RESTRICTED 
WORLD TRADE WT/BOP/S 
BOP/326 
ORGANIZATION 3i <***« 1995 
(95-3363) 
Committee on Balance-of-Payments Restrictions 
CONSULTATION WITH SRI LANKA UNDER ARTICLE XVIII: 12 (b) 
OF THE GATT 1994 AND THE RELATED UNDERSTANDING 
Basic Document supplied by Sri Lanka 
Introduction 
1. Sri Lanka has continued with liberalized market friendly trade policies since 1977 and significant 
progress has been made towards a competitive trading environment, especially during the past few 
years. Reducing quantitative restrictions on both imports and exports, rationalizing and simplifying 
the tariff structure to a three band system, eliminating state monopoly on economic activities, shifting 
towards a flexibly managed exchange rates system, relaxation of exchange control regulations, finally 
removing all restrictions on payments for current account transactions and eventually accepting 
Article VIII status of the IMF Articles of Agreement were among the major achievements recorded 
in the continued process of trade liberalization. 
Legal and Administrative Basis of the Trade Régime 
2. The present legal basis for the control of imports and exports lies in the Imports and Exports 
(Control) Act No. 1 of 1969, as amended by the Amendment Act No. 48 of 1945 and No. 28 of 1987. 
Under this Act, the Government has the power to prohibit or restrict the importation of any goods 
and prescribe any conditions relating to imports and exports. 
3. The imports control policy is formulated by the Ministry of Trade, Commerce and Food in 
consultation with the Ministry of Finance and Planning and is subject to the approval of the Cabinet. 
The Minister of Trade, Commerce and Food is empowered under the Act to formulate and issue 
regulations in conformity with the objectives and purposes of the Act. The responsibility of administering 
the regulations rests with the Department of Imports and Exports Control (DOIEC). 
4. With the liberalization of imports in 1977, the "Special Import Licence No. 1 of 1977" was 
published setting out, in a schedule thereto, all the items that could not be imported without a specific 
licence from the DOIEC. Over the years, some of those items were removed from Licence Control 
while some other items were brought under Licence Control, and this was done by the publication 
or amendment of a Gazette on each occasion. 
5. The Export Regulations published in Government Gazette No. 33/24 of 27 April 1979 have 
been amended from time to time. At present, the export of four items, viz; (a) coral chanks and shells, 
(b) timber (c) ivory and ivory products and (d) passenger motor vehicles first registered in Sri Lanka 
prior to 1 January 1945, only requires Export Licences issued by the DOIEC. 
6. Presently, of a total of around 6,000 tariff lines under the HS classification of imports, 280 
items are under import licensing requirements only for the reasons of security, health, environment WT/BOP/8 
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and public morals and balance of payments. (An updated list of items that could not be imported without 
a specific licence from this control is given in Annex III in the TPRM Country Report WT/TPR/G/6). 
7. The controller of Imports and Exports can refuse granting a licence to any applicant without 
adducing reasons. The applicant has the right to appeal to the Minister of Trade, Commerce and Food 
against the Controller's decision. 
Tariff Reforms 
8. For many years import duties had been used both - as a source of government revenue and 
a means of influencing the speed and direction of economic growth by protecting selected local industries. 
However, in line with the objective of promoting trade liberalization, the tariff structure was modified 
from time to time by a Presidential Tariff Commission which was established for the purpose. 
9. A major step in rationalization of the tariff was taken in 1985 when the maximum nominal 
rate was reduced from 100 to 60 per cent. Subsequently, the Tariff Commission recommended a four 
band tariff structure with rates of 50, 35, 20 and 10 per cent which was implemented in the budget 
for 1992. A further tariff change was introduced in 1993 when the maximum nominal tariff was reduced 
to 45 per cent with accompanying liberalization of items under import control. These rates have been 
further reduced by the 1995 budget by introducing a three band tariff system 35,20 and 10 per cent 
from February, 1995, with the ultimate objective of moving to a lower uniform single tariff by 1997. 
10. The overall objective of reduction of import duties was to improve economic activities to generate 
more employment and make industries more competitive. Sri Lanka is now working towards a lower 
uniform import duty rate in the near future, incorporating three band tariff now in operation. However, 
high import duties will continue to be applied on liquor, tobacco, passenger cars and certain luxury 
goods for revenue and social reasons. 
