RESTRICTED 
WORLD TRADE WT/BOP/W/S 
BOP/W/163 
ORGANIZATION 20 October 1995 
(95-3203) 
Committee on Balance-of-Payments Restrictions 
1995 CONSULTATION WITH SRI LANKA 
UNDER ARTICLE XVHI:12(B) OF THE GATT 
Background Paper by the Secretariat 
1. This paper has been prepared in accordance with paragraph 12 of the Understanding on the 
Balance-of-Payments Provisions of the General Agreement on Tariffs and Trade 1994. 
1. Sri Lanka's previous consultations 
2. Sri Lanka first invoked Article XVIILB in 1971 to justify its use of quantitative restrictions 
on imports. Since then Sri Lanka consulted under simplified procedures every two years, except in 
1991 when consultation was delayed until 1992. During the last simplified consultation held on 26 
and 27 July 1994, the Committee requested Sri Lanka to notify, by tariff line, import restrictions, if 
any, maintained for balance-of-payments purposes, or to disinvoke Article XVIILB, no later than 
September 1994. The Committee also concluded that should any such import restrictions be identified, 
the Committee would hold a full Consultation with Sri Lanka (BOP/R/219). Subsequently, in a 
notification dated 19 October 1994, Sri Lanka informed the Committee that it would continue to invoke 
Article XVIII:B and submitted a list of eight agricultural items, which were at the time subject to import 
licensing measures for their indirect impact on the balance-of-payments situation (Table 1). 
Table 1 
Import-licensing measures notified by Sri Lanka as being retained for their indirect impact on the balance-of-payments situation, 
October 1994 
H.S. Heading No. 
07.01 
07.03 
09.04 
10.01 
11.01 
11.03 Item 
Potatoes, fresh or chilled 
Onions, shallots, garlic, leeks 
and other alliaceous 
vegetables, fresh or chilled. 
Pepper of the genus 'Piper', 
dried or crushed or ground, 
fruits of the genus capsicum 
or of the genus pimenta 
Wheat and meslin 
Wheat or meslin flour 
Cereal groats, meal and 
pellets H.S. Code Number 
0701.90 
0703.10.01 
0703.10.02 
0904.20 
1001.10 
1001.90 
1101.00 
1103.11 Description 
Other 
red onions 
big onions 
fruits of the genus capsicum 
or of the genus pimenta dried 
or crushed or ground 
durum wheat 
other 
Wheat or meslin flour 
of wheat 
Note: Information contained in columns ( 1 ) and (2) above give merely a broad definition of the specific tariff lines under licences, which 
are indicated only in columns (3) and (4). 
Source: GATT document L/7542 of 3 November 1994. WT/BOP/W/8 
BOP/W/163 
Page 2 
H. Sri Lanka's trade policy and recent changes 
3. The following section gives a brief summary of trade policy and recent changes. A detailed 
examination can be found in the Report by the WTO Secretariat on Trade Policy Review of Sri Lanka 
(WT/TPR/S/6) of 13 October 1995. 
(a) Licensing 
4. In recent years, Sri Lanka has removed almost all import and export licensing requirements 
except those mentioned above and others maintained for security, health, moral and environmental 
reasons. Licences for the relevant items are issued by the Import and Export Control Department 
(Ministry of Trade, Commerce and Food). According to the authorities, imports of cereals have also 
been liberalized. 
5. According to information provided by the Customs Department of the Ministry of Finance, 
a number of products, both agricultural and manufactured, are subject to import licensing (Table 2). 
Table 2 
Products subject to import licensing, mid-1995, other than those mentioned in Table 1. 
Item 
Motor vehicles 
Arms and ammunition 
Rice (including flour) 
Manufactured liquor 
Photocopying apparatus (colour) 
Goods restricted under the Montreal Protocol on 
Substances that Deplete the Ozone Layer and the Basel 
Convention on the Control of Trans-boundary 
Movements of Hazardous Waste and their Disposal Competent authority 
Department of Import and Export Control 
Ministry of Defence 
Department of Food Commissioner 
Department of Excise 
Department of Import and Export 
Central Environmental Authority 
Source: WTO Secretariat based on information provided by the Customs Department (Ministry of Finance). 
6. Import licences are originally valid for 180 days; they may be extended for up to one year 
if "acceptable reasons" are given. Block licences for one year may be issued for drugs and chemicals 
which may then be imported in instalments up to the ceilings mentioned. Licences are issued only 
to Sri Lankan nationals or companies majority owned by Sri Lankans. 
