soon we started the promotion of non-traditional exports in these markets, with the assistance of the Department of Commerce, Export Development Board and the chambers. One of the first items promoted were fruits and vegetables. The first vegetable shipments were sent in cane baskets, in the same way vegetables were transported in the domestic markets. This resulted in substantial wastage. By the time, vegetables reached the shops most of it was damaged and were not fit for sale in the relatively sophisticated market. The embassy received large number of complaints with regard to the quality of the produce. Almost immediately the EDB launched a programme with the assistance of the embassies, ITC and the Commonwealth Secretariat, to improve the quality of packaging and transport.

This resulted in significant improvements in the quality of produce which reached the market. The benefits of these improvements, I understand, were passed down to all the stakeholders down the value chain. These improvements not only brought benefits to the exporters but also to the growers in rural Sri Lanka. Thirty years later the government has made it compulsory to transport vegetables in plastic baskets, through regulations, to minimize the wastage, in the domestic market.

The Export Processing Villages were established by the EDB, to pass on the benefits of open economy to primary producer. As a result, even today, some of the vegetable farmers in remote areas of the NCP are more closely linked to markets in Kuwait and Dubai than the “Economic Centre” in Dambulla. As a result of globalization and the closeness of the global markets, the same vegetables producer in the NCP, gets a much better prices for their products than those who supply to the domestic markets.

A significant number of Sri Lankan farmers and workers are closely connected to outside world. Not only that the tea growers in Nuwara Eliya or Ruhuna are more closely linked to markets in the UK or the Gulf than Kandy or Colombo. One may also argue that tea was introduced by the British to exploit Sri Lanka’s resources for the benefit of the colonial companies. Hence, tea or even rubber, production is naturally connected to the metropolitan markets. Today, however, the people of this country benefit from exports. In the case of the vegetable producers in the NCP it is the development of the markets in the Gulf and Europe and improved connectivity which created a higher demand and increased and improved production.

This also applies to other areas of export agriculture. Rural farmers and workers in Sri Lanka have benefited from export-led growth policies government has followed since late seventies. Today, Sri Lanka’s exporters provide jobs to thousands of young men and women in their factories and farms. These workers mostly live with their families, or at least live closer to their families in Sri Lanka.
The goods they produce, whether garments from Mahiyangana or chillies from Chilaw, are exported to markets all over the world. At the same time the young men and women from these areas go to work as housemaids or to work in factories and farms in Middle East, under very harsh conditions. Common sense tells us it is better for these young men and women to work in factories and farms in Sri Lanka than those in Jordan or Bahrain, and export what they produce. You do not need a specialized knowledge in “trade and sustainable development” for that.

Recently the Treasury Secretary pointed out that “although exports have recorded an impressive growth of 22 per cent, the expansion in exports to emerging markets has remained sluggish due to the traditional bias towards established markets. Hence, targeting fast growing economies with specific export products, should receive the specific attention of exporters.” Though exports from Sri Lanka has increased over the years, her share of world exports as well as exports to GDP ratio has declined significantly, particularly in the recent years. This is most badly reflected in what was Sri Lanka’s main market, the United States where Sri Lanka’s main export is clothing. In 2001, Sri Lanka’s clothing exports to the United States increased, year on year basis, by just 1% and registered at US$ 1624 million.

Though this is nowhere near the then previous year’s 17% growth, it has to be viewed in the context of overall US imports of clothing by 1% as well as decline of imports from Bangladesh by 2% and India by 4%. In 2001 market shares of South Asian exporters in the USA were; Sri Lanka (2.4%), Bangladesh (3.4%), India (3.1%) and Pakistan (1.7%).The exports from Bangladesh, India and Pakistan were valued at US$ 2232 million, 2063 million and 1101 million, respectively. By 2010 Sri Lanka’s clothing exports to the US had declined to US$ 1,349 million and market share to 1.6%. As against this value of exports and market share of other South Asian Exporters increased; Bangladesh to US$ $4,154 million (5.1%), India US$ 3,422 million (4.2%), and Pakistan US$ 1,349 million (2%). During the period 2005- 2010, the decline of clothing exports from Sri Lanka to United States averaged at 6%, per year. Though, the growth of the US market remained stagnant during the period, exports from Asia increased at average of 4% and from Bangladesh increased at an average of 10%.

Fortunately for Sri Lanka, during the same period, the EU’s imports of clothing increased by 5% annually. The increase was higher from Asia (8%). The increase of exports from Bangladesh averaged at 12% and from Sri Lanka at 9%. By this time Sri Lankan exporters, for the first time, had received a level playing field vis-à-vis her competitors in the EU market, through enhanced GSP benefits. Unfortunately however, in 2010 exports from Sri Lanka to the EU, decreased by 2% exports while Bangladesh increased by 7%. Though Sri Lanka’s exports growth is “impressive”, from a domestic perspective, it has remained modest compared to these countries.

