TRADE POLICY REGIME

FRAMEWORK AND OBJECTIVES

GENERAL INSTITUTIONAL FRAMEWORK
Since 1977, Sri Lanka has been gradually reforming its trade policy. Almost all import quotas and licenses have been removed. In particular, imports of capital goods and raw materials for export processing are free from duties. A four band tariff regime with a maximum rate of 45% has been introduced. Most foreign exchange controls have been lifted although the Rupee is not fully convertible.

The export sector continues to be provided with several fiscal, financial and institutional incentives.  These include the duty rebate scheme, the manufacture-in-bond scheme and the duty free clearance of machinery scheme.

Import and Export Controls
Sri Lanka maintained an open trade policy regime with only a few exceptions as in the past. Four categories of exports remained under license (coral chuk and shells, wood and articles of wood, ivory and ivory products and passenger motor vehicles registered in Sri Lanka prior to 1945) on the grounds of protection of environment and preservation of antiques. The remaining import licensing requirements were due mostly to public health, public morals, environmental protection and national security reasons. The import licensing requirement of four items, namely, wheat, meslin, wheat and meslin flour was maintained in terms of a past contract entered into by the Government with a private flour milling company. Certain agricultural items, namely potatoes, big onions, chillies and maize, remain under license with the objective of providing protection to domestic producers.

Textile Quota Allocation
To ensure the continuous availability of quotas to deserving exporters, allocation of textiles quotas is primarily based on their past performance. Once the initial allocation is made, two per cent of the balance is allocated to other registered exporters who have small quota holdings (none or less than 5,000 dozen for the preceding year), on a prorata basis of the number of employees. The remainder is put to a common pool and allocated among exporters, taking into consideration other factors such as payments of EPF and ETF contributions. The pool quota scheme improves allocation and utilization of quotas and also provides opportunities to both existing & quota; small quota holders as well as newcomers to the industry.

NATIONAL EXPORT POLICY OBJECTIVE OF PROMOTION AND DEVELOPMENT OF EXPORTS 1998

The objective of promotion and development of exports is the enhancement of foreign exchange earnings:

(a) to accelerate economic growth and create employment;
(b) to solve the balance of payments problem; and
(c) to reduce the dependence on foreign aid.

A. MACRO - ECONOMIC STRUCTURES AND POLICIES:

1. The Government will endeavor to maintain a realistic exchange rate in order to retain the competitiveness of the export sector vis-a-visthe trading partners and competitor countries.

2. The Government will ensure for exporters (direct and indirect) unrestricted and duty/tax-free access to imported inputs (raw materials, packaging materials. Consumable, raw material and finished
product samples, technologies including design specifications, machinery, equipment, accessories, technical advice, training, etc.).

3. The Government will work towards making available finance (medium and long-term as well as short-term) at internationally competitive rates.

4. The Government also will endeavor to provide expanded access to financing particularly by developing substitutes for physical collateral and strengthening the capabilities of financial
institutions to evaluate projects on the basis of viability.

5. The Government will adopt (as stated in the Strategy for Industrialization) all measures necessary to develop the capital market including the popularization of Unit Trusts, Venture Capital Companies and the provision of incentives for the purchase of stocksand shares.

6. The Government will, as stated in the Strategy for Industrialization, take steps to ensure that the export sector is as competitive as the other sectors of the economy by constantly reviewing and lowering the import tariff and phasing out export tariffs, (except where there is need to promote further processing of local materials) so that resources may flow into the export sector and other sectors on the basis of comparative advantages.

B. PROCEDURES AND DOCUMENTATION:

7. The Government will adopt suitable measures to streamline procedures and documentation to :ensure as far as possible  automatically (as already stated in the Strategy for Industrialization) in regard to :

(a) import of inputs for production for export;
(b) export of goods and services;
(c) release of foreign exchange for purchase of inputs , travel,setting up of offices abroad, payments to expatriates, remittance of profits, etc.;
(d) approval of applications for projects, sites, Plans, etc.;
(e) land leases and grants;
(f) grant of incentives; and
(g) taxes and levies.

