Pakistan –Sri Lanka Trade flow needs to adjust to market demand

Pakistan and Sri Lanka share warm and friendly relations through a long history based on religion, culture and trade. In modern times both countries further cemented the cooperation through sports, technology, and defence. Pakistan and Sri Lanka commenced formal trade in 1955 by providing most-favoured nations status (MFN) to each other. On the trade front Sri Lanka’s exports to Pakistan were $91.86 Mn in 2021 and Pakistan’s exports were $394.34 in the same year while combined trade volumes were around USD 486 Mn. The trade balance between two countries has been in favour of Pakistan for the last five (5) years. This is no surprise because in international trade most of the time the bigger economy always tend to export more to the smaller economy.  At present Pakistan is the 26th export market for Sri Lanka and Pakistan is the 12th Import partner of Sri Lanka. The other notable feature is neither country is in the other country’s top 10 export or import destinations. This was in contrast to the trade patterns in the past. In 1977, Pakistan was Sri Lanka’s largest export market with a share of 8.67% supported by strong market penetration of traditional products such as Ceylon Tea amounting to 27,617 MT. Even In 1990, Pakistan accounted for 45.8% of Sri Lanka’s exports to SAARC countries and 27.6% of Sri Lanka’s imports from same region. Thereafter the trade volumes between two countries showed a sharp decline. The trade landscape between Pakistan and Sri Lanka is supported by Pakistan Sri Lanka Free Trade Agreement (PSFTA) signed in August 2002 effective July 2005, South Asia Free Trade Agreement (SAFTA) and South Asia Preferential Trade Agreement (SAPTA).Under PSFTA Initially Pakistan offered duty-free market access to 206 products and Sri Lanka granted duty-free access to 102 products and later product coverage was increased to over 4000 products.

 Bilateral Trade Flow under Trade agreements,                    Value in US$ Mn

  • Source: DOC 

However Sri Lanka‘s low export volumes in 2021 under FTA concessions are amounted to 67% of total exports to Pakistan. The dominant partner Pakistan managed to channel around 93 % of its exports to Sri Lanka outside the PSFTA. Agreement (PSFTA) provide law tariff restrictions for both the countries, but the existing negative list , non-tariff barriers have overshadowed the impacts of tariff rationalization under the PSFTA and in turn, have been the major impediments to export performance for both.

Future works on Sri Lanka Pakistan trade under the FTA should be focused more on identifying realistic export opportunities for Sri Lanka in Pakistan’s markets and identifying the possible constraints with which Sri Lanka exporters may face in diversifying its export to Pakistan. Similar exercise should happen on, Pakistan as well since Sri Lanka is an important market for textile products, machinery, and pharmaceuticals along with other products that Pakistan records significant exports to other countries. Any FTA will provide a significant market share to partner countries on the drawing board but to get the best out of FTA’s is challenge for some countries. According to trade complimentary index prepared by SAARC Chamber of Commerce and Industry (2020) in Islamabad Pakistan-Sri Lanka bilateral trade has the combined potential of over US$ 2.7 billion. One of the major opportunities for Sri Lanka is to enhance its Tea exports which have rapidly declined since 1970-80s.Sri Lanka lost the Pakistan Tea market to Kenya mainly due to the low cost tea came from Kenya. Though imposition of quotas, licenses are true fully against the spirit of free trade Sri Lanka needs to explore more innovative ways of utilizing the quota offered by Pakistan under the FTA for Sri Lankan Tea. The famous quote ‘The old questions can only be solved by new solutions “provides the direction to solve the challenge of utilizing the quota up to 10,000 MT of Ceylon Tea in all forms under FTA. The recent market survey indicate the increased popularity of Sri Lankan construction materials in Pakistan market.

Both Pakistan and Sri Lanka are lucrative investment destinations and the close proximity (1531 nautical miles) between Pakistan and Sri Lanka can be covered within 4 days therefore speedy delivery of goods is a positive factor for both countries. By and large both countries are English speaking countries with a sizable proportion of upwardly mobile middle class income earners providing an excellent opportunities for marketing communication. It’s important that both governments encourage their exporters to tap the partner country market by incentivizing and granting tax concessions on expenses incurred on research, innovation, and value addition and branding in the partner country to help them adjust to the demands of the partner country market. In case of Sri Lanka the trade support measures need to be upgraded and among those are need for rationalization of HS codes, Implementation of aggressive productivity improvement plan across the major industries, establishment of the national single window, introduction of progressive National Trade Policy (NTP) based on national interest, setting up of a specialized unit for market intelligence, granting subsidies to Sri Lankan exports and special grants to encourage SME’s exports etc.

Author: Ajith D Perera, Executive Secretary – APTA Chamber of Commerce and Industry.

President – Professional Business Coaches Association,

Secretary General/ CEO –( 2014-2022) Federation of Chambers of Commerce and Industry of Sri Lanka

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