If Sri Lanka’s export growth, during this period, was closer to that of Bangladesh, Colombia or Vietnam, then what would have been its impact at the rural level? It would have resulted in more jobs in the export sector, perhaps as much as 50% more. During a recent visit to an apparel factory in remote Mahiyangana, I was asked why no new factories, such as the MAS or Maliban (garments) factories were built during the last few years, in that area? Why girls from the area have to go to countries such as Jordan to work in garment factories, under more difficult conditions, albeit at slightly higher salaries? The short answer is; it’s the trade policy. Jordan has duty free access to her main markets. Sri Lanka face tariff peaks.

Why? Since independence Sri Lanka benefited from the membership of GATT/WTO system and did not have major problems with regard to the level of market access to her major exports markets under the multilateral trading system. Therefore, a need for a strong proactive trade policy did not always come to the attention of the decision makers. However, when there was need for such initiatives Sri Lanka did not hesitate to take them, as was in the case of the rubber-rice agreement with China. Similarly, a weakness in the multilateral system, the guaranteed market access under textiles quotas, was used to develop a world class apparel industry. However, these were limited interventions. Outside these, Sri Lanka’s exporters mainly benefited only from the multilateral process.

The progress in the multilateral trade liberalization process has stagnated since the end of the Uruguay Round of the multilateral trade liberalization. The limited progress only covers special treatment to Least Developed Countries. As a result most of the WTO members have entered in to more comprehensive bilateral and regional trading arrangements to develop trade. These include all developing countries, other than very few exceptions and Sri Lanka is one of them. Though, Sri Lanka too initiated negotiation of Economic Partnership Agreements with the two FTA partners, India and Pakistan, these have remained almost frozen, since 2008. As a result trade under the bilateral FTAs too has not developed beyond their early achievements.

As against this other countries in Asia are in a process of accelerated integration through comprehensive FTAs and EPAs. Japan has already signed agreements with ASEAN and India and is considering agreements with China, Korea and Mongolia. China has agreements with Pakistan and ASEAN and agreements with India, Japan and Korea are under consideration. The Chinese approach on FTA/EPAs was perhaps best summarized by Commerce Vice Minister Yi Xiaozhun in a speech in July 2010 when he stated “With the acceleration of the economic globalization and the integration of th,e world market, economic interdependence among countries and regions is further enhanced, regional economic cooperation and trade liberalization and investment is further developed, given which, the Chinese government actively boosted the construction of FTA.

Since the signing of Framework Agreement on ComprehensiveEconomic Co-operation with original 10 member countries of ASEAN in 2002, China has signed 9 FTA Agreements with 17 countries and regions including Hong Kong, Macao, Chili, Pakistan, New Zealand, Singapore, Peru, and Costa Rica.” Finally it is important to note that these countries can provide enhanced market access to LDCs under the WTO provisions, and therefore they need not sign bilateral FTAs for that purpose. But where does Sri Lanka stand with regard to these arrangements? Since independence Sri Lanka had oscillated between opening its economy to foreign markets and to foreign investment and varies degrees of isolationism.
However, since 1977, all governments have committed to move on open economic policies as well as export-led economic growth.

That is certainly reflected in the policy frame work of the present government; “Mahinda Chintanaya”, particularly in the five hubs concept. Even then, necessary initiatives to provide better level of market access to our exporters have not being pursued in a proactive way. As a result Sri Lankan exporters do not have an equal opportunity, a level playing field, in the two main markets, US and EU as well as in the emerging markets. Though it has been observed “…the expansion in exports to emerging markets has remained sluggish due to the traditional bias towards established markets. Hence, targeting fast growing economies with specific export products, should receive the specific attention of exporters”, the necessary institutional framework which would facilitate the exports promotion in these markets has not been provided.

The best example is the CEPA with India, one of the fastest growing markets, right next door to Sri Lanka, and the loss of GSP Plus in the EU. Similarly Sri Lanka perhaps is the only Asian non LDC without an EPA or even negotiating an EPA with Japan. Meanwhile, we have those who call for EPAs with Maldives, Bangladesh or even Iran or Venezuela!! Then there are those who advocate for the export of manpower alone. If Jordan or Mauritius has duty- free- access to the EU and the USA, let our girls go and work in those factories or as housemaids. Last year workers remittances amounted to over $ 5 billion. Should we go for these options? Then there is a second option. Let us look at our Asian neighbours and try to understand their strategies.

Why do they go for those EPAs and FTAs? Do they know something which we don’t or do we know something which they don’t? Can we or do we want to achieve export growth like Vietnam or Thailand, or even Bangladesh? Do we want to join the rest of Asia and benefit from their growth? Asia certainly is in the process of moving into a seamless economic space. Do we want Sri Lanka to be part of it?
Or do we want Sri Lanka to remain as an island- in terms of economics, as well as geography?

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