The critical current economic issue is whether we would lose the GSP Plus status and what its implications would be for the economy. The country has enjoyed this concession for several years. It has undoubtedly assisted the country’s industrial exports. Unlike in the past Sri Lanka’s economy is dependent on industrial exports and any setback has serious implications for the trade balance, balance of payments, external reserves, incomes, employment and poverty. The decline in industrial exports has already had these effects. The crisis we faced in the early part of this year was partly as a result of our decreasing exports due to the global recession.
What is GSP Plus? It is an extension of the system of the General System of Preferences that was adopted as a result of the recommendations of UNCTAD that is described as a new deal for vulnerable countries. To benefit from ‘GSP Plus,’ countries need to demonstrate that their economies are poorly diversified, and therefore dependent and vulnerable. Poor diversification and dependence is defined as meaning that the five largest sections of its GSP-covered imports to the community must represent more than 75 percent of its total GSP-covered imports. GSP-covered imports from such a country must also represent less than 1 percent of total EU imports under GSP.
To benefit from this concession countries have to also ratify and effectively implement the 16 core conventions on human and labour rights and 7 (out of 11) of the conventions related to good governance and the protection of the environment. At the same time beneficiary countries must commit themselves to ratifying and effectively implementing the international conventions which they have not yet ratified. In any case, the 27 conventions have to be ratified by the beneficiary countries by December 31 2009. Therefore the GSP Plus facility was granted to Sri Lanka on the condition that the Sri Lankan government would abide by international covenants pertaining to civil and political rights. This commitment was given and the trade concessions were obtained. If we now retract from that commitment we lose the trade concessions.
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The European Commission has investigated and submitted a report that has found that Sri Lanka has fallen far short of those commitments. The Government is expected to respond to the findings of the Report by November 6. Responding to the report is mandatory if we are to enjoy the trade concessions under GSP Plus. From statements made by government sources it is unlikely that there would be an adequate response or cooperation by the government. Consequently the withdrawal of the GSP Plus concession is a matter of time. Whether Sri Lanka has violated the human rights conditions is no doubt a controversial issue that has been discussed widely. It is one that the reader could judge. This issue is outside the purview of this column that looks at the economic implications of the withdrawal of the GSP Plus status.
The Central Bank is of the view that the withdrawal of GSP Plus would not be of much consequence to the economy. It points out that according to the European Commission’s estimate, the total value of benefits in terms of lower import duties under the GSP+ scheme for the year 2008 was euro 78 million which is only 1.4 per cent of Sri Lanka’s total exports in the same year. Therefore, the Bank concludes that “the loss of preferential duty margin by around 6-7% arising from a potential withdrawal of the GSP plus facility is not expected to have an adverse impact on Sri Lanka’s exports.”
This is a cavalier attitude towards an important economic issue. Besides, the calculation is flawed and misleading. What the country would lose is not the extent of the benefit of the duty concession but the value of exports that we would lose.
The US accounted for 24 percent of Sri Lanka’s export market while EU accounted for 23 percent of exports in 2008. This is of all exports, but when industrial exports, and especially exports of garments and textiles are considered the importance of the EU grows. The fact is that the export of the country’s industrial exports to EU countries is enormously important to the country’s industrial sector. While the US market has shrunk, the EU market has grown. The garment industry is the country’s largest export earner. It contributes 56 percent of total industrial exports. The value of apparel exports in 2008 was US$ 3469 million. The bulk of these exports (94 percent) are to the USA and Europe. Nearly one half of the country’s apparel exports (49 percent) go to EU countries. The second largest market for garments is the US that accounts for 45 percent of garment exports. Only an insignificant 6 percent go to markets outside these destinations.
The Central Bank in its Annual Report for 2008 attributes the growth of the EU market to the GSP Plus concession. It said: “The declining growth in the US market in recent years was offset to a certain extent by the sharp expansion in exports to the EU, the largest market for Sri Lanka’s exports of apparel. The growth in exports to the EU was supported by the GSP + scheme, which provides duty free access to Sri Lankan exporters.” The withdrawal of the concession would cripple several of the country’s industrial exports, especially apparel exports, as nearly 50 percent of these exports are to EU countries. Textile and garment industries are estimated to employ about 270,000 and therefore the loss of exports would have a serious impact on employment.
The issue is therefore straightforward, there is no way our garment exports could be competitive in this market if we lose the trade concessions that come with the GSP+ facility. That means the death knell to the country’s largest industrial export sector. The withdrawal of the GSP Plus concession will also affect other exports such as ceramics, rubber and leather goods.
The implications of losing the GSP plus status are serious for the economy. It will make a dent in the trade balance and increase the trade deficit further. However it is not a matter of the balance of payments as worker remittances could offset much of the increase in the trade deficit. The large volume of foreign exchange reserves could assist in solving the resultant balance of payments problem. The serious economic repercussions are a loss in employment, incomes and poverty for workers in the country and a huge setback to industrialization. |
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