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P.K.BALACHANDRAN | 5 JULY, 2019

Resumption of Hanging Will Cost Lanka Billions

Economic logic?


COLOMBO: If there is a resumption of hangings as per the present decision of the Sri Lankan President Maithripala Sirisena, Sri Lanka will be subjected to a heavy economic loss running into billions of US dollars.

The withdrawal of GSP-Plus concessions by the European Union (EU), which is likely to follow automatically, will reduce the country’s export earnings and markedly reduce the competitiveness of its products in the EU markets vis-à-vis several Asian countries enjoying such concessions. In the US too withdraws its GSP concessions, it will be a double whammy for Sri Lanka.

According to most economic commentators, Sri Lanka should be concerned about suspension of EU and US GSP facilities because 57% of its total exports go to these two markets.

The EU suspended its GSP-Plus to Sri Lanka in 2010 on charges of war-time human rights violations. They were restored only in 2017 after the change of government in Colombo. The US too restored the concessions in 2017.

Between 2010 and 2017, the export sector suffered significantly because of the absence of the GSP-Plus concessions.

While it is difficult to pin point the exact loss, one can get an idea by looking at how Sri Lanka’s Asian competitors fared in the EU market in its absence.

According to the International Trade Centre, in 2009- 2010, before the punitive withdrawal, Vietnam, Pakistan and Cambodia were all behind Sri Lanka. Their exports to EU were US$ 2.1 billion, US$ 1.5 billion and US$ 1.09 billion respectively, against Sri Lanka’s U$ 2.3 billion.

But by 2015, Vietnam’s apparel exports to the EU had risen to US$ 3.9 billion, Pakistan’s to US$ 2.9 billion and Cambodia’s to US$ 3.7 billion, with Sri Lanka trailing at US$ 2.4 billion.

It is interesting to note that Sri Lanka actually registered a small growth from US$ 2.3 billion to US$ 2.4 billion without the GSP-Plus. But in the absence of the concessions, Lanka moved at a snail’s pace in contrast to others, who galloped ahead thanks to the concessions.

The EU reinstated GSP Plus facility to Sri Lanka with effect from 19 May 2017, and the conditions in the apparel sector started looking up.

In many apparel categories, duties were cut from 9.6% to zero. In the seafood sector it came down from 18.5% to zero. In the fresh and processed fruits and vegetable sector it plunged from 12.5% to zero. In the porcelain and ceramic ware sector it came down from 8.4% to zero; and in the toy products sector from 1.2% to zero.

Apparels are Sri Lanka’s biggest exports to the EU. Given that the Rules of Origin under GSP Plus requires the fabric to be sourced from Sri Lanka or from an area that qualifies for regional cumulation in order to qualify for GSP Plus, there should be an increase in the demand for fabrics sourced from Sri Lankan fabric mills, rather than from countries such as China.

Sri Lanka’s leading export products to EU are included among the 7000 products eligible for the EU GSP. This is of great advantage to the island nation’s economy.

All apparels categorized under HS tariff Code 61, 62, and textile code 63, except a few items are permitted for export under the EU GSP facilities. Footwear, tunas, other sea foods, ornamental fish, some variety of cut flowers and foliage, black tea, gherkin, rubber items, activated carbon, table ware, wooden products are among Sri Lankan export products in the eligible list of the EU GSP.

Thus, almost 90% of Sri Lankan exports to EU are exported under GSP Plus or with zero duty.

Sri Lanka will continue to be eligible for GSP Plus only as long as the periodic reviews by the EU do not raise any red flags with regard to the implementation of agreed human rights and governance reforms.

Overall, EU exports were up by 11% in the 12 months after regaining GSP in 2017. Apparel accounted for nearly 60% of exports and grew by 8%. Fisheries exports had doubled since the removal of the fish ban and regaining GSP Plus. Rubber tyres and gloves did not gain volume, but eared more through higher prices.

Among the other advantages of being part of the EU GSP-Plus scheme is that it shows that Sri Lanka has good governance practices or is moving towards such practices. Such conditions are a signal to foreign investors to invest in Sri Lanka.

The GSP Plus scheme encourages increased value addition within Sri Lanka, and thereby promotes backward integration, resulting in the setting up of new industries, and creating new employment opportunities in the country.

Sri Lankan exporters can also exploit the potential for agro-based processed food exports in collaboration with European companies through joint ventures and transfer of technology.

Small and Medium Enterprises (SMEs) can be encouraged to work more effectively and be part of the value chains of larger companies.

Sri Lanka needs to go for diversification and not restrict itself to garments as now. Electronics, light engineering products, electrical items, wellness products and certain agricultural products, such as spices could be promoted in a focused manner. All of these can enter the EU market on a duty free basis.

However, the GSP Plus utilization rate is still relatively low in Sri Lanka. It was only 55 per cent in 2017. In clothing, it was 43 per cent.

But the EU is helping Sri Lanka make fuller use of the GSP-Plus. The EU-Sri Lanka Trade-Related Technical Assistance project launched in 2017 is aimed at increasing the trade competitiveness of Sri Lankan Small and Medium scale Enterprises (SMEs) in the SAARC and EU markets.

The reason for President Sirisena’s rigid stance is that he believes that the drug menace is ruining Lankan society and that the drug trade had been behind both Tamil and Islamic terrorism the country was subjected to.

Sirisena also believes that the Philippines President Rodrigo Duterte’s harsh methods against drug dealers have paid off and therefore they should be replicated in Sri Lanka.

Sirisena told the UN Secretary General Antonio Guterres, that anybody who opposes his decision on capital punishment has to be deemed to be a supporter of the drug trade. He told the European Union (EU) to back off when it warned that re-institution of capital punishment might lead to the suspension of trade concessions under the General System of Preferences-Plus (GSP-Plus) scheme.

Sirisena said that the threat of withdrawal is tantamount to interference in Lanka’s international affairs and that he will not allow any infringement of his country’s sovereignty.

It is yet to be seen whether economic logic or the question of national sovereignty will decided Sri Lanka’s fate.
 

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