Is Sri Lanka serious about benefiting from European Union support?

*EU has been a steady supporter of Sri Lanka since the opening of the EU Delegation in the country in 1995

*Through the GSP+, the EU has unilaterally granted duty free access to about 7,000 Sri Lankan products

*Over-protecting local industries may reduce productivity and competitiveness of Sri Lankan products

by Sanath Nanayakkare

Denis Chaibi, Ambassador, Head of Delegation of the European Union to Sri Lanka and the Maldives had a series of discussions with a number of Sri Lankan authorities recently while he was on an official tour in the country. ‘The Island’ had an interview with Chaibi after he had concluded the round of talks. Below are some excerpts from that interview.

Q.

The EU, a Standards Super Power in the world, has consistently been supportive of Sri Lanka. How can Sri Lanka benefit from that support to build a best-in-class manufacturing infrastructure and receive international acceptance for its products and services in the global market?

A

. Indeed, the EU has been a steady supporter of Sri Lanka. Since the opening of the EU Delegation in the country in 1995, the EU taxpayers have provided roughly one billion Euro in development assistance. All of this in grants, with no significant conditions attached.

With 27 Member States and 450 million customers with high income, we are also the largest market in the world. Through the GSP+, the EU has unilaterally granted duty free access to about 7,000 Sri Lankan products – that’s 66% of the EU tariff lines.

To help Sri Lanka in taking full advantage of these GSP+ opportunities, the EU had also made available over 8 million EUR of grants for trade assistance, with the support of specialised UN agencies such as UNIDO and the International Trade Centre. This cooperation translates into real support for Sri Lanka’s national export strategy, help SME’s to get ready to export and encourage new export sectors. Diversification is important as Sri Lankan exports are still focused on very few products.

Sri Lanka has a number of strengths it can further work on. First is the focus on quality. There are opportunities in producing more quality goods for Sri Lanka to stay competitive in the global arena. To put it simply, many neighbouring countries can produce cheaper, but price is not the only way to stay competitive. Quality is another one.

Second, compared to many countries in the region Sri Lanka has high compliance with international labour and environmental standards. This a competitive advantage! Sri Lanka could move further towards sustainable production concepts such as organic produce, green production and Fair Trade practices. Such practices are highly valued by consumers around the world, and in particular in the EU. And they are ready to pay a premium for such products.

Third, beyond export promotion, Sri Lanka is reflecting on how to attract more investments and offer an attractive business environment. Investors can bring not only capital but also share their know-how and best practices.

Finally, a fourth strength would be to remain open for business! Over-protecting local industries may reduce productivity and competitiveness, meaning that products will be more expensive for Sri Lankans, and the possibilities to export will be limited as neighbours will produce better products for a cheaper price. Sri Lanka has a great opportunity to further develop its position as a regional trading hub and major trans-shipment centre. Yet, closing borders to imports is not conducive to these objectives.

Sri Lanka could look at coconut-based products which could be produced in Sri Lanka in the most effective and competitive way. Since the volume of production cannot compete with larger producing countries Sri Lanka could invest in niche products with very high added value marketing/branding their uniqueness. The EU supports geographical branding in Sri Lanka such as “Pure Ceylon Cinnamon”, this is one of the many way not only to add value but also offer new market access opportunity.

Q.

What should Sri Lanka do to gain support of the EU to obtain broader export market access?

A

.The EU market is already wide open: GSP+ grants unilateral tariff preferences on a large range of products to Sri Lanka. About €3 billion was imported into the EU from Sri Lanka in 2019 using the GSP+ preferences. This resulted in a positive trade balance for Sri Lanka of 1.5 billion euro in 2019 alone!

There has been impressive export growth in the months following the re-gaining of GSP+ in 2017 and in total, since its reinstatement, Sri Lanka’s exports to the EU have increased by more than 25%; Fisheries exports have literally doubled since the removal of the fish ban and regaining GSP+. Other notable growth sectors include clothing, tea, tyres, gems as well as motor vehicle parts and footwear.

We thus believe that GSP+ has worked and is working well for Sri Lanka. However, GSP+ still offers great future potential for Sri Lankan companies. GSP utilisation rate is currently still relatively low, and concentrated in a few sectors. We hope that this will improve in the future.

The recent reclassification of Sri Lanka as Lower Middle Income country, means that the GSP+ scheme can continue for at least another three years. On the other hand, this also requires Sri Lanka to continue implementing the 27 international Conventions GSP+ is based on – and all have been signed and ratified by Sri Lanka.

Beyond formal market access, it is also key for Sri Lankan exporters to comply with relevant European standards, in particular phytosanitary certificates (an official document required when shipping regulated articles such as plants, plant products or other regulated articles). We therefore support Sri Lanka in setting up relevant laboratories and in training its companies.

Anyone who has shopped for fruits and vegetables over the last year has seen that prices have increased drastically, and part of the reason is due to more concentrated demand and less competition.

European Importers also decide based on quantity and predictability of supply and other consumer requirements. So, Sri Lankan companies should be equipped with strong marketing and sales work force.

Q.

What do you think of the ongoing import ban in Sri Lanka?

A.

The European Union believes that global problems, such as the pandemic and the ensuing economic crisis, can only be solved through global cooperation. We can help ourselves only by working together. For the recovery of the Sri Lankan and global economy, open and rules-based trade is essential as it gives confidence to businesses to invest, and re-start exchanges that bring in employment and revenues.

Sri Lanka is the only country in the world that has recently adopted an outright import ban. We understand that the Government took this decision to solve a dire problem of foreign currencies. The situation is indeed difficult, but as time goes by, the import ban appears less and less as a temporary measure, and more and more as an economic policy that will increasingly prove incompatible with an export drive.

For Sri Lankan companies, it is already getting more difficult to obtain the needed inputs for their production. Even if special provisions allow them to import raw material, the ban simply complicates business and makes producing in Sri Lanka more expensive.

Highly-restrictive trade measures imposed by an import ban also reduces much-needed State revenue from import tariffs and para-tariffs. Overall, I fear that the import ban reduces Sri Lankan exports competitiveness by adding hurdles when importing raw materials, and by reducing shipping options. The legal uncertainty of the measures will reduce Sri Lanka’s ability to attract European investments, which Sri Lanka has been calling for.

Last, but not least Sri Lanka is part of global trade through its membership and compliance with WTO rules. So notification of the decision to the WTO, and explanations on how these measures will be rescinded, are needed.

In short, trade cannot be a one-way street where the EU is opening its market to Sri Lanka, which benefit greatly from it with a positive trade balance, while EU producers cannot have access to Sri Lanka.

Q.

What was the outcome of your recent engagement with Sri Lankan Trade Minister Bandula Gunawardena and Foreign Affairs Minister Dinesh Gunawadena?

A.

We had a very good and open exchange with both Ministers. On trade, we understand from the meetings that the government is keen to continue cooperation with the EU under GSP+ and many other areas. There are a variety of assistance projects in the pipeline in the area of agriculture, the justice sector and in terms of COVID-19 response. We also agreed with the Foreign Minister to soon resume our formal political consultations through an EU-Sri Lanka Joint Commission and working groups on development, human rights and trade.

Q.

Did you have a dialogue with President Gotabaya Rajapaksa?

A.

Yes, of course. The last time all EU Ambassadors met President Rajapaksa was in June. We shared our concern about the import-ban but also discussed more broadly current challenges of the country and how we can work together to tackle them. This also included discussion about possible EU support in agricultural development, including cold storage facilities.