GSP+ withdrawal: How would it impact Sri Lanka’s economy?
By Asanka Wijesinghe and Eleesha Munasinghe
Sri Lanka’s preferential access to the vital European Union (EU) market faces fresh challenges after the European Parliament’s special resolution adopted in June 2021. The resolution calls for an assessment on “whether there is sufficient reason, as a last resort, to initiate a procedure for the temporary withdrawal of Sri Lanka’s GSP+ status.”.
The GSP+ is a non-reciprocal trading arrangement whereby Sri Lanka does not have to lower tariffs in return but is required to implement certain non-trade related conventions to benefit from preferential access. The GSP+ arrangement slashes import duties to zero for vulnerable low and lower-middle-income countries that implement 27 international conventions related to human rights, labour rights, environment protection, and good governance. This article assesses the impact of a hypothetical withdrawal of GSP+ on Sri Lanka’s exports to the EU: the largest single trading bloc, with the United Kingdom (UK), accounting for 30% of Sri Lanka’s exports.
A possible withdrawal of GSP+ will increase the tariffs for Sri Lankan products up to the Most Favoured Nation (MFN) tariffs. Consequently, products coming from Sri Lanka will be more expensive in the EU market, directly reducing the export demand from Sri Lanka. However, Sri Lanka’s competitors that continue to benefit from the EU’s GSP will face zero preferential tariffs. Thus, in addition to the trade destruction effect, with the relative price of goods from Sri Lanka being higher, the trade will be diverted to those competitors. Using a partial equilibrium analysis, one can ex-ante quantify these effects of GSP+ withdrawal. Assuming the UK will follow the EU lead, and Sri Lanka will face the lower bound of relevant MFN tariffs, partial equilibrium estimates show that Sri Lanka’s exports to the EU will fall by 627 USD million The simulations are done taking 2019 as the base year.
The worst-hit sectors are apparel (HS 61 and HS 62), tobacco (HS 24), seafood (HS 03), and rubber (HS 40) sectors. The combined loss for the apparel sector will be as much as 494 USD million, and it is 79% of the total estimated trade loss. In addition, the seafood sector is deemed to lose 20 USD million or 17% of the sector’s 2019 exports to the EU. Thus, losing preference to a vital market will be hard for the recovering seafood industry
There are two caveats of an ex-ante impact assessment of this kind. The first is that the analysis is based on assumed elasticities. However, the assumptions are not overly restrictive. The second is that all the eligible exports from Sri Lanka do not utilise the GSP+ facility. Thus, the actual impact will be contingent upon the utilisation ratio. However, after Sri Lanka regained GSP+ preference in 2017, the utilisation ratio increased, reaching 61.8% in 2019, improving from 55.1% in 2017. Therefore, the increasing utilisation ratio makes the potential impact still significant.
Notably, there is a variation of the utilisation rate within the HS chapters, .
The apparel sector will be relatively resilient to a loss of preference as its utilisation ratio was 52% in 2019. However, a loss of preference will halt any industry drive that aims to increase the utilisation rate and then expand the market share in the EU. Further, the 2010 loss of GSP+ inflicted high costs to the industry. As seafood, rubber products, and footwear sectors utilise more than 90% of GSP+ preference, those sectors will be more vulnerable to the shock. Indeed, the difference between GSP+ preferential tariff and MFN tariff for seafood is higher -zero versus 7.5% respectively aggravating the impact.
The losses from GSP+ preference will be significant and heterogeneous across sectors. The GSP+ also opens the door for EU investments as outsourcing production to preference receivers is beneficial to the EU. In addition, sectoral losses may spillover to the overall economy exacerbating poverty and income inequality. Thus, avoiding such losses should be a political priority for policymakers. Less dependence on the EU market is a widely suggested strategy. Diversification is indeed beneficial when it is done for economic reasons. However, ad-hoc moves to diversify to escape from unresolved political issues will not do much good. The EU market is a high-end export destination for Sri Lanka. The quality improvements, product standards, and consumer preferences positively challenge the Sri Lankan exporters to improve product quality and competitiveness.
Additionally, a non-reciprocal preference for various products incentivises product diversification away from traditional exports into more complex products like electronic equipment, including semiconductors (HS chapter 85). Therefore, while Sri Lanka should work to secure the GSP+ resolving the current political issues and focus on fully utilising GSP+ preference in the short run. In the long run, as GSP+ is contingent upon income level, Sri Lanka will lose it someday, and as such should enter into reciprocal trade agreements with the EU and other high-end markets, including the US.
