Financial Times

South Asia is the home to around two billion people out of the six billion on the planet. Data from the World Bank and the ADB suggest that its regional GDP was around US$ 850 billion at the end of 2004, and expected to grow at a rate not less than 5.5% for the next decade.

Even with the conservative growth rate of around 3.5% - 4%, by end of 2010, South Asia can aspire to become a trillion dollar economy, with services and manufacturing, accounting for a larger chunk of GDP in comparison to agriculture.

The South Asia Free Trade Agreement (SAFTA), is going to be a critical vehicle for accelerating the transition of South Asia from a “Billion dollar” to a “Trillion dollar” economy. By preferentially reducing tariff and non –tariff barriers to goods originating from South Asian region (Comprising Sri Lanka, Bangladesh, Bhutan, India, Maldives, Nepal & Pakistan) , SAFTA regime can create investment and trade opportunities having the potential to expand the per capita income in South Asia to an average of 4% per annum in the next decade. Deeper trade integration through SAFTA is expected to generate “Peace Dividend” that might end up channelising billions of dollars into hard and soft ware infrastructure, Manufacturing & service skill development like BPO’s facilitating a more robust level of trade in the region. Fostering of efficient institutions and infrastructure will only reduce the cost of trading within the region, thereby enhancing the trade competitiveness of industries located in South Asia.

GDP in South Asian Countries

The World Bank predicted that the regional GDP growth in South Asia is expected to slow down to 6.4% in 2006. But in 2005, GDP growth in the region was estimated at 6.9 per cent, up from 6.8 percent in 2004. I strongly believe that South Asia is in the period of transition, there is a need to implement effective economic, political, social and legal structures to support sustained growth. In 2005, India experienced growth rates in real GDP of 8.1%, whilst Pakistan and Bangladesh experienced growth rates of 8.4% and 6.3%, Bhutan 7.6%, Maldives 6.0%, Nepal 3.7% and Sri Lanka 5.9%. IMF provided a list Asian Countries sorted by GDP and listed a world ranking where India came in at no 11, Pakistan at 51, Bangladesh at 55 and Sri Lanka at 77, Maldives and Bhutan are on 159 and 162 respectively

With the implementation of SAFTA from 1st of January 2006, and the first half of tariff reduction coming into force from the 1st of July 2006 we will see a stronger economic growth in the region resulting in the world ranking changing drastically to the member countries. By 2013 the tariff and custom duties will be between 0-5 per cent where we will really see, SAFTA – Real time opportunity becoming a reality.

Sri Lanka Economy and Exports in 2005

As in the past, the services and industry sectors provided the impetus for growth during the period. Many agricultural sectors performed reasonably well, despite the poor performance in the fishing industry which was severely affected by the Asian Tsunami. The adverse effects of the Asian Tsunami continued to be felt in the fourth quarter of the year as well.

Exports to NAFTA increased by 6.4% in 2005. Exports to EU absorbed 28% of our total exports and registered a marginal increase of 2.7% due mainly to the decline in export of garments (2.1%) to the EU region, which accounted for 53% of our total exports to the region.

Exports to SAARC countries grew by 28% in 2005 to US$642 Million. SAARC accounts for 10.1% of the total exports up from 8.6% contribution in 2004.

Challenges to be addressed

Trade in South Asia is characterized by porous boarders and parallelism. Studies carried out by ICRIER and other bodies show that a magnitude of such parallel trade in goods is depriving the exchequers of SAFTA members. In such a context, SAFTA could be hailed to be a successful agreement if:

It can sufficiently give incentives to those taking part to engage in parallel trade, to trade their products using legal channels

Create a trade facilitating architecture that can arrest such parallel trade.

Whilst reduction in tariff rates might end up moving the trade arbitrates associated with illegal or parallel trade, one cannot deny that major gains from trade under SAFTA are hinged to addressing concerns in the area of trade facilitation in an accelerating manner. Article 3 in the SAFTA agreement states commitment by members to trade facilitation reforms through plans to integrate transport systems and harmonize standards. This can make movement across boarders less costly.

In the above context, care will have to be taken that rules of origin do not become disguised barriers to trade facilitation in the region and at the same time are not flouted at the cost of industry in South Asia. Respecting this thin line of difference will require tremendous will from regulatory authorities as well as industry. Raising sirens and demanding an overall of the system immediately after its implementation n order to address short term fears will only weaken the trade architecture of SAFTA and raise spanners in the time table of tariff liberalization.

SMEs: Opportunities and Challenges

In the back drop of the macro picture where Sri Lanka has registered a 28% growth to the SAARC countries we must be cognizant that the size of the SMEs in India is much larger in comparison to the SME counterparts in Bangladesh, Pakistan and Sri Lanka. Which means Sri Lanka SMEs will not have the advantage of economies of scale when it comes to pricing of products. The challenge for a Sri Lankan SME is to segment the consumers in the SAFTA region and identify NICH markets that we can command leadership by customization.

We will have the opportunity of pricing the product at a premium price due to customization. There after the challenge will be to close to market so that the SME can drive changing the product based on the changing needs of the south Asian consumer.

The proliferation of music and cinema from India to the region whist having cultural issues for a marketer provides the opportunity to use a single advertisement across the region, there by reducing the investment of a separate piece of ‘creative’ in each country of the SAFTA region.

If we are to discuss the issues let me take the example of the Chemical sector as I work for global detergent giant, a look at the major exports and imports of the SAFTA members in the chemicals business reveals that Bangladesh (agrochemical and fertilizers) and Pakistan (Pharmaceuticals, organic and inorganic chemicals) have the capabilities of exporting intermediate and higher end chemicals into the region. On the other hand all countries in the region namely Sri Lanka and India require importing of large quantities of chemicals to be used in their domestic industries.

This provides the opportunity for companies to invest in countries such as Sri Lanka using the many investor friendly policies. The 15 year tax holiday for investment of 30 Million and above is one such attractive offer for investors from the region to Sri Lanka. The Sri Lankan facility can be the window to the large Indian market that a typical Pakistan businessman will not have direct access to. This is one such case in point of exploiting the regional opportunity but there can be millions of dollars that can be circulated in the South Asian region with out letting these monies move out to the rest of the world.

If we define define our rules of origin requirements properly then there is every possibility that our exports can even enter European markets competitively using the cumulative rules of origin benefit extended by the European Union to SAARC.

But there is every opportunity that a non Sri Lankan company might also use the SAFTA frame work to import products from a country like India where one can enjoy the economies of scale principle and there by have more competitive pricing.

The domestic industry must understand that there are not going to be any tariff walls to protect local companies from the competition emerging from SAARC countries and in the near future from ASEAN countries too.

I strongly advocate that Sri Lanka must think about non – tariff barriers such as technical barriers, so that we can have to some degree control on free trade and protection to infant industry.

The writer is a top Marketer, business personality and economic analyst in the country. He is the Country Head for a British American Multinational company and Director of the Sri Lanka’s National Council for Economic Development (NCED) under the Presidential Secretariat.