C. INFRASTRUCTURE

8. The Government will give the export sector (direct and indirect)priority in the provision of public utilities and services in the following areas. The Government will also ensure that such facilities are provided at competitive rates particularly by encouraging the private sector to provide such facilities/ 
services :
(a) transport, sea/air freight;
(b) telecommunications;
(c) water supply
(d) electricity and fuel supplies,
(e) R & D facilities;
(f) quality control/standards;
(g) Packaging; and
(h) industrial estates/developed plots.

D. GOVERNMENT ASSISTANCE: 

9. The Government and agencies of the Government will assist the export sector (direct and indirect) in - 

(a) identifying export markets; 
(b) Providing information on the needs and specifications of export markets; 
(c) catering to the needs of the export market through subcontracting, training, acquisition of technology, packaging, quality control, etc.; 
(d) securing orders; 
(e) marketing of goods and services; 
(f) setting up of export trading houses; 
(g) offering incentives to the private sector to provide export services; and 
(h) improving management capabilities to increase efficiency and improve productivity. 

E. GOVERNMENT RECOGNITION : 

10. The Government will recognize the role of the private sector in export development through the following measures: 

(a) ensuring the free export of all products and services other than products and services which, in the opinion of the Government, should be prohibited or restricted for anyone of the reasons like national security, national heritage, etc.; and compliance with the country's obligations under multilateral or bilateral treaties; 

(b) permitting market forces in determining prices. 

(c) respecting the sanctity of international trading contracts made lawfully in the ordinary course of business and ensuring that no impediments are placed in the execution of such contracts and 

(d) refraining from andy prohibitive or restrictive action of a retroactive nature except with the sanction of the Export Development Council of Ministers after a proper and thorough study of the pros and cons. 

11. All Ministries, Departments and Agencies of the Government shall adhere to the National Policy enumerated above in carrying out their functions relating to the promotion and development of exports. 

12. Annexed hereto are 

(i) Products which are prohibited or restricted for export 
(ii) Items under License Control. 

PRODUCTS WHICH ARE PROHIBITED OR RESTRICTED FOR EXPORT
 

ITEMS UNDER LICENSE CONTROL (Annex 2) ITEMS UNDER LICENSE CONTROL 

Four items are subject to export license issued by the Controller of Imports and Exports. List of items under export licenses, their Harmonized System (HS) Classification numbers are given below. 

TRADE AGREEMENTS AND ARRANGEMENTS 
Sri Lanka became a founding member of the World Trade Organization (WTO) which was established in January 1995. Sri Lanka has bound all tariffs on agricultural products numbering 2,228 tariff lines at the rate of 50 percent under her commitments to the WTO. The scope of tariff binding on industrial products has remained small with the same ceiling rates applicable as in agriculture. Sri Lanka's commitments under the General Agreement on Trade in Services (GATS) are limited to tourism and tourist related services. However, Sri Lanka's current trade policy regime is far more liberal than her commitments to the WTO. In particular, her actual maximum tariff rate of 35 per cent is below the bound rate of 50 per cent, while the services sector is already open for foreign competition (financial services are opened to foreign participation upto 49 per cent of total investment).

The WTO, in consultation with the Government and contracting parties, conducted a major review of Sri Lanka's trade policy regime and trade practices in 1995. The objective of this exercise was to assist in improving adherence to GATT/WTO rules, disciplines and commitments, thus contributing to smooth functioning of the multilateral trading system. The Trade Policy Review Committee was of the opinion that trade policies and practices have evolved in a positive direction and that Sri Lanka had made significant progress towards removing distortions created by the past import substitution policies. The Committee also recognized that trade liberalization, deregulation and privatization have improved conditions for employment and growth and commended the efforts made to further streamline the tax and tariff structure. The Committee concluded that it was important for Sri Lanka to continue with its liberalization agenda, accept a higher level of multilateral commitments and 
expeditiously implement WTO provisions.

Sri Lanka also participated at the second round of the Global System of Trade Preferences (GSTP), which is the first major proposal for intra-regional cooperation among developing countries who are members of the Group of 77. Sri Lanka has exchanged lists of requests and offers with 16 participating countries. Two sessions were held during 1995 and the negotiations are expected to be concluded by March 1996 well in advance for UNCTAD IX which is scheduled to be held in April 1996.

