Trade Openness and Integration
Sri Lanka began trade liberalization policies in the late 1970s, well ahead the rest of South Asia. Since then Sri Lanka has operated a unified exchange rate under a "managed float" system which became fully floated in January 2001. Sri Lanka’s trade integration, measured by the trade-GDP ratio stood at 82 percent of GDP in 2004. While average tariffs are low, tariff escalation has increased in recent years and effective protection to agriculture remains high. Most QRs were removed in the 1980s and by the end of 1990s only a few remained on selected agricultural and industrial commodities. However, these were eventually removed in 1998 following a review by WTO.
Future Trade Agenda
With the abolition of the Multi-Fiber Agreement (MFA) since January 2005, Sri Lanka faces additional challenges to remain competitive in the market place. Against this backdrop, it will be important for Sri Lanka to further strengthen external sector policies and address remaining "behind the border constraints" (e.g., infrastructure bottlenecks and labor regulations).
In terms of trade policies, a competitive exchange rate will need to be maintained and pressures to increase tariff protection will need to be resisted. It will also be important for Sri Lanka to maintain a selective policy towards FTAs, following those completed with India and Pakistan, given the substantial administrative costs associated these type of arrangements. For instance, it would be desirable for Sri Lanka to actively pursue an FTA with the US, Sri Lanka’s largest export market for garments. Since half of the garment imports to the US occur under various preferential agreements, such an FTA would help Sri Lanka compete in the post-MFA period.
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