Link to blog: https://www.ips.lk/talkingeconomics/2021/09/28/gsp-withdrawal-how-would-it-impact-sri-lankas-economy/
Asanka Wijesinghe is a Research Economist at the Institute of Policy Studies of Sri Lanka (IPS) with research interests in macroeconomic policy, international trade, labour and health economics. He is also interested in the impact of adjustment costs of trade, gravity modelling in trade, econometrics and the trade origins of populist politics. He has undertaken efficiency analyses, particularly public spending efficiency, using parametric and non-parametric efficiency analysis approaches.
Asanka holds a BSc in Agricultural Technology and Management from the University of Peradeniya, an MS in Agribusiness and Applied Economics from North Dakota State University, and an MS and PhD in Agricultural, Environmental and Development Economics from The Ohio State University. His latest research focused on the effect of global trade-induced labour market changes on voting behaviour in recent US elections, including the 2016 presidential election.
Eleesha Munasinghe was a research intern at IPS. She is currently an undergraduate (Economics and Finance) at New Castle University in UK.
EU funded SEDR Project launches Policy Brief to strengthen alternative dispute resolution in Sri Lanka
The Supporting Effective Dispute Resolution (SEDR) project, funded by the European Union and implemented by the British Council in partnership with The Asia Foundation, launched a Policy Brief titled ‘Strengthening A Just Alternative’ to strengthen community-based alternative dispute resolution (ADR) mechanisms in the country.
The launch event, held at the British Council Library in Colombo, was attended by several distinguished dignitaries, including Dr. Wijeyadasa Rajapakshe, Minister of Justice, Ms. Beatrice Bussi, (Interim) Head of Development Cooperation of the European Union to Sri Lanka and the Maldives, Priyanath Perera, Secretary of the Mediation Boards Commission, Hon. Justice Yapa, Chairperson of the Mediation Boards Commission, and Commissioners of the Mediation Boards Commission.
Speaking at the event, Ms. Beatrice Bussi stated that “The importance of mediation in Sri Lanka is twofold, as it ensure an easy and economic access to justice to citizens, while it provides the opportunity to reduce the burden on the Sri Lankan court system. I want to praise the model of Sri Lankan community mediation boards, for its effectiveness and for the value it delivers to communities in addressing local disputes preventing their escalation”.
Dr. Wijeyadasa Rajapakshe stated ” One of the main tasks of the Ministry is to ensure the necessary legal, policy, and institutional framework is set up for efficient resolution of disputes. Alternative dispute resolution, including mediation, play a major role in this regard. There are different opinions regarding the effectiveness of alternative dispute resolution mechanisms, especially mediation among the community and stakeholders. In the meantime, the Ministry has initiated a number of reforms to improve dispute resolution processes in Sri Lanka. Accordingly, the Ministry highlights the importance of surveys of this nature to facilitate evidence-based decision-making regarding alternative dispute resolution mechanisms. As such the Ministry would like to congratulate the SEDR project on this successful initiative.”
The Policy Brief is based on the findings of a Knowledge, Attitudes, and Practices (KAP) survey commissioned by SEDR and conducted by the Centre for Poverty Analysis (CEPA) in 2022. The survey aimed to assess knowledge, attitudes and practices of various community-based alternative dispute resolution mechanisms, including mediation boards. The survey covered six districts in the country, targeting 1,712 households of all three main ethnic groups.
COYLE urges government to engage business leaders in policy-making process for fair, sustainable, and economically sound decisions
The Chamber of Young Lankan Entrepreneurs (COYLE) held its 24th Anniversary Celebrations on 10th March 2023, at Shangri-La Hotel, Colombo. The event was attended by the chief guest, Prime Minister, Dinesh Gunawardena; the guest of honour, U. S. Ambassador, Julie Chung; former President of Sri Lanka, Maithripala Sirisena; Chief of the Defense Staff, General Shavendra Silva; cabinet and state ministers; parliamentarians; commanders of the Sri Lanka Armed Forces; government officials, and business leaders.
The Chamber of Young Lankan Entrepreneurs (COYLE) comprises more than 116 prominent individuals who serve as Chairmen and Controlling Shareholders of some of the most influential companies in Sri Lanka.
It has over 500 member organizations and is affiliated with nearly 50 business chambers in the country. The organization is managed and controlled by young entrepreneurs but also boasts a number of senior and respected business leaders who joined the organization during its formative years to help shape COYLE into what it is today.