Balance of Payments Situation and Level of Monetary Reserves 
11. The overall surplus in the balance of payments in 1994 in Sri Lanka declined sharply due to 
a variety of reasons such as high demand for imports, deterioration in the terms of trade and reduced 
inflow of foreign capital. Under the impact of increased expenditure on imports by 16 per cent and 
a deterioration in the terms of trade by 4.7 per cent, the trade deficit widened from SDR 825 million 
in 1993 to SDR 1095 million in 1994. The surplus in the services account too declined from 
SDR 28 million in 1993 to SDR 12 million in 1994 owing to large outflows on account of travel and 
repatriation of profits and dividends, prompted by lower interest rate differentials between Sri Lanka 
and international markets, and political uncertainty during the year. Meanwhile, private transfers grew 
at a slower pace of 10 per cent in 1994 in comparison to a growth of 17 per cent in the previous year. 
Accordingly, the current account deficit (excluding official transfers) widened by SDR 250 million 
to SDR 646 million in 1994 raising the current account deficit/GDP ratio from 5.3 per cent in 1993 
to 7.9 per cent in 1994. 
12. In the meantime, capital account inflows showed a notable moderation in 1994. However, 
there was a decline in portfolio investments and direct foreign investment from SDR 182 million in 
1993 to SDR 131 million in 1994. Similarly, capital inflows to the government too declined from 
SDR 334 million in 1993 to SDR 283 million in 1994. On the contrary, net private short and long 
term loan capital inflows increased considerably from SDR 240 million in 1993 to SDR 398 million 
in 1994 raising the country's external debt. The combined impact of all transactions in the capital 
account was moderate increase in the non-monetary capital from SDR 612 million to SDR 674 million WT/BOP/8 
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between the two years. Consequently, the balance of payments recorded an overall surplus of 
SDR 173 million in 1994 compared to SDR 375 million in 1993. Following these developments, Sri 
Lanka's gross external assets rose from SDR 1,544 million at the end of 1993 to SDR 1,792 million 
at the end of 1994. 
13. Although Sri Lanka's external assets rose by 16 per cent in 1994, the overall developments 
in the balance of payments front clearly underscored the adverse impact of sustained high demand 
pressure on the balance of payments and hence warrant prudence and caution. 
14. Sri Lanka, in the meantime, accepted the obligations under the Article VIII of the Articles 
of Agreement of the IMF in March 1994 removing all restrictions on current account transactions and 
allowing free convertibility of Sri Lanka Rupee. This was a major step forward under the ongoing 
liberalization programme of the country. 
15. The details with regard to balance of payments and external assets in Sri Lanka during the 
recent past are presented in tables I and II respectively in Annex A. 
16. It could be observed from Table I of Annex A that the widening gap between exports and imports 
has been offset by a substantial inflow of remittances by Sri Lankans employed abroad and capital 
inflows such as foreign grants, foreign loans, foreign direct investments and portfolio investments. 
These developments in the balance of payments turned the overall balance into a surplus. However, 
this situation does not represent a strong balance of payments position as they are either contingency 
liabilities or they may flow outward as easily as they did inward. Relying on a balance of payments 
surplus on the basis of capital transfers of this nature may prove a destabilizing factor in our economy. 
In fact, the latest indications suggest that sharp decline in the overall balance from SDR 375 million 
in 1993 to SDR 173 million in 1994 would continue and hence the overall balance could turn into a 
deficit in the future. 
Balance of Payments Prospects and Expected Movements in Reserves 
17. The balance of payments during the first eight months of 1995 indicated an overall deficit of 
SDR 42 million. Exports grew by 12.5 per cent as compared with 11.2 per cent in the corresponding 
period of the previous year while imports increased by 7.8 per cent as compared with 7.6 per cent 
in the corresponding period of the previous year. The gross external assets at the end of August 1995 
were sufficient to finance 5.5 months of imports proj ected for 1995 while the import capacity of external 
assets were at 6.2 months as at the end August 1994. The current indications are that the overall balance 
of payment would be in deficit for the year as a whole. 