7. As regards licences of imports of food items, only registered importers are permitted to import 
seasonal crops; the allocation of licences is generally based on their previous performance. (Any rents 
thus accrue to the established traders.) While licences are not officially transferable, the authorities 
are aware of informal transfers. Entry of seasonal agricultural products is particularly closely monitored 
by the Controller of Imports and Exports. The Controller of Imports and Exports can reject licence 
applications without giving reasons; the decision may be appealed to the Minister of Trade, Commerce 
and Food. Import quantities of seasonal food crops, such as potatoes and dried chillies, are decided 
at a weekly "food security meeting", involving the Department of Census and Statistics, the Food 
Commissioner, Ministry of Agriculture, and the Controller of Imports and Exports. The decisions 
are taken in view of the country's food supply situation and additional considerations such as the cost 
of living. The Import and Export Controller is accordingly authorized to issue licences during specified 
periods not coinciding with the domestic marketing season. WT7BOP/W/8 
BOP/W/163 
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(b) Tariffs and other charges on imports 
8. The 1995 Budget introduced a three-band import tariff structure intended to reduce effective 
rates of protection. Most import tariffs are grouped into rates of 10,20 and 35 per cent. A two-pronged 
import tariff of 10 and 20 per cent and a single 15 per cent tariff are under consideration. 
9. Other charges on imports include: 
a computer maintenance fee of SL Rs 200 (approximately US$4) per transaction; 
a customs examination charge of SL Rs 300 (approximately US$6) per transaction; 
a 2 per cent stamp duty is levied on compulsory letters of credit on import consignments with 
a c.i.f. value exceeding US$7,500; 
motor vehicles, alcoholic beverages, tobacco and tobacco products are subject to a surcharge 
(cess) of 10 per cent on the duty value; and 
a turnover tax (up to 20 per cent), defence levy (4.5 per cent) and excise duty (up to 200 per 
cent) apply to both imports and domestic production but the value of imports on which they 
are levied includes import duties and is subject to a markup. Domestically manufactured 
cigarettes carry a lower excise tax (SL Rs 525 per 1000) than imports (SL Rs 925 -1,500 per 
1000). 
10. Tariff concessions are available for firms producing for exports, approved by the Board of 
Investment. Board of Investment approved firms producing for export are also exempt from all other 
import charges. The Import Tariff Guide published by the Customs Department (1994) provides for 
full tariff exemptions on 34 products as well as partial exemptions on 19 items. The number of products 
with full exemption has been narrowed down to 23 items in the February 95 Budget. Granting of duty 
waivers have now been discontinued. Items on which duty waivers were earlier granted concerning 
machinery, equipment and parts, etc. have now been included in the customs tariff with appropriate 
duties. 
11. Preferential tariffs are granted under the Bangkok Agreement, the Agreement on the Global 
System of Trade Preferences (GSTP) and, from December 1995, the South Asian Preferential Trade 
Area Arrangement (SAPTA). The preferential margins vary widely among the products covered, but 
are the same for all participants. There are no full tariff exemptions. The relevant rules of origin 
hinge on a value-added criterion. 
(c) Foreign exchange and capital controls policy 
12. Sri Lanka has removed all restrictions on current transactions and formally accepted the 
obligations of Article VIE, Sections 2, 3 and 4 of the International Monetary Fund (IMF) Agreement 
as of 15 March 1994. The authorities are considering the liberalization of the capital-account transactions 
in the medium term. 
13. Overseas borrowing or borrowing in foreign currencies is not allowed, except for export-oriented 
firms approved by the Board of Investment (BOI). Foreign currency loans to other export-oriented 
firms are permitted on a case-by-case basis by the Department of Exchange Control of the Central Bank. 
Since 1990, there have been no restrictions on foreign investment in securities registered at the Sri Lanka 
Stock Exchange, except government securities; funds may be withdrawn at any time. WT/BOP/W/8 
BOP/W/163 
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III. Main Macroeconomic Developments 
14. Real GDP growth averaged over 5 per cent over the 1990-94 period, with particular robust 
growth being recorded in 1993 (6.9 per cent). Manufacturing and, recently, construction were the 
leading sectors developing rapidly. The manufacturing sector grew on average over 8 per cent annually 
during 1990-94 and 10.5 per cent during 1993. By comparison, agriculture grew by less than 4 per cent 
annually during the same period, partly as the result of a decline during 1992 owing to weather 
conditions. 
* 
Chart 1 
Sri Lanka - Real GDP growth, 1989-94 
Annual percentage change 
Source: IMF. 
