RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/128 
4 February 2004  
 
(04-0329) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
SRI LANKA 
 
Report by the Secretariat 
 
  
 
This report, prepared for the second Trad e Policy Review of Sri Lanka, has been 
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has, 
as required by the Agreement establishing the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification from the Government of Sri Lanka on its 
trade policies and practices.  The Secretariat did not receive detailed comments 
or clarifications from the authorities on some parts of this report. 
 
Any technical questions arising from this report may be addressed to 
Mr. Michael Daly (tel. 022-739 5077). 
 
Document WT/TPR/G/128 contains the policy statement submitted by the 
Government of Sri Lanka. 
 
 
 
Note: This report is subject to restricted circul ation and press embargo until the end of the meeting 
of the Trade Policy Review Body on Sri Lanka. Sri Lanka WT/TPR/S/128 
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CONTENTS 
 
    P a g e  
SUMMARY OBSERVATIONS  
 (1) E CONOMIC ENVIRONMENT  vii 
 (2) T RADE AND INVESTMENT POLICY FRAMEWORK  vii 
 (3) T RADE AND TRADE -RELATED POLICIES AND MEASURES  viii 
 (4) S ECTORAL POLICIES  ix 
 (5) O UTLOOK  xi 
I. ECONOMIC ENVIRONMENT 1 
 (1) I NTRODUCTION  1 
 (2) R ECENT ECONOMIC DEVELOPMENTS  3 
 (3) M ACROECONOMIC POLICY DEVELOPMENTS  5 
 (i) Monetary and exchange rate policy 5 
 (ii) Fiscal policy 7 
 (4) S TRUCTURAL MEASURES  8 
 (5) T RENDS AND DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT  10 
 (i) Composition of merchandise trade 10 
 (ii) Direction of merchandise trade 10  (iii) Composition of trade in services 10 
 (iv) Foreign direct investment (FDI) 13 
 (6) O
UTLOOK  14 
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 16 
 (1) T RADE AND TRADE -RELATED POLICY OBJECTIVES  16 
 (i) Objectives 16  (ii) Institutional and legal framework 16 
 (iii) Trade policy formulation and implementation 17 
 (2) T
RADE AGREEMENTS AND ARRANGEMENTS  19 
 (i) World Trade Organization 19 
 (ii) Other arrangements 21 
 (3) F OREIGN INVESTMENT REGIME  24 
III. TRADE POLICIES AND PRACTICES BY MEASURE 27 
 (1) I NTRODUCTION  27 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  28 
 (i) Procedures 28 
 (ii) Customs valuation and rules of origin 28  (iii) Tariffs 29 
 (iv) Other charges affecting imports 36 
 (v) Import prohibitions, restrictions, and licensing 38  (vi) Contingency measures 40 
 (vii) Standards and other technical requirements 40 
 (viii) Government procurement 44   
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 (ix) Import operations of state-trading enterprises 47 
 (x) Local-content schemes 47  (xi) Other measures 47 
 (3) M
EASURES DIRECTLY AFFECTING EXPORTS  47 
 (i) Procedures 47  (ii) Export taxes and other charges 48 
 (iii) Minimum export prices 50 
 (iv) Export prohibitions, licensing, and other restrictions 50  (v) Export operations of state-trading enterprises 52 
 (vi) Export support 53 
 (vii) Export performance requirements 55  (viii) Export finance, in surance, and guarantees 56 
 (ix) Export promotion and marketing assistance 56 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  56 
 (i) Industrial policy 56 
 (ii) Incentives 58 
 (iii) Competition policy and regulatory issues 60 
 (iv) Price controls 63 
 (v) Corporate governance 63  (vi) State-owned enterprises and privatization 65 
 (vii) Intellectual property rights 66 
IV. TRADE POLICIES BY SECTOR 72 
 (1) I
NTRODUCTION  72 
 (2) A GRICULTURE  73 
 (i) Overview 73  (ii) Import policy 78 
 (iii) Subsidies and other assistance 80 
 (iv) Marketing 82  (v) Privatization 82 
 (vi) Land policy 83 
 (3) M
ANUFACTURING  83 
 (ii) Textiles and clothing 87 
 (iii) Petroleum 90 
 (4) E LECTRICITY  92 
 (5) S ERVICES  94 
 (i) Overview 94 
 (ii) Financial services 95 
 (iii) Telecommunication services 99 
 (iv) Transport 102  (v) Tourism 107 
REFERENCES   109 
APPENDIX TABLES  115 Sri Lanka WT/TPR/S/128 
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    P a g e  
CHARTS 
 
