RESTRICTED
WORLD TRADE WT/TPR/S/6
13October 1995
ORGANIZATION(95-3008)
TRADE POLICY REVIEW
SRILANKA
Report bytheSecretariat
Thisreport, prepared forthefirstTrade Policy Review ofSriLanka, hasbeendrawn
upbytheWTO Secretariat onitsownresponsibility. TheSecretariat has,asrequired
bytheAgreement establishing theTrade Policy Review Mechanism (Annex 3ofthe
MarrakeshAgreementEstablishingtheWorldTradeOrganization),soughtclarification
from theGovernment ofSriLanka onitstrade policies andpractices.
Document WT/TPR/G/6 contains thepolicy statement submitted bytheGovernment
ofSriLanka.
Note: Thisreport issubject torestricted circulation andpress embargo untiltheendofthemeeting
oftheTrade Policy Review Body onSriLanka.SriLanka WT/TPR/S/6
Page iii
CONTENTS
Page
SUMMARY OBSERVATIONS
(1) Economic Environment xi
(2) SriLanka inWorld Trade xi
(3) Legal andInstitutional Framework xii
(4) Trade Policy Features andTrends xii
(i) International obligations xii
(ii) Type andincidence oftrade policy instruments xii
(iii) Sectoral policy patterns xiii
(5) Trade Policies andTrading Partners xiv
I. THE ECONOMIC ENVIRONMENT 1
(1) Main Features 1
(2) Macroeconomic Policies andPerformance 4
(i) Fiscal policies 6
(ii) Monetary andexchange ratepolicies 7
(iii) External accounts 9
(3) Composition andDirection ofTrade 10
(i) Merchandise trade 10
(ii) Trade inservices 12
(4) Outlook 12
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 14
(1) General Institutional Framework 14
(2) Structure ofTrade Policy Formulation andImplementation 15
(i) Government institutions andstatutory bodies 15
(ii) Advisory andreview activities 17
(3) Trade Policy Objectives 18
(4) Trade Laws andRegulations 19WT/TPR/S/6
Page ivTrade Policy Review
Page
(5) Trade Agreements andArrangements 21
(i) World Trade Organization 21
(ii) Preferential trade agreements 22
(iii) Generalized System ofPreferences 23
(iv) Other agreements andarrangements 24
III. FOREIGN DIRECT INVESTMENT AND TRADE 25
(1) Investment Policies 25
(2) Legal Framework andProcedures 26
(i) Investment approval 26
(ii) Incentives forforeign investors 28
(3) Investment Patterns andTrends 30
(i) Investment bysector 30
(ii) Geographical origin ofprivate investment 32
IV. TRADE POLICIES AND PRACTICES BYMEASURE 33
(1) Overview 33
(2) Measures Directly Affecting Imports 33
(i) Registration andcertification requirements 34
(ii) Tariffs 35
(iii) Import-related levies andcharges 40
(iv) Import controls, prohibitions andlicensing requirements 41
(v) Trade sanctions 42
(vi) State trading 42
(vii) Countertrade 43
(viii) Standards andother technical requirements 43
(ix) Government procurement 44
(x) Emergency trade measures 45
(xi) Balance-of-payments measures 46
(xii) Local content requirements 46
(3) Measures Directly Affecting Exports 46
(i) Export taxes, charges andlevies 46
(ii) Minimum prices 47
(iii) Export controls, prohibitions andlicensing requirements 47
(iv) Export quotas 48
(v) Voluntary restraints, surveillance andsimilar measures 48
(vi) State trading 48
(vii) Export subsidies 48
(viii) Export-processing zones 49
(ix) Taxanddutyconcessions 49SriLanka WT/TPR/S/6
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Page
(x) Export finance andinsurance 51
(xi) Export promotion andmarketing assistance 52
(xii) Export performance requirements 53
(xiii) Measures maintained byimporting countries 53
(4) Other Measures Affecting Production andTrade 53
(i) Competition policy 53
(ii) Protection ofintellectual property rights 55
(iii) Research anddevelopment 57
(iv) Investment andadjustment incentives 57
(v) Subsidies forcurrent production 58
Annex IV.1 Import dutyexemptions 59
V. TRADE POLICIES AND PRACTICES BYSECTOR 61
(1) Overview 61
(2) Agriculture, Fisheries andFood Processing 63
(i) Main features 63
(ii) Policy objectives andinstruments 65
(iii) Policies inindividual sectors 69
(3) Mining andQuarrying 72
(4) Manufacturing 74
(i) Main features 74
(ii) Textiles andclothing 75