15. Inflation averaged about 10 per cent during 1986-89 but jumped to over 20 per cent in 1990, 
declining to around 12 per cent during 1991-93. However, the recent decline owes much to cuts in 
government administered prices, in particular of the bread price. The underlying rate in 1994 was 
well above the recorded 8.6 per cent. 
16. The Central Bank of Sri Lanka's main instruments to conduct monetary policy are open-market 
operations and changes in reserve requirements for commercial banks. While, until 1993, open market 
operations were conducted mainly in treasury bills, the bank has since issued its own securities. In 
addition, high minimum reserve requirements, 15 per cent on deposits in SL rupees in 1994, have 
been used to reduce the money multiplier and, thus, inflation. WT/BOP/W/8 
BOP/W/163 
Page 5 
17. The Central Bank intervenes to prevent wide fluctuations in the exchange rate. It announces 
daily spot buying and selling rates of the U.S. dollar, with a margin of 2 per cent, and buys and sells 
the rupee at these rates. Forward exchange rates are market determined. 
18. The unemployment rate was estimated to be 13.0 per cent in 1994, down from 16.6 per cent 
in 1992. 
IV. Public Finance 
19. The budget deficit excluding grants has remained above 7 per cent of GDP for each single 
year during 1990-94, reaching 11.6 per cent in 1991, declining to 7.3 per cent in 1992, going up since, 
reaching 10.0 per cent in 1994. The increase in 1994 was caused mainly by election related rise in 
current expenditure. However, it might prove difficult to constrain such expenditure as well as increases 
in military expenditure in view of the resurgence in civil war activities. 
20. Government revenue has declined as a share of GDP from 21.1 per cent in 1990 to 19.0 per cent 
in 1994. Tax exemptions and waivers contributed to this declining share of government revenue in 
GDP. The use of tax exemptions and waivers has been reduced since. Some consumption taxes, such 
as the broad-based defence levy, have been increased in mid-1995 to cover additional expenditure related 
to the civil war. Furthermore, the government has announced that it intends to introduce a value-added 
tax to enhance the elasticity of the revenue system by broadening the tax base. Private-sector involvement 
in infrastructure projects is also expected to ease their budgetary impact. 
V. Composition and Direction of Merchandise Trade 
21. The gradual refocusing of Sri Lanka's industrial policy from import substitution to export 
promotion, and the emergence of an export-oriented clothing industry, have brought about significant 
changes in the country's export basket. The share of clothing in total exports increased from 
10.5 per cent (US$110 million) in 1980 to close to 48 per cent (US$1,350 million) in 1993,' although 
domestic value added is very low.2 Not surprisingly, the world's two major clothing importers, the 
United States and the European Union, have taken increasing shares of Sri Lanka's total exports. The 
United States alone accounted for 35 per cent of the country's total shipments in 1993, up from 
11 per cent in 1980 (Chart 2). 
22. While Sri Lanka's share in the world tea market remained stable, the share of tea in total exports 
declined as shipments of manufactures expanded rapidly (Chart 2). Middle-Eastern countries have 
remained the most important export market for tea. 
'Trade Policy Review - Sri Lanka 1995, (WT/TPR/S/6), Table AI.2. 
2Trade Policy Review - Sri Lanka 1995, (WT/TPR/S/6), Chapter V(4)(ii). WT/BOP/W/8 
BOP/W/163 
Page 6 
Chart 2 
Composition and direction of merchandise trade, 1975-94 
Export structure Import structure 
Per cent 
80 100 
S£3 
B 
E^ Tea ra 
Other agricultural LZJ 
products 
Mining products CD Clothing 
Other 
manufacturing 
Other Per cent 
80 100 
5 Agricultural ^ Other 
products manufacturing 
sal Mining products • Other 
•• Textiles 
Destination of exports 
Per cent 
80 100 Origin of imports 
Per cent 
1975 
80 100 
USA ^ Middle East m 
European Union ra Japan ^ Republic of Korea cm Hong Kong raa Other Asia 
India ma Singapore nn Other 
Total merchandise imports, 1994, c.i.f.: USS3,528 million 
Total merchandise exports, 1994, f.o.b.: US$2,786 million 
Source: UNSTAT, Comtrade database. WT/BOP/W/8 
BOP/W/163 
Page 7 
23. On the import side, the share of rice and other food supplies declined from about half in 197S 
to 14 per cent in 1993, reflecting both reductions in quantities supplied and increasing imports of 
non-food items. Imports of textiles developed particularly dynamically, destined mostly as inputs for 
the booming clothing industry. They originated mainly from traditional textiles producers, underpinning 
the rôle of the Republic of Korea, India and some other Asian countries as suppliers to Sri Lanka 
(Chart 2). 
