EMBARGO: NOT FOR PUBLICATION BEFORE
1300 HOURS GMT 8NOVEMBER 1995
PRESS/TPRB/17
3November 1995
SRILANKA CONTINUES REFORMS BUT NEEDS
SUPPORT FROM ITSMAIN TRADING PARTNERS
Despite civilwarinpartsofthecountry, SriLanka 'seconomy hasresponded welltoeconomic
reforms since thelate1970s. Motivated especially bychanging theimport-substituting activities of
state-owned firms, thereforms wereinitially aimed atpromoting exports inmanufacturing, especially
textiles andclothing.
According toaWTO Secretariat report onSriLanka 'strade policies andpractices, reforms
havegradually shifted towards broader-based economic liberalization. During thepastdecade, market
opening tomanufactured imports hasbeenaccompanied byinternal deregulation andprivatization,
affecting alarge number ofstate-owned companies. Foreign direct investment iswelcomed andhas
played animportant rôleindeveloping theclothing andtourism industries. Equity shares ofupto40
percentaregenerally given automatic approval; investors receive national treatment. Newinitiatives
aimatexposing long-protected service sectors tocompetition andreducing andharmonizing tariff
protection.
ThepaceofSriLanka 'sreforms, however, hasvaried overtime, reflecting difficulties in
macroeconomic management andasevere balance ofpayments crisis inthelate1980s. According to
thereport, SriLanka 'stradebalance hasremained insubstantial deficit ingoods andservices combined,
amounting to$1.1billion oraround 10percent ofGDP in1993. However, stimulated bymore
favourable conditions foradjustment andgrowth, SriLanka 'seconomy expanded atanannual rate
ofalmost fivepercentbetween 1990 and1994.
Thereport states thattherecent WTO Agreements havesecured andarelikely towiden the
institutional framework forcontinued international market integration. While SriLanka hasbound all
tariffs onagricultural products, likeother WTO members, thescope oftariff bindings forindustrial
products issmall; theceiling ratesareatthesame levelasforagricultural products (50percent). Sri
Lanka'scommitmentsundertheGeneralAgreementonTradeinServices(GATS)arelimitedtotourism,
although market access conditions havealsobeenimproved forbanking andother service sectors.
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AmendmentsarenowunderwaytoaligndomesticlegislationwiththeWTOAgreementonTrade-Related
Aspects ofIntellectual Property Rights (TRIPs) andnewlawsarebeing considered toconform with
theWTO Agreements onSafeguards, Anti-Dumping andSubsidies andCountervailing Measures.
Thereport concludes thatgiven SriLanka 'scurrent export basket, itisessential thatcontinued
liberalization efforts besupported byopenandpredictable access conditions tothecountry 'slargeexport
markets outside theregion.
Notes toEditors
TheWTO Secretariat 'sreport, together withareport prepared bySriLanka willbediscussed
bytheWTO Trade Policy Review Body (TPRB) on7and8November 1995.
TheWTO Trade Policy Review Body conducts acollective evaluation ofthefullrange oftrade
policies andpractices ofeachWTO member atregular periodic intervals andmonitors significant trends
anddevelopments which mayhaveanimpact ontheglobal trading system.
Thetworeports,togetherwitharecordoftheTPRB'sdiscussionandoftheChairman'ssumming
up,willbepublished induecourse asthecomplete Trade Policy Review ofSriLanka andwillbe
available from theWTO Secretariat, Centre William, Rappard, 154ruedeLausanne, 1211 Geneva
21.
Thereports cover developments ofallaspects ofSriLanka 'stradepolicies, including domestic
lawsandregulations, theinstitutional framework, tradepractices bymeasure andbysector. Since the
WTO came intoforce, the"new areas" ofservices trade andthetrade-related aspects ofintellectual
property rights arealsocovered. Attached arethesummary observations from theSecretariat and
government reports. Fullreports willbeavailable forjournalists fromtheWTO Secretariat onrequest.