(iii) Petroleum 77
(5) Services 78
(i) Main features 78
(ii) International transport 79
(iii) Telecommunications andpostal services 81
(iv) Electricity 83
(v) Financial services 84
(vi) Tourism 85
VI. TRADE DISPUTES AND CONSULTATIONS 87
(1) Dispute Settlement under GATT/WTO Provisions 87
(2) Dispute Settlement under Regional Agreements 87
(3) Other Fora 87
REFERENCES 89
APPENDIX TABLES 93WT/TPR/S/6
Page viTrade Policy Review
CHARTS
Page
I. THE ECONOMIC ENVIRONMENT
I.1 Structure oftheeconomically active population bysector, 1993 3
I.2 Trade ingoods andnon-factor services asshare ofGDP, 1970-93 4
I.3 Share ofcentral government revenue andexpenditure inGDP, 1975-93 7
I.4 Exchange rateindices, 1983-95 8
I.5 Balance ofpayments, 1970-93 10
I.6 Composition anddirection ofmerchandise trade, 1975-94 11
I.7 Trade inservices, 1993 12
III. FOREIGN DIRECT INVESTMENT AND TRADE
III.1 Ratio offoreign direct investment tototalinvestment andimports, 1977-94 26
III.2 BOI-approved projects bysector andsource 31
III.3 Contribution offoreign-owned firms tomanufactured exports, 1975-92 32
IV. TRADE POLICIES AND PRACTICES BYMEASURE
IV.1 Nominal andeffective rateofprotection bysector, 1994 37
IV.2 Concentration inindustry, 1988 and1992 54
V. TRADE POLICIES AND PRACTICES BYSECTOR
V.1 Average tariffs byISIC classifications, 1995 62
V.2 Production, exports andproducer prices ofprincipal agricultural crops, 1989-94 64
V.3 Distribution ofcultivated landinthefood crop sector, 1994 65
V.4 Nominal andeffective protection ofselected agricultural sectors, 1992/93 68
V.5 SriLanka 'sshare inworld teaproduction andexports, 1983-93 69
V.6 Charges forathree-minute telephone calltoandfrom SriLanka, 1994 83SriLanka WT/TPR/S/6
Page vii
TABLES
Page
I. THE ECONOMIC ENVIRONMENT
I.1 Major features ofSriLanka 'seconomy 2
I.2 Economic performance, 1980-94 5
I.3 Macroeconomic projections, 1995-99 13
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES
II.1 Main departments andstatutory organizations involved intrade policy formulation
andimplementation, mid-1995 16
II.2 Main recommendations ofthePresidential Tariff Commissions 17
II.3 Overview oftrade-related legislation 19
II.4 Actions taken inthecontext ofWTO Agreements, July1995 21
II.5 Trade policies covered byinternational agreements, other thantheWTO 24
III. FOREIGN DIRECT INVESTMENT AND TRADE
III.1 Sector-specific bodies approving foreign direct investment 27
III.2 Functions oftheBoard ofInvestment byDepartment 28
III.3 Sector-specific investment incentives inaddition tothegeneral BOIincentives 29
IV. TRADE POLICIES AND PRACTICES BYMEASURES
IV.1 Border measures applied toimports 34
IV.2 Tariffs bystage ofprocessing, 1995 36
IV.3 Preferential trading agreements 39
IV.4 Products subject toimport licensing 42
IV.5 State-trading monopolies 42
IV.6 Thresholds fortendering procedures 45
IV.7 Royalties, duties andcesses applied toexports 47
IV.8 Insurance andbank guarantee outlays oftheSriLanka Export Credit Insurance
Corporation, 1992-93 52
IV.9 Credits andequity participations bytheNational Development Bank and
Development Finance Corporation ofCeylon, 1994 58
IV.10 Current transfers topublic corporations andstatutory boards, 1989-95 58WT/TPR/S/6
Page viiiTrade Policy Review
Page
V. TRADE POLICIES AND PRACTICES BYSECTOR
V.1 Fertilizer usebysector, 1991-94 65
V.2 Policies inmain agricultural sectors 67
V.3 Coconut export products, 1989-93 71
V.4 Fishproduction, 1990-94 72
V.5 Evolution ofthemining andquarrying industry, 1991-94 73
V.6 Value added, output andcapacity utilization bymanufacturing sector, 1989-94 75
V.7 Sector-specific commitments under theGATS 79
V.8 Performance oftheportofColombo, 1979-93 80
V.9 Aircraft movements atColombo International airport (Katunayaka), 1991-93 80
V.10 Evolution ofthetelecommunications sector, 1990-94 81
V.11 Development ofpostal services, 1990-94 83
V.12 Electricity production andconsumption, 1992-94 84
V.13 Development ofthetourist industry, 1992-94 86SriLanka WT/TPR/S/6