VI. Balance of Payments 
(a) Current account 
24. In spite of rapid export growth the trade deficit increased from 8.8 per cent of GDP in 1990 
to 13.4 per cent of GDP in 1994. In 1994, total merchandise exports amounted to SDR 2.2 billion, 
while merchandise imports were SDR 3.3 billion. However, foreign grants and, increasingly, private 
remittances are a major source of foreign exchange earnings (Annex A). The current account deficit 
(excluding official transfers) was therefore contained in the range of 5-8 per cent of GDP during 1990-94, 
rising from 5.3 per cent of GDP in 1993 to 7.9 per cent in 1994 (Chart 3). 
(b) Capital account 
25. During 1990 and 1991, net overseas long-term government borrowing to finance public 
investment projects exceeded the current account deficit (including official transfers), thus contributing 
to the accumulation of foreign reserves.3 Private capital inflows rose rapidly during 1993 and 1994, 
lead by private foreign borrowing of both a short- and a long-term nature while government borrowing 
declined below the 1990-91 levels. Foreign investment increased gradually; portfolio investment made 
a minor contribution during 1991-94 (Chart 3). 
3Public capital inflows continued to exceed the current account deficit until 1993, but as public capital outflows 
increased slightly and inflows declined substantially after 1991, net public inflows did not exceed the current 
account deficit since 1991. WT/BOP/W/8 
BOP/W/163 
Page 8 
Chart 3 
Balance of payments, 1989-94 
SDR million 
400 
200 
-200 
-400 
-600 
-800 
-1,000 n Direct investment 
S Portfolio investment 
• Private long-term net 
£3 Private short-term net 
• Government finance Current account, including 
/ unrequited transfers 
Current account, excluding 
unrequited transfers 
1989 90 
Per cent 
-2 91 92 93 1994 ' 
-4 
-6 
-8 
-9 Current account ratio to GDP 
(including unrequited transfers) 
/ 
Current account ratio to * 
(excluding unrequited transfers) 
1989 90 91 92 93 1994 
Includes adjustment to capital inflows on account of import of four aircrafts for which advance payments had 
been made in previous years. 
Provisional. 
Source: Central Bank of Sri Lanka. WT/BOP/W/8 
BOP/W/163 
Page 9 
(c) Reserves 
26. As the combined public and private capital inflows exceeded the current account deficit (and 
capital outflows were negligible) they contributed to the accumulation of foreign reserves during the 
1990s. However, imports also increased sharply during this period and the number of months of imports 
covered by reserves increased less dramatically during 1989-93 and stabilized during 1993 and 1994 
(Chart 4). At the end of 1994, gross official reserves amounted to SDR 1,389 million, equivalent 
to 5 months of imports (Annex B). 
Chart 4 
Sri Lanka - Gross official reserves at year end, 1989-94 
SDR million; and months of imports 
1600 
1400 
1200 
1000 
800 
600 
400 
200 SDR million (left scale) 
Months of imports (right scale) 
1989 1994 
Source: IMF. WT/BOP/W/8 
BOP/W/163 
Page 10 
(d) External Debt 
27. Following an increase during the late 1980s, foreign debt has remained fairly constant as a 
percentage of GDP. The debt-service ratio declined during recent years owing to a rapid growth in 
exports and favourable terms in the context of foreign aid backed loans (Chart 5). In 1994, total debt 
amounted to 75.2 per cent of GDP, while debt service was 11.6 per cent of total exports of goods 
and non-factor services (Annex B) 
* 
Chart 5 
Sri Lanka - External debt as a percentage of GDP and debt service as a 
percentage of exports of goods and services, 1989-94 
Percent 
1989 90 91 92 93 1994 
Source: IMF. WT/BOP/W/8 
BOP/W/163 
Page 11 
Annex A - Sri Lanka Balance of Payments, 1989-94 
(In millions of SDRs) 
Trade balance 
Exports 
Of which: Traditional 
Nontraditional 
Imports 
Of which: Petroleum 
Services, net 
Receipts 
Of which: Travel 
Payments 
Of which: Interest 
Private transfers, net 
Current account (excl. 