I. ECONOMIC ENVIRONMENT  
I.1 Product composition of merchandise trade, 1996 and 2002 11 
I.2 Direction of merchandise trade, 1996 and 2002 12  
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 III.1 Distribution of MFN tariff rates, 1998, 2001 and 2003 30 
III.2 Tariff escalation by 2-digit ISIC industry, 1998 and 2003 32 
III.3 Share of bound tariff lines by HS section, 2001 35 III.4 Import licensing by HS section, as at March 2002 39 
III.5 Items which must comply with SL standards, by HS section, 2001 41 
 IV. TRADE POLICIES BY SECTOR 
 
IV.1 Structure of production in manufacturing, 2002 85 
IV.2 Manufacturing indicators, 1996-2002 86 
IV.3 Interest rate spreads of commercial banks, 1990 and 1998-2002 98  
 
TABLES 
 
I. ECONOMIC ENVIRONMENT 
 I.1 Social indicators, 1996-02 1 
I.2 Selected macroeconomi c indicators, 1996-02 4 
I.3 Realized investment stocks of Board of Investment (BOI) enterprises, 1996,   1998 and 2001-02 13 
 
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES  
II.1 Main institutions involved in trade policy formulation and implementation, 2003 18 
II.2 Quota utilization of ready made garments and tea under ISFTA 23 II.3 Reserved and regulated sectors for FDI 25 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Rules of origin  29 
III.2 Structure of MFN tariffs in Sri Lanka 31 
III.3 Summary analysis of Sri Lanka's MFN tariff, 1998, 2001, and 2003 33 
III.4 Sri Lanka's preferential rates, 2003 36 III.5 Excise (special provisions) duty 38 
III.6 Selected amendments to the import licensing regime, 2000-03 39 
III.7 Methods to select bidders 46 III.8 Export cess and other export levies 49 
III.9 Products restricted or prohibited for export 50 
III.10 Export incentives  54 
III.11 Industrial licensing and other controls 57 
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IV. TRADE POLICIES BY SECTOR 
 IV.1 Agriculture, livestock and fishing in Sri Lanka, 1995-02 74 
IV.2 Lines where the MFN rate is higher than the bound rate 79 
IV.3 Sri Lanka's banking system, 2002 96 IV.4 Telecommunication services, 1996-02 100 
IV.5 Shipping services, 1997-02 104 
IV.6 Tourism statistics, 1996-02 107  
 
APPENDIX TABLES 
 
II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 
 AII.1 Selected notifications by Sri Lanka under WTO Agreements, as at June 2003 117 
 
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
AIII.1 Goods subject to concessional duty rate or exempted from import duties 119 AIII.2 Import prohibitions or restrictions 121 
AIII.3 Investment incentives under the Board of Investment (BOI) regime,  
 September 2003   123 AIII.4 Investment incentives under the Inland Revenue Act 126 
AIII.5 Privatization, 1995 to September 2003 128 
 IV. TRADE POLICIES BY SECTOR 
 