External Debt 
18. The external debt of Sri Lanka at the end of 1994 was estimated at SDR 6,089 million recording 
an increase of SDR 504 million from end 1993 to end 1994. This increase largely reflected the increase 
in lending to the private sector. Medium and long-term loans of the Government which accounted 
for 69 per cent of outstanding loans as at end 1994, increased by SDR 69 million mainly on account 
of concessional assistance extended by Japan, the ADB and the IDA. In 1994, Sri Lanka also received 
the first tranche under the third year programme of the Enhanced Structural Adjustment Facility 
arrangement with the IMF amounting to SDR 56 million. With a repayment of SDR 9 million in respect 
of a loan taken earlier under the Structural Adjustment Facility, the outstanding debt to the IMF increased 
by SDR 47 million to SDR 423 million at the end of 1994. WT/BOP/8 
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19. Debt service payments, which included amortization of medium and long-term loans and interest 
payments on all foreign loans increased by SDR 15 million or 4 per cent to SDR 372 million in 1994. 
With earnings from the export of goods and services increasing at a faster rate than the debt service 
payments during the year, the debt service ratio decreased from 13.8 per cent in 1993 to 13.0 per cent 
in 1994. 
20. The details with regard to external debt and debt service payments are given in the Table III 
and IV respectively in the Annex B. 
Reasons for Continuation of Licensing Restrictions on BOP Consideration 
21. The present overall surplus in the BOP is mainly due to the following reasons: 
(a) Private remittances by Sri Lanka's overseas. 
(b) Foreign investments of both direct and portfolio. 
(c) Foreign capital inflows in the form of foreign aid, grants etc. 
22. Despite the above, the merchandise account nevertheless has continued to be in deficit right 
throughout with the gap between the value of imports and exports continuing to widen year after year 
reaching an all time high of SDR 1,095 million in 1994. (Please see Annex A, Table I). 
23. The ongoing war in the country and the heavy expenditure involved towards meeting the cost 
of war has been a heavy burden on the economy over the years. According to the latest estimates, 
Sri Lanka's defence expenditure would increase to SDR 402 million in 1995 representing 9 per cent 
of GDP which is 1.5 per cent higher than the original estimate. The recent tragedy in the oil storage 
facility with an estimated loss of around SDR 20 million has aggravated this situation. Under the 
circumstances, Sri Lanka has to utilize its foreign reserves or to depend heavily on foreign assistance 
which would further deteriorate the balance-of-payments position. 
24. The rational for maintaining import licensing on potatoes, chilies and onions by the Government 
is primarily to protect a large number of farmers who are scattered around the Island. These farmers 
who are a very vulnerable segment of the population would find it extremely difficult to survive if 
import restrictions were to be removed in the face of cheap/subsidized imports from the neighbouring 
countries. For instance, in the case of chilies, due to the fact that such an item could be stored for 
long periods extending even up to two years, if free imports were allowed, it would result in the complete 
ruination of the local chilie industry. Accordingly, until such time local farmers develop improved 
farming techniques technology etc. and become competitive, it would be necessary that they be provided 
with an assured income for their economic well being. 
25. If not for the ongoing war situation in the North and the East, it would have been possible 
for Sri Lankan farmers to cultivate these crops in a competitive manner without protection from import 
licensing. 
26. The reason for maintaining licensing requirements for import of other items i.e. wheat and 
meslin and wheat and meslin flour is simply to protect contractual obligations between the Sri Lanka 
Government and the Prima Flour Mill. This agreement was signed in 1977 and will expire in 2005. WT/BOP/8 
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General Policy in the use of Restrictions for BOP Reasons 
27. Sri Lanka will use restrictions fro BOP reasons until the BOP position becomes strong. It 
has no intention of continuing licences for import of these items any longer. However, the present 
unsettled condition prevailing in the country does not warrant immediate removal of licensing for 
potatoes, onions and chilies. Consequent on a political settlement to the present crisis in the North 
and East licensing requirements for potatoes, onions and chillies could be removed. A variable rate 
of duty (higher rate during the seasons) giving a reasonable protection to the peasants would be imposed 
on these items with the removal of the licensing. 