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APPENDIX TABLES
AI.1 Merchandise imports bybroad product categories, 1980-94 95
AI.2 Merchandise exports bybroad product categories, 1980-93 96
AI.3 Imports byregion andmain sources, 1980-94 97
AI.4 Exports byregion andmain destinations, 1980-94 98
AIV.1 Products covered byexcise duties 99
AIV.2 Trade restrictions under theMontreal Protocol andtheBasle Convention 100
AIV.3 Cess oncoconut exports 101
AV.1 MFN tariffs byISIC category, 1995 102
AV.2 Sectoral structure ofGDP andemployment, 1989-94 105
AV.3a Exports ofMFA-restricted products totheUnited States, 1994 106
AV.3b Exports ofMFA-restricted products toCanada, 1994 107
AV.3c Exports ofMFA-restricted products totheEuropean Union, 1994 107SriLanka WT/TPR/S/6
Page xi
SUMMARY OBSERVATIONS
(1) Economic Environment
1. Until thelate1970s, SriLanka 's
economic development centred onimport-
substitutingactivitiesperformedmainlybyState-
owned firms. Theresults weredisappointing,
andeconomic expansion lagged significantly
behind other countries inthe region.
Encouraged bystrong export-driven growth in
eastandsouth-east Asian economies, economic
andtrade reforms wereinitiated in1977. Their
initial focus was onexport expansion in
manufacturing, particularly clothing, although
emphasis hasshifted recently tobroader-based
liberalization. Thepaceofchange hasvaried
overtime, interalia,because ofdifficulties in
macroeconomic management andasevere
balance-of-payments crisis inthelate1980s.
2. SriLanka 'seconomic ascent hasrelied
heavily onlabour-intensive export industries,
principally clothing andgemfinishing, thattake
advantage ofthecountry 'slow-cost, relatively
welleducated labour force aswellasgenerous
tariff exemption schemes. While theinternal
supply links ofthese industries remain weak,
ongoingeconomicliberalizationand
deregulation may help topromote greater
domestic content.
3. Despitecivilwarinpartsofthecountry,
theeconomy hasresponded welltorecent
reforms, with real GDP growth ofabout
5percent(1990-94),mountingforeignexchange
reserves andincreasing shortages ofcertain
skills. However, SriLanka 'strade balance has
remained insubstantial deficit ingoods and
servicescombined,amountingtoUS$1.1billion
oraround 10percent ofGDP in1993.
Remittances fromSriLankans working overseas
andgovernment-to-government grants cover
more thanhalfofthedeficit.
4. Formidablechallengesremain.
Persistent budget deficits tendtodrive upreal
interest rates andhamper long-term privateinvestment decisions. Fiscal retrenchment has
proved difficult inviewofanarrow taxbase,
thefiscal drain ofcivilwarand,more recently,
substantial consumer subsidies onsocially
sensitiveitems,inparticularbread.Traditional
public sector activities havebeencurbed and
restructured; however, significant investment
isneeded toupgrade the country 's
infrastructure, inparticular transport and
electricity, andease bottlenecks tofurther
economic expansion. Avalue-added tax,
scheduled forintroduction inlate1995, may
contribute toreducing theshare ofthebudget
deficit inGDP.
(2) SriLanka inWorld Trade
5. Traditionally, SriLanka 'smerchandise
exports weredominated byteaandteaproducts,
while riceandother fooditems werethemain
imports. Since thelate1970s, theteasector has
maintained itsshare inworld production and
trade, relying oncountries intheMiddle East
astheprincipal outlet. Theshare ofrice,the
main foodcrop, intotalimports hasdeclined
asdomestic production hasexpanded.
6. Since 1980, theclothing industry has
emerged asthecountry 'smain export earner.
Substantial foreign investments, including from
countries facing quotas under theMultifibre
Arrangement (MFA), created astrong
production base and eased access to
international marketing channels. Theascent
oftheclothing industry isreflected ina
reorientationofimportstowardstextilesuppliers
ineastandsouth-east Asia, suchasHong Kong,
Chinese Taipei andtheRepublic ofKorea.