AIV.1 Specific rates, as at March 2003 130 AIV.2 WTO agricultural products subject to  import licensing, as at March 2003 132 
AIV.3 Applied tariff escalation and tariff ranges, 1998 and 2003 134 
AIV.4 Sri Lanka's MFN tariff by ISIC category, 1998 and 2003 137  
 Sri Lanka WT/TPR/S/128 
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SUMMARY OBSERVATIONS 
(1) ECONOMIC ENVIRONMENT  
1. Sri Lanka's real annual growth in 
GDP averaged 4% during the period under 
review (1996-03), despite political uncertainty 
owing to the internal armed conflict, lasting some 20 years, and related economic difficulties.  Per capita GDP also rose to US$872 in 2002, 9% higher than in 1996.  
Nonetheless, poverty remains widespread, 
especially in rural area s.  The economy, which 
started recovering in 2002 because of the peace accord, remains fragile and its full recovery depends on the authorities' ability to ensure peace.  Moreover, sustainable 
economic growth requires major 
macroeconomic and structural reforms to redress fiscal imbalances and clear the way for greater private-sect or involvement in the 
economy, which would improve economic 
efficiency and thus competitiveness. 
2. Fiscal imbalances continue to be a 
major problem in Sri Lanka.  During the review period, the budget deficit averaged 9% of GDP; it reached its highest level in 2001 (10.8% of GDP), but declined to 8.9% of GDP 
in 2002 after greater fiscal discipline was 
adopted.  Servicing the public debt, which exceeds GDP, has severely hampered growth.  The Government’s main macroeconomic policy objectives include reducing the budget 
deficit and tackling the debt crisis.  Related 
structural objectives involve the sale of inefficient loss-making state-owned enterprises, and tax reform aimed at increasing tax revenue, especially through 
improved tax collection. 
3. The Government is still involved in a 
number of loss-making commercial activities in many sectors.  In particular, state-owned enterprises supplying, inter alia, electricity, petroleum and public transport, are highly 
indebted.  State involvement in banking and 
transport remains import ant.  Improving the 
soundness of the state banks, which dominate banking, is crucial to rehabilitating the financial system.  In addition, escalating power and energy costs, owing to inefficiency, 
penalize users.  The electricity and petroleum subsectors are being restructured and the telecommunications and insurance subsectors 
privatized. 
4. Sri Lankan exports remain 
concentrated in a few goods (clothing and tea) and markets (the United States and the European Union).  Export performance has 
been poor because of unreliable domestic 
supply, security problems, and developments affecting Sri Lanka's ma in export products and 
markets.  For instance, tea and garment prices have declined, and competition is increasing from low-cost clothing suppliers and from 
countries receiving trade preferences in major 
markets.  Further structural and institutional reforms, including in areas of taxation, state-ownership, the financial system, and basic infrastructure, should improve Sri Lanka’s 
international competitiveness and thus 
contribute to export growth and diversification.  Policies aimed at further opening the Sri Lankan economy to trade and foreign investment can be expected to contribute to the success of these structural 
reforms. 
(2) T
RADE AND INVESTMENT POLICY 
FRAMEWORK  
5. Sri Lanka’s trade policy objectives 
include moving towards a more outward-
oriented trade regime and improving market 
access for its exports.  In recent years, however, the focus of its trade policy has seemingly shifted towards regionalism, which Sri Lanka considers a springboard for broader 
trade liberalization.  Nevertheless, Sri Lanka 
recognizes that its long-term trade and other economic interests are best served by a stable and liberalized multilateral trading system that supports the needs of developing nations.  Thus, Sri Lanka, an original Member of the 
WTO, continues to play an active role in the 
organization.  It grants at least MFN treatment to all its trading partners. 
6. The authorities stated that since the 
last review, policies have been aimed at WT/TPR/S/128 Trade Policy Review 
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enhancing production and productivity 
through a continuous process of economic reform, with a view to promoting a more efficient allocation of resources, while 
improving the environment for private 
domestic and foreign investment.  While Sri Lanka seems to be much more open than in 1995, trade barriers still impose unnecessary economic costs.  Moreo ver, there have been 
some backward steps in the reform effort, as 
trade-related and other economic policies are changed frequently in an ad hoc manner, mainly because of political pressures, with detrimental effects on the transparency and predictability of Sri Lanka’s trade policy 
regime. 
7. Sri Lanka’s institutional and legal 
framework has remained largely unchanged since 1995.  The Government has attempted to facilitate private sector development with less 
reliance on control and regulation.  
Nonetheless, Sri Lanka's Government is, in per capita terms, one of the biggest in the world, employing around one million public servants.  The executive comprises 57 ministries, some 37 of which are cabinet rank.  The large 
number of ministries contributes to 
overlapping jurisdictions in trade and trade-related policies leading to a certain lack of coherence in their formulation and implementation.  This tends to undermine the 
cost-effective implementation of policy 
measures and delivery of government programmes.  
8. Undue political influences, which give 
rise to ad hoc policy developments and 
unsatisfactory governance practices, would 
seem to have had a negative impact on the reform process and economic performance.  Transparency of the regulatory system also appears to be somewhat lacking.  While Sri Lanka's legal system appears to be well 
developed and laws covering, inter alia, taxes, 
exchange controls, customs, standards, and intellectual property rights are in place, foreign and domestic investors often complain that the regulatory system allows for too much 
bureaucratic discretion.  Enforcement 
mechanisms are also weak and coordination problems are common between the relevant 
agencies. 
9. Sri Lanka's investment regime has not 
undergone major changes since 1996.  
Foreign equity restrictions were relaxed in key 
services, such as finance, mass transport, telecommunications, and professional services.  Incentives are still available to national and foreign investors.  Nevertheless, 
foreign inflows have remained subdued, 
probably due in part to the civil conflict, but also to other factors including obstacles to clearing products through customs, lack of access to land to build factories, and inadequate infrastructure (e.g. poor 
transportation facilities and unreliable power 
and water supplies). 
(3) T
RADE AND TRADE -RELATED 
POLICIES AND MEASURES  
10. At the time of its previous Trade 
Policy Review in 1995, Sri Lanka had made 
substantial progress in liberalizing trade as a part of its extensive economic reform programme introduced in the late 1970s.  Since then trade liberalization efforts have slowed and economic reform in general has 
received less attention as efforts have 
concentrated on ending the long drawn out civil conflict.   
11. The tariff, which involves 11 rates, 
remains a major instrument of trade policy 
and source of government revenue.  A planned 
two-band tariff system has not been attained mainly because of revenue considerations and political pressure from protected producers and other interest groups.  Reflecting these 
pressures, the tariff lacks predictability;  rates 
have been raised and lowered frequently in an ad hoc manner during the period under review.  The current average applied MFN tariff (as of March 2003) is 9.8%, up from 9.2% in 2001.  Furthermore, in 2001, an 
import surcharge of 40% based on the c.i.f. 
value and the import duty (i.e. c.i.f. value times import duty) was introduced to increase tax revenues, but then lowered to 20% in 2002 (and extended indefinitely beyond its original Sri Lanka WT/TPR/S/128 
 Page ix 
 