28. Licensing requirements for import of wheat and meslin and wheat flour and meslin flour will 
be removed no sooner the agreement between prima Flour Mills and the Government of Sri Lanka 
is expired. WT/BOP/8 
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Annex A 
Table I - Balance of Payments 
(SDR million) 
1. Merchandise 
Exports 
Imports 
2. Services » 
Receipts 
Payments 
3. Goods & Services ( 1+2) 
4. Transfers (net) 
Private (net) 
Official (net) 
5. Current Account (3+4) 
6. Non Monetary capital (net) 
Direct investment 
Portfolio investment 
Private long term (net) 
Private short term (net) 
Govt, long term (net) 
Inflows 
Outflows 
Govt, short term 
7. Errors and omission 
8. Overall balance 1990 
-518 
1,456 
1,974 
-72 
391 
463 
-590 
398 
268 
130 
-192 
345 
24 
7 
-33 
48 
299 
392 
93 
-
-14 
138 1991 
-726 
1,491 
2,217 
-65 
440 
505 
-791 
441 
293 
148 
-350 
475 
46 
24 
-18 
35 
366 
463 
97 
23 
28 
152 1992 
-740 
1,745 
2,485 
-23 
489 
513 
-763 
457 
328 
130 
-306 
381 
86 
18 
18 
91 
189 
313 
124 
-22 
59 
133 1993 
-825 
2,046 
2,871 
28 
535 
507 
-797 
517 
402 
115 
-281 
612 
134 
48 
135 
105 
190 
334 
144 
-
44 
375 1994 
-1,095 
2,236 
3,331 
12 
627 
615 
-1,083 
552 
438 
115 
-531 
674 
111 
20 
216 
182 
146 
283 
137 
-
29 
173 
Source: Central Bank of Sri Lanka Annual Report 1994. 
Table II 
External assets of Sri Lanka 
(SDR million) 
1. Government 
2. Central Bank 
3. Commercial Banks 
4. Total 
5. Gross external assets in 
months of : 
(a) Merchandise imports 
(b) Import of goods 
services and 1990 
19.3 
286.3 
296.4 
602.0 
3.7 
3.0 1991 
26.7 
475.9 
306.2 
808.8 
4.4 
3.6 1992 
23.4 
657.9 
365.7 
1,047.0 
5.5 
4.2 1993 
23.4 
1,193.7 
326.4 
1,543.5 
6.5 
5.5 1994 
15.6 
1,373.3 
403.3 
1,792.2 
6.5 
5.5 
Source: Central Bank of Sri Lanka Annual Report 1994 WT/BOP/8 
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Annex B 
Table III 
External Debt 
(SDR Million) 
1. Medium & long-term debt 
1 1.1 Government 
1.2 Public Corps, with 
Govt. 
1.3 Private sector with 
! Govt guarantee 
1.4 Public Corp. without 
Govt, guarantee 
1.5 Pte.sector without 
Govt, guarantee 
1.6 IMF drawings 
2. Short term debt 
Total (1+2) 1990 
3,822.4 
3,184.4 
136.0 
108.0 
5.0 
101.0 
288.0 
294.0 
4,116.4 1991 
4,246.0 
3,589.0 
141.0 
120.0 
3.0 
113.0 
280.0 
350.0 
4,596.0 1992 
4,624.3 
3,840.8 
175.6 
129.0 
2.4 
138.7 
337.8 
420.6 
5,044.9 1993 
5,059.8 
4,122.7 
246.4 
144.0 
1.4 
169.6 
375.7 
525.7 
5,585.5 1994 
5,381.8 
4,192.0 
398.3 
156.5 
0.4 
211.9 
422.8 
707.4 
6,089.2 
Source: Central Bank of Sri Lanka Annual Report 1994. 
Table IV 
Debt Service Payments 
(SDR million) 
1. Debt Service Payments 
1.1 Amortization 
To IMF 
Toothers 
1.2 Interest payments 
To IMF 
To others 
2. Earnings from merchandise 
exports & services 
3. Receipts from merchandise 
exports, Services & Private 
transfers 
4. Debt Service Ratios 
As percent of 2 above 
As percent of 3 above 1990 
328.6 
182.0 
31.8 
150.2 
146.6 
20.6 
126.0 
1,847.0 
2,143.0 
17.8 
15.3 1991 
356.3 
200.5 
63.6 
136.9 
155.8 
14.7 
141.1 
1,930.7 
2,253.7 
18.5 
15.8 1992 
382.3 
231.0 
54.4 
176.6 
151.3 
7.8 
143.5 
2,233.7 
2,622.6 
17.1 
14.6 1993 
357.5 
213.2 
18.1 
195.1 
144.3 
5.4 
138.9 
2,581.3 
3,034.9 
13.8 
11.8 1994 
372.4 
211.0 
8.9 
202.1 
161.4 
4.9 
156.5 
2,862.4 
3,361.3 
13.0 
11.1 
Source: Central Bank of Sri Lanka Annual Report 1994. 