Clothing exports haveexpanded rapidly, while
nowalsosubject toquotas oncertain items in
main markets, including theUnited States and
theEuropean Union. Atpresent, theshare of
clothing inmerchandise exports isclose to
50percent,withalmost twothirds destined for
theUnited States.WT/TPR/S/6
Page xiiTrade Policy Review
7. Semi-precious stones contribute some
10percentofmerchandise exports; shipments
ofprocessed gems haveexpanded particularly
rapidly since 1990. Despite specific incentives
fortheelectronics industry, itsshare in
production andexports hasremained limited.
8. Mirroringdevelopmentsin
manufacturing, services sector growth initially
relied onareas contributing directly toforeign
exchange earnings, suchastrans-shipment and
tourism. While thetourist sector hassuffered
from uncertainties related tothecivilwar,
arrivals recently picked upagain toreach
400,000 in1994. Although nodetailed dataare
available, thegeographical distribution ofboth
imports and exports ofservices appears
dominated bytrading partners outside the
region.
(3) Legal andInstitutional Framework
9. SriLanka 'spresent Constitution,
promulgated in1978, provides forastrong
executive President whoiselected forasix-year
term. Thecurrent President holds several
portfolios, including thoseofFinance, Planning
andDefence.
10. Policycompetenceinmaintrade-related
areas lieswiththeMinister ofFinance andthe
Minister ofInternal andExternal Trade,
Commerce andFood. While theMinister of
Finance isincharge ofrevenue-related aspects,
including tariffs, surcharges, subsidies and
government procurement, responsibilities ofthe
Minister ofTrade include theadministration of
import andexport licensing andintellectual
property legislation. TheBoard ofInvestment
(BOI), under theMinister ofFinance, is
mandated toapprove, administer andfacilitate
inward foreign investment.
11. Since thelate1970s, threePresidential
Tariff Commissions havetabled reports onthe
impact ofalternative trade policy options,
preparing theground, inside andoutside
Government, forsubsequent liberalization
initiatives.(4) Trade Policy Features andTrends
(i) International obligations
12. SriLanka hasbeenacontracting party
totheGeneral Agreement onTariffs andTrade
(GATT) since 1948. Itratified theMarrakesh
Agreement inJune1994 tobecome afounding
member oftheWorld Trade Organization
(WTO).
13. Likeother WTO Members, SriLanka
hasbound alltariffs onagricultural products.
Although wellabove applied rates, thebound
rates -50percent-mayconstrain theuseof
surcharges during harvest seasons. Thescope
oftariff bindings intheindustrial sphere has
remained small, withthesame ceiling rates as
inagriculture. SriLanka 'scommitments under
theGeneral Agreement onTrade inServices
(GATS) arelimited totourism, although access
conditionshave,inpractice,alsobeenimproved
inother areas suchasbanking. Amendments
areinpreparation toalign domestic legislation
withtheWTO Agreement onTrade-Related
Aspects ofIntellectual Property Rights (TRIPS).
14. SriLanka 'sinvolvement inregional
trade agreements islimited. Itisasignatory
totheBangkok Agreement andparticipates in
theSouth Asian Preferential Trade Area
(SAPTA), which istobecome effective from
November 1995. The scope ofthese
arrangements isconfined mainly toduty
reductions andexemptions onarelatively small
range ofitems; services arenotcovered.
Consequently, SriLanka hasnotnotified m.f.n.
exemptions under Article IIoftheGATS.
(ii) Type andincidence oftrade policy
instruments
15. Past liberalization initiatives have
reinforced therôleoftariffs asthecentral
instrument regulating SriLanka 'smerchandise
trade. Inturn,thetariffrégime hasbecome less
distortive during subsequent rounds ofreform.
Itcurrently relies onathree-pronged structureSriLanka WT/TPR/S/6
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withrates of10,20and35percent; the
unweighted average isintheorder of
20percent. Following thetariffication ofmost
quantitative restrictions, apart from some
remaining measures maintained forbalance-of-
payments reasons, remaining controls and
licensing requirements aremotivated mainly by
health, safety andsecurity concerns. Licences
areissued onlytoSriLankan nationals or
companies majority owned bythem.
16. Although tariff escalation hasbeen
reduced over time, itisstillconsiderable.
Effective rates ofprotection currently exceed
100percentinareas suchaspaper andmetal
products. While further tariff reduction and
harmonization would helptoreduce economic
distortions -theGovernment envisages
introducing auniform tariff of15percentin
themedium term-fiscal constraints maybean
impediment. Revenue considerations have
already ledtotheintroduction, andsubsequent
increase, ofadefence levyonallimports
destined fordomestic consumption; thecurrent
rateis4.5percent. Inaddition, suchimports
aresubject toa2percentstamp dutyon
compulsory letters ofcredit.
