Sri Lanka’s export growth has been slow and concentrated, contributing to macroeconomic vulnerability. The country faces challenges such as a trade deficit, currency depreciation, and limited export diversification, which exposes it to external shocks. India offers significant untapped export potential for Sri Lanka, with $808 million in unrealized potential, primarily in apparel, tea, and spices. However, nontariff barriers and weaknesses in the Indo-Sri Lanka Free Trade Agreement (ISFTA) persist, limiting this potential.
Key reforms to boost export competitiveness include removing para-tariffs, streamlining export procedures, and upgrading the ISFTA. Phasing out para-tariffs would reduce administrative costs and improve competitiveness, while a trade national single window would facilitate exports by digitizing and streamlining procedures. Export promotion for products with large potential, such as spices and tea, could deliver quick wins. Sri Lanka’s strategic location and deep-sea port make it a competitive gateway to India, offering opportunities to integrate into global value chains.
The ISFTA’s limitations include excluding many products from duty-free access and overly restrictive rules of origin. Mutual product certification recognition and harmonization can lower nontariff barriers. Expanding the ISFTA to more products, relaxing tariff-rate quotas, and introducing more flexible rules of origin could unlock its potential. Additionally, expanding the ISFTA to services and investment could unlock synergies in IT, tourism, logistics, and business services, further enhancing Sri Lanka’s attractiveness to investors.