 
end date in 2003).  Tariff exemptions are 
common;  indeed, it has been estimated that some 70% of all imports enter duty free, which seems to be in conflict with revenue objectives.  
Their elimination could add transparency to 
the tariff and compensate for the possible decline in tariff revenue from the planned across-the-board tariff reduction.  Non-tariff barriers, especially licences affect a 
substantial number of goods.  Moreover, as in 
the case of tariffs, licences are removed and restored easily, and often used interchangeably with tariff increases.  Sri Lanka does not have any provisions in place to use contingency measures, although anti-
dumping legislation has been drafted.  
Standardization is aimed at ensuring the quality, safety, and performance of products and services.  Sri Lanka’s national standards and technical regulations follow international 
guidelines whenever possible.  
12. Export policies also suffer from 
inconsistencies.  In or der to promote exports, 
procedures have been streamlined;  nevertheless, they continue to be regulated by a myriad of laws.  Several incentive 
programmes (e.g. duty exemptions, 
drawbacks, export-processing zones), some of which are contingent on export performance, are available to support exports.  According to the authorities, export duties have been phased 
out in all sectors, although they may be 
restored if the Government feels that there is a need to promote further processing of local materials.  Traditional exports are still subject to export cess;  apparently these cesses are 
earmarked to finance specific activities (e.g. 
R&D, export promotion, and to support small-
scale land holders).  In addition, a few items are subject to export licensing.  Export competitiveness would benefit from the implementation of more coherent and 
predictable trade policies. 
13. Tax and non-tax incentives remain in 
place to promote the establishment of export-oriented industries, industrial diversification, and industrialization in  specific regions.  
These have had limited success, however.  Sri 
Lanka continues to export only a few goods;  manufacturing depends heavily on the 
production of textiles and clothing, and most industries are still located close to Colombo.   
14. Government intervention through 
regulation and ownership of enterprises 
remains important.  Privatization has been slow, and loss-making state-owned enterprises remain a heavy budgetary burden.  The main objective of privatization has been to raise 
revenues rather than to improve the economic 
efficiency of the enterprises and sectors involved.  As a result, in some sectors, private monopolies have replaced public ones;  a new competition law was passed by Parliament in January 2003, but it remains to be seen 
whether the new law addresses this and other 
weaknesses of the former competition regime.   
15. While new statutes have been drafted 
to govern the protection of intellectual property rights (IPRs), it is not clear when 
these will come into force.   In any event, no 
data are available to determine whether existing IPR laws are being enforced in Sri Lanka.  
(4) S
ECTORAL POLICIES  
16. Agriculture remains an important 
sector in Sri Lanka with a third of the 
population engaged in agricultural or related activities;  it contributed some 20% to GDP in 2002.  The sector is also a major source of raw materials and earner of foreign exchange.  
During the period under review, the provision 
of different subsidies (e.g. consumer, producer, and export subsidies) and other forms of assistance have failed to improve the sector's growth and productivity, which have 
remained low.  This poor performance may be 
attributed, inter alia , to low levels of 
investment, lack of quality inputs, heavy dependence on regular rainfall, traditional cultivation practices, lack of credit, inadequate infrastructure (notably 
transportation), weaknesses in the marketing 
system, state control of land, and inconsistent trade policies.  Government intervention in agriculture, as in other sectors, remains substantial.  Less protection on agricultural WT/TPR/S/128 Trade Policy Review 
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goods and other forms of assistance together 
with the adoption of a more predictable trade policy regime could lead to a better allocation of resources, thus rais ing productivity and 
increasing living standards.  In addition, the 
establishment of a transparent land tenure system might make farmers more willing to invest and to adopt modern farming technologies. 
17. Industrial policy throughout the years 
has aimed at diversifying the industrial base;  regional industrialization has also been promoted.  To this end, attempts have been made by the Government to create an environment conducive to investment, with 