17. Withaviewtoinsulating exporters from
thedirect costofimport protection, various
schemes areusedtoprovide access totraded
inputs atclose toworld market prices. While
export-processing zones wereinitially setupin
specific geographic areas, thewhole country
wasdeclaredanexport-processingzonein1992.
Although thismayhave encouraged export
production inrural areas, inlinewithoriginal
intentions, itmayalsohavefacilitated leakages
ofduty-free imports intothedomestic economy
asmovement ofsupplies foreligible companies
isdifficult tomonitor. Inaddition, while
promoting exports, such imports mayhave
hampered theemergence ofintermediate
industries and,thus, ofabroader industrial
base.
18. 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-upsubsidiesfornewexporters.SriLankan
exports ofcertain textile andclothing items to
theUnited States andofcoconut products to
Brazil havebeensubject tocountervailing duty
actions.
19. Gradual import liberalization, andthe
ensuing adjustment pressures, may have
encouraged requests fortemporary protection
through import surcharges. Applications are
decided bytheMinister ofFinance, whohas
considerablescopefordiscretion.Noinjurytest
isrequired. There were 17cases in1994,
covering arange ofproducts from onions to
razor blades andbicycles; however, all
measures havenowexpired. Theauthorities are
considering newlegislation toconform withthe
WTOAgreementsonSafeguards,Anti-dumping,
andSubsidies andCountervailing Measures.
20. Since the 1970s, foreign direct
investment inexport-oriented activities hasbeen
welcomed. Such investment played a
particularly important rôleinthedevelopment
oftheclothing and tourist industries.
Commitments uptoanequity share of
40percent aregenerally given automatic
approval, and investors receive national
treatment. Larger commitments areexamined
case-by-case. Structural deficiencies inthe
insurance sector and theGovernment 's
preferential claim oncertain funds, reflecting
fiscal straits, appear tohave delayed
liberalization inthisarea. Partial reforms,
allowingforminorityforeignshareholdings,are,
however, under consideration.
(iii) Sectoral policy patterns
21. SriLanka 'splantation-based teasector
co-exists withsignificant levels ofsubsistence
farming, predominantly ofrice. Large-scale
public investments inirrigation facilities
benefited ricegrowers during the1980s, and
havecontributed toSriLanka 'shighlevelof
self-sufficiency. Today, emphasis isbeingWT/TPR/S/6
Page xivTrade Policy Review
placed oncultivation ofhighvalue-added crops
andrelated processing activities. Market-
oriented seed improvement schemes, special
credit facilities and theprivatization of
plantation management aremajor initiatives in
thiscontext. However, forsocial andregional
policy reasons, ricefarming islikely toattract
strong continued policy attention.
22. Externalliberalizationinmanufacturing
hasbeenaccompanied byinternal deregulation
andprivatization, affecting alarge number of
State-owned companies. Exceptions arelimited
mainly to"security-sensitive" areas such as
petroleum andgasproduction. Thedeclining
share ofpublicly-owned enterprises in
manufacturing value added -from almost
60percentin1981 tolessthan15percentin
1991 -may beattributable both tothese
initiatives andtostrong growth intheprivate
sector, especially inclothing.
23. Accesstoanumberofservicessectors,
including telecommunications andbanking, has
gradually beenderegulated. While SriLanka
Telecom (SLT) continues tooperate asthe
exclusive provider ofbasicvoiceservices, linked
toitsnetwork monopoly, activities such as
mobiletelephonyanddatatransmissionareopen
tocompetition. Efforts areunderway toreinininternal cross-subsidization within SLTand
furtherrationalizeitstariffstructure.Continued
liberalization mayencourage thedevelopment
ofoutward-oriented services, underpin the
competitiveness ofuserindustries andreinforce
theirinternal supply links.
(5) Trade Policies andTrading Partners
24. SriLanka 'seconomic reforms were
launched inresponse towidespread public
dissatisfaction withpoorindustrial performance
andrampant rent-seeking within adistorted
incentive system. While there havebeensome
slippages overtime, strong growth inrecent
years hashelped tobroaden theinternal
political support forchange. Ontheexternal
front, theWTO Agreements havesecured and
widened theinstitutional framework for
international market integration. Thesignsare
thus positive fornew initiatives aimed at
exposing long-protected services sectors to
competition, further reducing andharmonizing
tariff protection, rationalizing dutydrawback
and exemption schemes and developing
alternative,lessdistortivesourcesofgovernment
revenue. Given SriLanka 'scurrent export
basket, itisessential thatsuch efforts be
supported byliberal andpredictable access
conditions tolarge export markets outside the
region.