Lanka, an effective entry point for Asian markets

The National Chamber of Exporters of Sri Lanka (NCE), the only Chamber exclusively serving Sri Lankan exporters, in a media release commended the approach of the government in balancing its foreign policy and economic policy with other nations in a non-partisan manner for the overall benefit of the country.

Excerpts from the release.

It is mutually beneficial to facilitate easy access to neighbouring markets through FTAs with special consideration to the small economy. But in the past may be due to lack of political will, prevented freer movement of goods from Sri Lanka to partner countries, frustrating exporters.

Repeated market entry hurdles faced by exporters compelled them to keep away from the easy neighbouring markets and move to markets far away. With the new bilateral talks, there is a window of opportunity to push for the FTA to positively change trade statistics and win back the exporter community.

Sri Lanka's economic objectives are to increase trade ties with South Asia's dominant economic powers, induce transformation of Sri Lankan exports from low value goods to high value-added goods aimed at niche markets, and also to benefit consumers with lower cost of living by strengthening the welfare effect of FTAs.

Sri Lanka is also expected to attract Foreign Direct Investments (FDI) from third countries, by promoting herself as an effective entry point to access the large Indian and Pakistan markets.

Powerful

India and Pakistan could invest in Sri Lanka and export to western markets exploiting favourable conditions in those markets.

At the AGM of the NCE recently, Ambassador for Norway in Sri Lanka, Grete Lochen said that consumers in Europe are becoming much more conscious about labour and environmental standards, and their voice is more powerful than ever before.

She added that many Sri Lankan companies have a good record on this front, compared to many others in Asia, and this certainly becomes a competitive advantage to focus on, if Sri Lanka wished to pivot back to European markets.

However, achieving SFTA and PSFTA over the past decade have not been up to expectations.

In this background it is necessary to objectively look at the trade performance of Sri Lanka in the two largest Asian markets (and in the world) viz China and India.

Imports

In the case of India, exports from Sri Lanka, where over 80 percent of the products have duty free access under the ISFTA, increased steadily upto 2005 in absolute terms, and, thereafter, showed declining trend upto 2010.

Thereafter, although recording marginal gains upto 2013 the value of exports is yet to reach the level achieved in 2005, 13 years after ISFTA.

On the other hand imports from India grew substantially upto 2011, and have declined marginally thereafter.

Nevertheless, the balance of trade has remained excessively in favour of India to date. (US$ 2,525 million as at end of 2013).

Fifty percent of exports to India during the growth period up to 2005 arose out of Indian investments in Sri Lanka for the production of Vanaspati (hydrogenated vegetable oil) and refined copper.

These investments, as is well known, did more damage to the Sri Lankan economy in terms of environmental and labour issues, as opposed to the benefits derived from re-exports to India.

They were later wound-up, due to the strong domestic lobby of the Indian industry opposing duty free imports. The other contributory factor has been the many unknown Non-Tariff barriers (NTB) encountered by Sri Lankan exporters in India. Many of these remain in place to date.

Skewed

Some economists argue that the trade balance cannot be positive with all trade partners and depends on trading conditions.

However, the fact remains that the trading pattern in respect of Sri Lanka's largest Asian partners remains heavily skewed in their favour.

In the case of India, available literature indicates the concerns of the India regarding the negative trade balance with South Korea related to the FTA with that country.

The question, therefore, remains whether the same principle should not apply to a smaller trading partner such as Sri Lanka.

The Institute for Social and Economic change of the Centre for Economic Studies and Policy of India recently carried out a research study in Sri Lanka on NTB's encountered by exporters in Sri Lanka and India.

According to the findings of this study (which is still in the discussion stage) it is surmised that the number and nature of NTB's encountered by Sri Lankan exporters, in respect of identified specific sectors, is more than those encountered by their Indian counterparts.

Raw materials

In the case of the Chinese market too, the balance of trade remains heavily in favour of China, with exports from Sri Lanka to China negligible in comparison to imports from China to Sri Lanka. (Trade balance in favour of China at the end of 2013 was US$ 2,838 million).

A major portion of exports from Sri Lanka were raw materials (coir fibre) and not finished products.

The above perceptions regarding the Indian market was the determining factor among a vociferous section of Sri Lankan entrepreneurs who resisted the proposed Comprehensive Economic Partnership Agreement (CEPA) with India.

However, according to a recent news report, the Indian Prime Minister Narendra Modi has apparently focused his attention on the negative trade balance of Sri Lanka during discussions with the President Sirisena.

At a time when India and Sri Lanka are focusing on rebuilding strong political and economic ties between the two countries, it is most opportune to correct the deficiencies and misconceptions, related to trade between the two countries.

In this context and related to the discussions to strengthen the economic and trade relationship between India and Sri Lanka, concerns have been expressed in certain quarters in Sri Lanka, based on a perception, that India is keen to negotiate the following with Sri Lankan authorities.

a) Agree on the implementation of the CEPA.

b) Promote Indian investments in Sri Lanka to supply the Sri Lankan market relating to the following sectors -

• Pharmaceuticals

• Electric and electronic products

• Rubber, plastic and related chemical products

c) Set up an exclusive industrial zone for Indian investors.

1. The NCE as a responsible Chamber calls upon the Government to insist that officials to be mindful of the following during negotiations with Indian counterparts and ensure the correction of existing issues related to the ISFTA.

2. Consult the Sri Lankan stakeholders adequately on specific aspects of the proposed CEPA before entering into an agreement.

3. Do not permit foreign investments to produce for the domestic market except under exceptional and justifiable circumstances, to protect domestic enterprises especially in the SME sector, but permit investments only for re-export.

4. Prevent the setting up of an exclusive zone in respect of any single country. However, where necessary investment zones for a particular sector for example, the pharmaceutical sector may be allowed, provided it is open to investors from other countries as well.

This approach will ensure healthy competition and prevent bias to particular trading partners, in keeping with balanced foreign policy, and trade relationships with all countries.

In regard to the pharmaceutical sector, the policy announcement of the government to do away with brand names for drugs and adopt generic names, is commendable from the consumer's point of view, to overcome the many irregularities that prevail in the sector and to reduce the cost of drugs.

It is also proposed to encourage the local production of pharmaceuticals. It may be desirable to permit select investments to produce for the domestic market, in the form of joint ventures with local partners on the condition of transfer of the related technology to the local counterparts within an agreed period and specifically aimed at import substitution of the relevant pharmaceutical products.

In regard to investments for the production of chemical products such as dye, it is important to be mindful of environmental issues, arising out of the discharge of effluents, by ensuring preventive measures, in the terms of approval of investments.