incentives to encourage both domestic and 
foreign investment.  Nevertheless, manufacturing, which contributed some 16% to GDP and accounted for 17% of employment in 2002, remains heavily concentrated in 
textiles and apparel, the leading net foreign 
exchange earner.  However, Sri Lankan textile and apparel exports have lost competitiveness;  the costs of production have risen as energy, telephone, and other utility prices have increased, and labour productivity has 
declined.  The apparel industry faces 
additional challenges, notably the expected end to the quota system in 2005, and increasing competition from low-cost manufacturers in other countries and from 
exports under preferential trading 
arrangements.   
18. State intervention in the oil sector is 
declining.  The Ceylon Petroleum Corporation (CPC), a state-owned enterprise, which until 
recently was the exclusive importing and 
marketing agency for petroleum and petroleum products, is being reformed.  The liberalization of oil product prices also seems to be under way.   
19. The electricity sector went through a 
severe crisis in 2001 and part of 2002, when 
there were prolonged power cuts, which had an adverse impact on the country's output and productivity.  In addition, high electricity tariffs, by raising business costs, have 
potentially weakened Sri Lanka's external competitiveness.  Investme nt in the electricity 
sector has been marginal in recent years;  as a result, there have been delays in repairing existing plants and in establishing new power 
generation capacity.  Sri Lanka is therefore 
likely to continue to face severe power shortages in the future.  The Ceylon Electricity Board (CEB), a state-owned monopoly, and its subsidiary Lanka Electricity Company (Pvt.) 
Ltd. (LECO), are still in charge of the 
generation, transmission, and distribution of electricity in Sri Lanka.  However, the Electricity Reforms Act passed in 2002 stipulates the re-structuring of the electricity sector;  it calls for the separation of the 
generation, transmission, and distribution 
operation of the CEB, while paving the way for greater private sector participation. 
20. The contribution of services to real 
GDP increased from 55% in 1996 to 62% in 
2002.  Tourism, one of Sri Lanka's largest 
foreign exchange earners, was severely affected by the domestic armed conflict;  however, it rebounded following the peace initiative, and offers co nsiderable potential.  
Nonetheless, the inefficient delivery of key 
services, such as telecommunications, 
financial services, and transport, has burdened the economy as whole.  The modernization of the services sector is essential to improving the economy's 
productivity and thus its international 
competitiveness.  The Government has taken 
some steps to reduce direct state involvement in the sector and raise private, including foreign, participation.  For instance, in 
financial services, foreign investment limits 
have been relaxed;  fu ll foreign ownership in 
insurance and banks is now allowed.  Since the last Review, privatization has been concentrated in the telecommunications and insurance subsectors.  The state monopoly on 
basic telecommunications has ended.  
Moreover, the state-owned insurance company has been fully privatized.  However, state involvement in banking remains important.  The banking system in Sri Lanka is weak, 
despite efforts to upgrade prudential 
supervision.  Banks have a high level of non-performing loans, and the two dominant Sri Lanka WT/TPR/S/128 
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banks, which are state-owned, are particularly 
weak and in need of major restructuring.  State intervention in transportation remains substantial.  The provision of air services is 
still dominated by the majority state-owned 
national carrier, Sri Lankan Airlines (SLA).  Another state-owned company has the monopoly on airport services.  Some private-sector involvement was allowed in the 
provision of port services in 1998, but there 
have been few reforms since then. 
(5) O
UTLOOK  
21. Sri Lanka's economic prospects 
appear favourable, provided that peace and political stability are maintained and 
economic reforms, particularly those aimed at reducing government intervention, are continued.  On the macroeconomic front, 
continued efforts are n eeded to ensure further 
fiscal consolidation.  Additional structural reforms, including in the fields of trade, investment, and institutions, should help raise the economy’s productivity and growth 
prospects.  These reforms could also help 
boost investor confidence and promote inflows of foreign investment, which are essential to Sri Lanka's future growth. 
 