official transfers) 
Official transfers, net 
Current account 
Capital account 
Medium - & long-term net 
Disbursements 
Government 
Private2 
Amortization 
Government 
i Private2J 
Direct investment, net4 
Government short-term, net 
Private short-term, net5 
Errors and omissions 
Overall balance 
Monetary movements 
Gross official reserves 
Use of Fund credit 
Central Bank borrowing, net 
Commercial banks, net 1 ! m \ ' • 
- 520.0 
1,217.0 
(426.0) 
(742.0) 
-1,737.0 
(182.2) 
-127.3 
303.9 
(59.3) 
-431.2 
(150.5) 
257.9 
-389.4 
146.7 
-242.7 
226.1 
153.1 
316.5 
301.6 
14.9 
177.3 
127.9 
49.4 
14.0 
-
73.0 
50.1 
-66.7 
-17.0 
20.9 
45.1 
17.7 ":"iWr 
-517.8 
1,456.1 
(472.0) 
(916.0) 
-1,973.9 
(264.0) 
-72.1 
365.8 
(94.0) 
-437.9 
(146.6) 
268.4 
-321.5 
129.8 
-191.7 
320.6 
272.9 
396.2 
372.3 
23.9 
154.0 
97.2 
56.8 
30.7 
-
47.7 
10.8 
139.7 
-82.0 
12.9 
-14.3 
-56.3 :':'/m -725.7 
1,490.6 
(408.6) 
(1,082.1) 
-2,216.3 
(277.7) 
-67.6 
440.9 
(115.6) 
-508.5 
(159.0) 
293.3 
-500.0 
148.6 
-351.4 
474.9 
417.1 
525.8 
463.4 
62.4 
178.3 
98.3 
80.0 
69.6 
22.7 
35.1 
29.5 
152.3 
-197.1 
-7.6 
1.5 
50.9 m ' 
-721.4 
1,747.6 
(348.9) 
(1,397.7) 
-2,469.0 
(225.6) 
-23.0 
489.3 
(138.5) 
-512.3 
(151.4) 
328.2 
^16.2 
130.2 
-286.0 
352.0 
307.2 
424.9 
311.4 
113.5 
220.6 
124.7 
95.9 
103.0 
-22.0 
66.8 
68.0 
133.0 
-178.6 
57.6 
-16.7 
4.7 ifcra 
-825.2 
2,046.3 
(382.3) 
(1,664.0) 
-2,871.5 
(221.3) 
31.3 
535.0 
(146.2) 
-503.7 
(141.3) 
401.6 
-392.3 
115.0 
-277.3 
611.1 
506.0 
550.8 
366.7 
184.2 
227.0 
143.8 
83.2 
182.1 
-
105.1 
40.8 
374.5 
-535.8 
37.9 
87.4 
36.0 .p1'1;1" 
-1,095.0 
2,235.5 
(399.5) 1 
(1,836.0) 
-3,330.5 
(207.0) 
12.6 
627.4 
(161.6) 
-614.8 
(161.1) 1 
437.6 
-644.8 
114.8 
-530.0 
676.8 I 
495.1 
513.8 
328.0 ! 
185.8 
149.2 
146.9 
2.3 
130.7 
-
181.7 
26.1 
172.9 
-171.8 
47.1 
3.9 
-52.1 
Memorandum items: 
' Gross official reserves at 
year end 
In months of current year 
imports 
Current account balance 
(excluding official transfers) 
Current account balance (including 
official transfers) 
Capital account 
Overall balance 
Debt service ratio 6 
Total debt6 223.6 
1.5 
-7.1 
-4.5 
4.1 
-1.2 
24.8 
72.3 305.6 
1.8 
-5.4 
-3.2 
5.4 
2.4 
18.8 
70.4 502.7 
2.7 681.3 
3.3 
In per cent of GDP 
-7.6 
-5.3 
7.2 
2.3 
21.2 
70.2 -6.1 
-4.2 
5.1 
2.0 
19.5 
74.6 1,217.1 
5.1 
-5.3 
-3.7 
8.3 
5.1 
12.9 
75.8 1.388.9 
5.0 
-7.9 
-6.5 
8.3 
2.1 
11.6 
75.2 
1 Preliminary estimates. 
2 Consists of public corporations and private companies. 
3 Includes progress payments for Air Lanka of SDR 40.7 million in 1991 and SDR 42.9 million in 1992. For 1993, progress payments 
of SDR 43 million are netted against the unfinanced value of 2 commercial airliners imported by Air Lanka. 
4 Includes portfolio investment and privatization proceeds. 
5 Consists of trade credits, short-term borrowings of public corporations and private companies, and liabilities to FCBUs. 
6 Total debt, including use of Fund credit, private sector debt, and short-term debt. Debt service ratio is expressed as a percent of exports 
of goods and nonfactor services. 
Source: IMF , based on data provided by the Sri Lanka authorities. 