The Chamber actively promotes entrepreneurship, the development of rural communities, and thought leadership. In adherence to the organization’s strongly held principles and as a mandatory service to the community, COYLE engages in countless CSR initiatives through its member companies around the country. The Chamber provides leadership, learning, and development for its members and stakeholders, and over the years, it has grown into a vehicle for business growth in Sri Lanka via its many local and global networks.
The past year was an exceptionally challenging one for all parties in the Sri Lankan economy. Remarking on this, the Outgoing Chairman of COYLE, Mr. Dimuth Chankama Silva, stated during his address, “This year was the greatest test of our mettle. Even diamonds are born out of pressure. This year gave us the opportunity to shine through pressures from all directions. I believe we shone. We are here alive and kicking, our businesses are growing, we are conquering international markets and territories, and COYLE has grown in leaps and bounds.”
A notable emphasis was given to the introduction of the COYLE theme for the year 2023/24, EVOLUTION: #Resilience, #Agility, and #Transformation. The incoming Chairman, Mr. Rasith Wickramasingha, stated, “Evolution is to upscale capability, enhance skills and increase creativity, innovate at a time of chaos, and re-imagine a new business environment. Evolution requires change: change in mindset, attitude, self-awareness, and acumen of the surrounding environment as well as culture.”
He went on to note that in today’s environment, every five years constitutes a generational gap and emphasized the need for COYLE to evolve as a chamber in order to be relevant and sustainable for the future. He further mentioned that decades of ill-conceived, politically driven policies based on the advocacy of a few, rather than consultative decision-making with recognized business chambers, have led to the current crisis. Elaborating on this point, Mr. Rasith Wickramasingha said, “Policy formulation should be done based on sound economic principles and business acumen. Businesses rely on stable policies so that they may plan ahead. Ad hoc policies which bring no economic benefit have led to losses in the private sector and leakage of foreign exchange from the country.”
He emphasized that it is heartbreaking to see that the individuals who strive continuously for the betterment of the country and persistently do the right thing get penalized while those engaging in unethical practices to avoid taxation are rarely held accountable. COYLE hopes for more genuine dialogue from policymakers regarding these issues and affirms that the organization’s globally exposed and experienced members could be a great value addition to any actions taken to revive the economy. What sets COYLE apart from the rest is that its members are made up of business owners and decision-makers who are passionate about doing something good for the country, who are genuinely aligned with this cause, and willing to embrace the future without diluting our national and cultural heritage.
The 24th Anniversary Celebration of COYLE closely reflected in its overarching tone the state of the country following the Easter Bombings, the pandemic, and the economic and political crisis. The event also honored and recognized the Chamber’s numerous members who weathered the storm by building resilience, being agile, and transforming their businesses. It also highlighted the many CSR initiatives undertaken by COYLE member organizations, many of which were carried out quietly, purely as a service to the country.
These initiatives focus on communities most affected by the calamities of the past years and were chosen regardless of race, religion, or creed. With a host of esteemed and influential guests attending the celebrations, COYLE made this event a platform to convey a strong message calling for sociopolitical change in the country. COYLE believes that the hardline decisions taken by President Ranil Wickremesinghe and the Governor of the Central Bank, Dr. Nandalal Weerasinghe, were tough but necessary considering the state of affairs. The Chamber also notes that as a result of these decisions, gradual change for the better is apparent in the economy. Considering the massive pool of collective experience, expertise, and connections held by COYLE, it is capable of providing significant value and insight for economic reform. Hence, COYLE urges the government to actively engage and work together with the Chamber to expedite economic revival.
Once again, AIA Ran for their Lives – proud sponsor for the 3rd consecutive year
AIA Insurance was humbled to be a part of Run For Their Lives 2023, in raising funds for the Apeksha Cancer Hospital. The charity run aligns with AIA’s brand purpose of helping people live healthier, longer, better lives with focus on the prevention and management of Non-Communicable Diseases in Sri Lanka. The company will continue its commitment to fight NCDs and actively engage in creating awareness on leading NCDs in the country.
With AIA’s goal of making a positive impact on one billion lives by 2030, participants at RFTL were encouraged to make a pledge for a healthy habit that could help prevent illness and remain healthy in the long run. The participants also took part in a real-time survey that measured their unhealthy habits and recommended healthy lifestyle habits. Participants were also instantly rewarded for taking part in the wellness games and the free BMI sessions organised by one of AIA’s wellness partner Vida Medical Clinic.
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