Sri Lanka's free trade deal with Singapore has yet to be implemented

With a key geostrategic location in the Indian Ocean, international trade is a natural focus for Sri Lanka. The country has signed on to a variety of bilateral and multilateral free trade agreements (FTAs) over the years, with the most recent being the Sri Lanka-Singapore FTA (SLSFTA) in January 2018. Yet, as 2019 began, the SLSFTA ran into a number of challenges, shedding light on the pros and cons of such arrangements.

Key Partner

At that time of signing, Sri Lanka was Singapore’s 36th-largest trading partner, according to Singapore’s Ministry of Trade and Industry, with bilateral trade amounting to LKR352.4bn ($2.2bn) in 2017. This involved approximately LKR326.3bn ($2.1bn) in exports from Singapore to Sri Lanka, with trade the other way registering around LKR23.2bn ($146.1m).

The agreement is the first comprehensive trade pact the government has signed beyond goods, covering services, investment, sanitary and phytosanitary measures, technical barriers to trade, trade remedies, dispute settlement, Customs cooperation, government procurement, e-commerce and intellectual property rights. The SLSFTA is additionally important because it is part of the government’s broader push to “look east” in building new trade ties and reducing the country’s dependence on EU and US export markets. For Sri Lanka, the SLSFTA promised more investment, with government officials saying that it would further open trade and boost manufacturing and services.

Covering far more than Sri Lanka’s existing deals with India and Pakistan, the SLSFTA is forecast to eliminate tariffs on around 80% of Singapore’s exports over a 15-year period, while also allowing Singaporean companies to bid for projects run by Sri Lanka’s government and state-owned enterprises. Further cementing ties between the two nations, the Singapore International Arbitration Centre was listed as the go-to institution for any disputes between investors and state authorities.

Questions 

Since the deal was signed, however, many local businesses and politicians have criticised the SLSFTA. Singapore’s membership in the increasingly tariff-free Association of South-east Asian Nations (ASEAN) bloc means Sri Lankan goods would gain greater access to ASEAN markets. However, there were also concerns that relaxed rules of origin criteria could mean such traffic would work both ways, allowing greater access to Sri Lanka for ASEAN states such as Vietnam, Thailand and Indonesia, which are more direct competitors with Sri Lanka than Singapore. Sri Lankan farmers were therefore worried about the arrival of cheaper commodities, though this concern was ultimately unfounded. Furthermore, as Singapore is one of the region’s most liberalised economies, Sri Lanka already enjoys widespread tariff-free market access.

Commissions of Inquiry

These concerns and others – notably over the procedure through which the SLSFTA talks were conducted – resulted in the appointment of a Committee of Experts to Evaluate the SLSFTA last year by President Maithripala Sirisena.

Published in December 2018, the committee’s findings were highly critical, with officials claiming that until Sri Lanka had reformed its economy to make it more competitive, deals such as the SLSFTA would not be beneficial to local businesses. “It is only through domestic economic reforms aimed at national development goals that the constraints impeding competitiveness can be eliminated,” the report read.

President Sirisena told the Singaporean authorities in January 2019 that changes would have to be made before the deal could be accepted, and as of February 2019 no such amendments had been made. In the meantime, the committee’s criticisms have not been lost on many businesses, which note that for Sri Lanka to attract more trade and foreign direct investment (FDI), additional approaches will needed. Indeed, Keerthi Gunawardane, vice-president of the Federation of Chambers of Commerce and Industry of Sri Lanka, told local media in September 2018 that attracting FDI would require improving the ease of doing business.