Since December 1989, thefollowing reports havebeencompleted: 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), Côted'Ivoire (1995),
Egypt (1992), theEuropean Communities (1991, 1993&1995), Finland (1992), Ghana (1992), Hong
Kong (1990 &1994), Hungary (1991), Iceland (1994), India(1993), Indonesia (1991 and1994), Israel
(1994), Japan (1990, 1992and1995), Kenya (1993), Korea, Rep.of(1992), Macau (1994), Malaysia
(1993),Mauritius(1995),Mexico(1993),Morocco(1989),NewZealand(1990),Nigeria(1991),Norway
(1991), Pakistan (1995), Peru(1994), thePhilippines (1993), Poland (1993), Romania (1992), Senegal
(1994), Singapore (1992), South Africa (1993), Sweden (1990 &1994), Switzerland (1991), Thailand
(1991),Tunisia(1994),Turkey(1994),theUnitedStates(1989,1992&1994),Uganda(1995),Uruguay
(1992) andZimbabwe (1994).
MOREPRESS/TPRB/17
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TRADE POLICY REVIEW BODY
SRILANKA
Report bytheSecretariat -Summary Observations
Untilthelate1970s, SriLanka 'seconomic development centred onimport-substituting activities
performed mainly byState-owned firms. Theresults were disappointing, andeconomic expansion
lagged significantly behind other countries intheregion. Encouraged bystrong export-driven growth
ineastandsouth-east Asian economies, economic andtrade reforms were initiated in1977. Their
initial focus wasonexport expansion inmanufacturing, particularly clothing, although emphasis has
shifted recently tobroader-based liberalization. Thepaceofchange hasvaried overtime, interalia,
because ofdifficulties inmacroeconomic management andasevere balance-of-payments crisis inthe
late1980s.
SriLanka 'seconomic ascent hasrelied heavily onlabour-intensive export industries, principally
clothing andgemfinishing, thattakeadvantage ofthecountry 'slow-cost, relatively welleducated labour
force aswellasgenerous tariffexemption schemes. While theinternal supply linksofthese industries
remain weak, ongoing economic liberalization andderegulation mayhelptopromote greater domestic
content.
Despite civilwarinpartsofthecountry, theeconomy hasresponded welltorecent reforms,
withrealGDPgrowth ofabout 5percent(1990-94), mounting foreign exchange reserves andincreasing
shortages ofcertain skills. However, SriLanka 'strade balance hasremained insubstantial deficit
ingoods andservices combined, amounting toUS$1.1 billion oraround 10percentofGDP in1993.
Remittances from SriLankans working overseas andgovernment-to-government grants cover more
thanhalfofthedeficit.
Formidable challenges remain. Persistent budget deficits tendtodrive uprealinterest rates
andhamper long-term private investment decisions. Fiscal retrenchment hasproved difficult inview
ofanarrow taxbase, thefiscal drain ofcivilwarand,more recently, substantial consumer subsidies
onsocially sensitive items, inparticular bread. Traditional public sector activities havebeencurbed
andrestructured; however, significant investment isneeded toupgrade thecountry 'sinfrastructure,
inparticulartransportandelectricity,andeasebottleneckstofurthereconomicexpansion.Avalue-added
tax,scheduled forintroduction inlate1995, maycontribute toreducing theshare ofthebudget deficit
inGDP.
SriLanka inWorld Trade
Traditionally, SriLanka 'smerchandise exports weredominated byteaandteaproducts, while
riceandother fooditems werethemain imports. Since thelate1970s, theteasector hasmaintained
itsshare inworld production andtrade, relying oncountries intheMiddle Eastastheprincipal outlet.
Theshare ofrice,themainfoodcrop, intotalimports hasdeclined asdomestic production hasexpanded.
Since 1980, theclothing industry hasemerged asthecountry 'smainexport earner. Substantial
foreign investments, including fromcountries facing quotas under theMultifibre Arrangement (MFA),
created astrong production baseandeased access tointernational marketing channels. Theascent
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oftheclothing industry isreflected inareorientation ofimports towards textile suppliers ineastand
south-east Asia, suchasHong Kong, Chinese Taipei andtheRepublic ofKorea. Clothing exports
haveexpanded rapidly, while nowalsosubject toquotas oncertain items inmain markets, including
theUnited States andtheEuropean Union. Atpresent, theshare ofclothing inmerchandise exports
isclose to50percent, withalmost twothirds destined fortheUnited States.
Semi-precious stones contribute some 10percentofmerchandise exports; shipments of
processed gems haveexpanded particularly rapidly since 1990. Despite specific incentives forthe
electronics industry, itsshare inproduction andexports hasremained limited.