Sri Lanka continued to be a beneficiary of all schemes under the Generalized System of Preferences (GSP) which were in operation in 1995. There were 16 different schemes of GSP which were implemented by 27 preference giving countries including the USA, Japan and member countries of the European Union (EU). The revised EU GSP Scheme which came into force in January 1995 introduced new features such as the graduation principle applicable to developing countries, and countries involved in eradicating drug trafficking. This scheme also dismantled all GSP quotas, ceilings and maximum limits and transformed them into tariff. Manufactured products covered by the EU Scheme have been categorized under 4 groups namely, very sensitive, sensitive, semi-senstive and non-sensitive. The products categorized as very sensitive include, mainly, textile products and tariff concessions granted under the GSP Scheme to this category have been reduced further. The Department of Commerce made representations about possible adverse effects on Sri Lanka of certain aspects of the new EU GSP scheme.

Sri Lanka became a signatory to the International Natural Rubber Agreement (INRA III) 1995, which could come into effect on or before January 1997. As in the previous agreement, natural rubber prices are to be established through the operation of an international buffer-stock of 550,000 metric tons as the sole means of market intervention. Although Sri Lanka's total rubber production and its exports to the world market are relatively insignificant in influencing world market conditions, it was considered beneficial for Sri Lanka to be a participant in INRA III.

Sri Lanka became a founding member of the South Asian Preferential Trading Agreement (SAPTA) which came into force on 7 December 1995, following intensive rounds of bilateral and multilateral negotiations. The SAPTA is aimed at promoting and maintaining mutual trade and economic cooperation among the contracting states of SAARC through exchange of trade concessions. Sri Lanka has offered concessions on a number of tariff lines in the Consolidated National Schedules of 
Concessions which altogether cover 226 tariff lines (India 106, Pakistan 35, Sri Lanka 31, Maldives 17, Nepal 14, Bangladesh 12 and Bhutan 11). The second round has been recently concluded.

Sri Lanka continued to receive preferential treatment from other member countries such as Bangladesh, India, Laos and the Republic of Korea under the Bangkok Agreement.

While trade among SAPTA member countries accounts for only 3 per cent of their total trade, the importance of the SAPTA lies in the anticipated trade liberalization in member countries with a view to promoting and expanding trade opportunities not only with each other, but with nonmember countries as well. In this regard, while Sri Lanka currently has one of the most liberalized trade regimes among SAPTA member countries, it is expected that with regional cooperation  under the SAPTA, all member countries would move towards fully liberalized trading systems in keeping with the objectives of the final Uruguay Round reforms which are expected to be implemented by the World Trade Organization to achieve a free global trading system.

On a bilateral level, the fourth session of the Sri Lanka-Maldives Joint Commission on Economic and Technical Cooperation was held in Colombo at Ministerial level in January 1995. The meeting focussed on enhanced cooperation between the two countries in the areas of trade and tourism, among others. Further, the Sub-Commission on Trade, Finance and Investment between Sri Lanka and India met in Colombo in February 1995. Bilateral cooperation in the respective areas was 
reviewed and decisions were taken towards facilitating trade flows and investment. This subject was taken a step further when the President and the Minister of Internal and External Trade, Commerce and Food visited India and Bangladesh in March 1995. During these discussions, Sri Lanka secured tariff concessions on a number of products of export interest. Sri Lanka also ratified bilateral trade agreements with Kuwait and Cyprus during 1995.

At a meeting held in Colombo in late 1995, the members of the Asian Clearing Union (ACU) agreed to adopt a clearing mechanism for US dollar denominated transactions under the ACU with effect from 1 January 1996 as the previous arrangement of clearing settlements only through national currencies using the SDR for the conversion rates appeared to hinder the growth of trade among ACU members.

Other agreements and arrangements
Trade barriers are falling in the region. The South Asia Preferential Tariff Arrangement (SAPTA) came into force on 7th December, 1995. Already tariff concessions apply to 226 items. The 7 countries which comprise the South Asia Association for Regional Cooperation (SAARC) have agreed to expand the list of items to around 2,000 shortly. SAARC member nations have further resolved that SAPTA should eventually progress towards the South Asia Free Trade. Arrangement (SAFTA) preferably by the year 2000, but not later than 2005.