Now that Sri Lanka has achieved notable success in containing the danger posed by the COVID-19 pandemic to the health of the nation, the time has come for a concerted and decisive focus on reviving the economy.  This is particularly timely now that the economy has been removed from its “induced coma” with the elimination of daytime curfew throughout the island.

A Pathfinder Foundation Study Group produced a report which set out a new economic vision for post-COVID-19 Sri Lanka.  It has been shared with the key leaders of the government.  An important recommendation in the Report was the pursuit of trade agreements.

The Doha Round of Multilateral Trade Negotiations is at an impasse.  It has probably been dealt a fatal blow with the disengagement of the current US administration from the WTO.  Many countries have responded by pursuing bilateral, regional and plurilateral trade agreements to boost their growth and employment prospects.  Sri Lanka has fallen behind and is confronted with the possibility of falling even further behind.

The Sri Lankan authorities have done well to stabilize the external position of the country despite the extreme shock delivered by the pandemic to Sri Lanka’s key sources of foreign exchange:  remittances; apparel exports; tourism receipts; earnings from shipping, FDI inflows; foreign institutional investment in government securities and the stock market; as well as the prospects of raising money from international capital markets. However, the temporary import bans and the decline in oil prices have served to mitigate the worst effects of these adverse trends.  The effectiveness of these measures is reflected in the forex market, where the LKR has been largely stable after its initial sharp depreciation to LKR 199: USD.  It has now stabilized around LKR 186: USD.

However, the economy is in a sub-optimal equilibrium as far as growth and employment prospects are concerned.  There have been some green shoots of recovery in exports of apparel, seafood, tea and some rubber products.  However, this is far from sufficient to support the country’s ambitions on growth and employment.

For this to happen, Sri Lanka has to work towards a transformation of its export and FDI performance. This has proved elusive so far.  The measures needed to achieve this are well known.  They must now be implemented effectively and trade agreements need to be an integral part of this effort.

The shift of the centre of gravity of the global economy to the East is likely to be accelerated in the post-COVID-19 world.  At present, over 50% of Sri Lanka’s exports are to the EU and US.  More needs to be sold to Asia.  In addition, the export basket needs to be more diversified and complex.  Trade agreements provide access to markets, investment and know-how which can catalyse the diversification of both export markets and the product mix.

On FDI, a market of 21 million people with purchasing power based on USD 4000 per capita income is not attractive in a world where over 190 countries are competing for investment inflows.  Securing enlarged market access on a preferential basis is therefore a matter of high priority, particularly at a time when global supply chains are being reconfigured for the post-Covid19 world.

The Pathfinder Foundation recommends that Sri Lanka:

  1. Sell more to Asia, the most dynamic region and the part of the world which is recovering most quickly from the effects of the pandemic; and
  2. Enlarge preferential market access to attract FDI to promote export growth.

An urgent priority therefore is to revive and accelerate the negotiation of a partnership agreement with China; an expanded agreement with India; and an agreement with Thailand.  Agreements with other Asian countries, particularly other ASEAN members and Japan, should also be explored.  Another goal should be maximizing the benefits from the Agreement with Singapore.

In addition, the UK remains an important trading partner.  Brexit negotiations have recommenced. At the same time, the UK is negotiating trade deals with non-EU countries. It is important that Sri Lanka negotiates an early trade deal with the UK which sets the GSP Plus preferences as the minimum.

3. In order to accelerate these processes, it is important that an empowered and technocratically competent high-level trade negotiating team is appointed reporting directly to the highest level of government.


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