Mirroring developments inmanufacturing, services sector growth initially relied onareas
contributing directly toforeign exchange earnings, suchastrans-shipment andtourism. While the
tourist sector hassuffered fromuncertainties related tothecivilwar,arrivals recently picked upagain
toreach 400,000 in1994. Although nodetailed dataareavailable, thegeographical distribution of
bothimports andexports ofservices appears dominated bytrading partners outside theregion.
Legal andInstitutional Framework
SriLanka'spresentConstitution,promulgatedin1978,providesforastrongexecutivePresident
whoiselected forasix-year term. Thecurrent President holds several portfolios, including those
ofFinance, Planning andDefence.
Policy competence inmaintrade-related areaslieswiththeMinister ofFinance andtheMinister
ofInternal andExternal Trade, Commerce andFood. While theMinister ofFinance isincharge of
revenue-related aspects, including tariffs, surcharges, subsidies andgovernment procurement,
responsibilities oftheMinister ofTrade include theadministration ofimport andexport licensing and
intellectual property legislation. TheBoard ofInvestment (BOI), under theMinister ofFinance, is
mandated toapprove, administer andfacilitate inward foreign investment.
Since thelate1970s, three Presidential Tariff Commissions havetabled reports ontheimpact
ofalternative tradepolicy options, preparing theground, inside andoutside Government, forsubsequent
liberalization initiatives.
Trade Policy Features andTrends
International obligations
SriLanka hasbeenacontracting party totheGeneral Agreement onTariffs andTrade (GATT)
since 1948. Itratified theMarrakesh Agreement inJune1994 tobecome afounding member ofthe
World Trade Organization (WTO).
Likeother WTO Members, SriLanka hasbound alltariffs onagricultural products. Although
wellabove applied rates, thebound rates-50percent-mayconstrain theuseofsurcharges during
harvest seasons. Thescope oftariff bindings intheindustrial sphere hasremained small, withthe
same ceiling ratesasinagriculture. SriLanka 'scommitments under theGeneral Agreement onTrade
inServices (GATS) arelimited totourism, although access conditions have, inpractice, alsobeen
improved inother areas suchasbanking. Amendments areinpreparation toaligndomestic legislation
withtheWTO Agreement onTrade-Related Aspects ofIntellectual Property Rights (TRIPS).
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SriLanka 'sinvolvement inregional tradeagreements islimited. Itisasignatory totheBangkok
Agreement andparticipates intheSouth Asian Preferential Trade Area(SAPTA), which istobecome
effective fromNovember 1995. Thescope ofthesearrangements isconfined mainly todutyreductions
andexemptions onarelatively small range ofitems; services arenotcovered. Consequently, Sri
Lanka hasnotnotified m.f.n. exemptions under Article IIoftheGATS.
Type andincidence oftrade policy instruments
Pastliberalizationinitiativeshavereinforcedtherôleoftariffsasthecentralinstrumentregulating
SriLanka 'smerchandise trade. Inturn,thetariffrégime hasbecome lessdistortive during subsequent
rounds ofreform. Itcurrently relies onathree-pronged structure withratesof10,20and35percent;
theunweighted average isintheorder of20percent. Following thetariffication ofmostquantitative
restrictions,apartfromsomeremainingmeasuresmaintainedforbalance-of-paymentsreasons,remaining
controls andlicensing requirements aremotivated mainly byhealth, safety andsecurity concerns.
Licences areissued onlytoSriLankan nationals orcompanies majority owned bythem.
Although tariff escalation hasbeenreduced overtime, itisstillconsiderable. Effective rates
ofprotection currently exceed 100percentinareas suchaspaper andmetal products. While further
tariffreductionandharmonizationwouldhelptoreduceeconomicdistortions-theGovernmentenvisages
introducing auniform tariffof15percentinthemedium term-fiscal constraints maybeanimpediment.
Revenue considerations havealready ledtotheintroduction, andsubsequent increase, ofadefence
levyonallimports destined fordomestic consumption; thecurrent rateis4.5percent. Inaddition,
suchimports aresubject toa2percentstamp dutyoncompulsory letters ofcredit.
Withaviewtoinsulating exporters fromthedirect costofimport protection, various schemes
areusedtoprovide access totraded inputs atclose toworld market prices. While export-processing
zones were initially setupinspecific geographic areas, thewhole country wasdeclared anexport-
processing zonein1992. Although thismayhaveencouraged export production inrural areas, in
linewithoriginal intentions, itmayalsohavefacilitated leakages ofduty-free imports intothedomestic
economy asmovement ofsupplies foreligible companies isdifficult tomonitor. Inaddition, while
promoting exports, suchimports mayhavehampered theemergence ofintermediate industries and,
thus, ofabroader industrial base.
Exports ofarange ofnatural-resource-based products, aswellascertain steelitems, aresubject
toroyalties, duties andcesses. These aregenerally applied atmoderate levels. Thefunds aredestined
foreither thegeneral budget orexport promotion activities, including start-up subsidies fornew
exporters. SriLankan exports ofcertain textile andclothing items totheUnited States andofcoconut
products toBrazil havebeensubject tocountervailing dutyactions.
Gradual import liberalization, andtheensuing adjustment pressures, mayhaveencouraged
requests fortemporary protection through import surcharges. Applications aredecided bytheMinister
ofFinance, whohasconsiderable scope fordiscretion. Noinjury testisrequired. There were 17
cases in1994, covering arange ofproducts from onions torazor blades andbicycles; however, all
measures havenowexpired. Theauthorities areconsidering newlegislation toconform withtheWTO
Agreements onSafeguards, Anti-dumping, andSubsidies andCountervailing Measures.
Since the1970s, foreign direct investment inexport-oriented activities hasbeenwelcomed.
Such investment played aparticularly important rôleinthedevelopment oftheclothing andtourist
industries. Commitments uptoanequity share of40percentaregenerally given automatic approval,
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andinvestors receive national treatment. Larger commitments areexamined case-by-case. Structural
deficiencies intheinsurance sector andtheGovernment 'spreferential claim oncertain funds, reflecting
fiscal straits, appear tohavedelayed liberalization inthisarea. Partial reforms, allowing forminority
foreign shareholdings, are,however, under consideration.
Sectoral policy patterns
SriLanka 'splantation-based teasector co-exists withsignificant levels ofsubsistence farming,
predominantly ofrice. Large-scale public investments inirrigation facilities benefited ricegrowers
during the1980s, andhavecontributed toSriLanka 'shighlevelofself-sufficiency. Today, emphasis
isbeingplacedoncultivationofhighvalue-addedcropsandrelatedprocessingactivities.Market-oriented
seedimprovement schemes, special credit facilities andtheprivatization ofplantation management
aremajor initiatives inthiscontext. However, forsocial andregional policy reasons, ricefarming
islikely toattract strong continued policy attention.
External liberalization inmanufacturing hasbeenaccompanied byinternal deregulation and
privatization, affecting alarge number ofState-owned companies. Exceptions arelimited mainly to
"security-sensitive" areassuchaspetroleum andgasproduction. Thedeclining share ofpublicly-owned
enterprises inmanufacturing value added -from almost 60percentin1981 tolessthan15percent
in1991-maybeattributable bothtotheseinitiatives andtostrong growth intheprivate sector, especially
inclothing.
Access toanumber ofservices sectors, including telecommunications andbanking, has
gradually beenderegulated. While SriLanka Telecom (SLT) continues tooperate astheexclusive
provider ofbasic voice services, linked toitsnetwork monopoly, activities suchasmobile telephony
anddatatransmission areopen tocompetition. Efforts areunderway toreinininternal cross-
subsidization within SLTandfurther rationalize itstariff structure. Continued liberalization may
encouragethedevelopmentofoutward-orientedservices,underpinthecompetitivenessofuserindustries
andreinforce theirinternal supply links.
Trade Policies andTrading Partners
SriLanka 'seconomic reforms werelaunched inresponse towidespread public dissatisfaction
withpoorindustrial performance andrampant rent-seeking within adistorted incentive system. While
there havebeensome slippages overtime, strong growth inrecent years hashelped tobroaden the
internal political support forchange. Ontheexternal front, theWTO Agreements havesecured and
widened theinstitutional framework forinternational market integration. Thesigns arethuspositive
fornewinitiatives aimed atexposing long-protected services sectors tocompetition, further reducing
andharmonizing tariffprotection, rationalizing dutydrawback andexemption schemes anddeveloping
alternative, lessdistortive sources ofgovernment revenue. Given SriLanka 'scurrent export basket,
itisessential thatsuchefforts besupported byliberal andpredictable access conditions tolargeexport
markets outside theregion.
END