Sri Lanka Economic Revival Through TradeAgreements – Free Trade Agreement With India

Sri Lanka, a nation grappling with unprecedented economic challenges, is now turning to an ambitious strategy of establishing free trade agreements (FTAs) with key partners to revive its ailing economy. The government, led by President Ranil Wickremesinghe, has set its sights on finalizing FTAs with India, Indonesia, Malaysia, Vietnam, and China by the end of 2024, a move that is expected to open new markets and provide a much-needed boost to the country's struggling businesses.

Reason behind the Decision

The decision to pursue these trade agreements comes at a time when Sri Lanka is facing its worst economic crisis since independence. The country defaulted on its sovereign debt for the first time in April 2022, leading to the ouster of former President Gotabaya Rajapaksa and the appointment of Wickremesinghe as the new leader. The new government has been forced to implement a series of unpopular economic reforms, including tax hikes and cuts to government spending, in order to secure a bailout from the International Monetary Fund (IMF).

The Pursuit of Free Trade Agreements (FTAs)

At the heart of Sri Lanka's economic revival strategy is the pursuit of FTAs with key partners. Foreign Minister Ali Sabry, in a recent statement, outlined the government's plans to finalize these agreements by the end of 2024. The primary objective of these FTAs is to open new markets for Sri Lankan businesses, providing them with access to larger economies and a wider range of customers.

One of the most significant FTAs that Sri Lanka is seeking to finalize is with India, its neighbor and one of the world's largest economies. Talks on the Economic and Technology Cooperation Agreement (ETCA) between the two countries resumed in Colombo in October last year after a hiatus since 2018. The previous negotiations had been hindered by political and trade union opposition, but the current government is determined to overcome these obstacles and secure a deal that will benefit both countries.

Economic Reforms and the IMF Bailout

In addition to pursuing FTAs, the Sri Lankan government has also been forced to implement a series of economic reforms in order to secure a bailout from the IMF. These reforms have been unpopular with many Sri Lankans, who have had to endure tax hikes, cuts to government spending, and other austerity measures.

However, the government has argued that these reforms are necessary in order to stabilize the economy and put it on a path to sustainable growth. The IMF bailout, which is worth around USD 2.9 billion, is seen as a critical lifeline for Sri Lanka, and the government is hoping that it will help to restore confidence in the country's economy and attract much-needed foreign investment.

Advantages of the India-Sri Lanka FTA

The potential benefits of an FTA between India and Sri Lanka are significant.

Advantage for Sri Lanka

t would mean access to a market of over 1.3 billion people, providing a much-needed boost to its struggling export sector. This is particularly important given that Sri Lanka's exports, which once contributed significantly to its GDP, have declined from 30% in the 1990s to just 15% today.

The FTA would also help Sri Lanka to diversify its export basket, which has traditionally been dominated by a few key commodities such as tea, textiles, and spices. By gaining access to the Indian market, Sri Lankan businesses would be able to explore new opportunities in sectors such as agriculture, manufacturing, and services.

Advantage for India

The FTA with Sri Lanka would provide a strategic foothold in the Indian Ocean region, allowing it to counter the growing influence of China in the region. It would also provide Indian businesses with access to a market that is closer and more accessible than many other countries in the region.

Recent Progress and Success Stories

Sri Lanka has already made significant progress in its pursuit of FTAs, recently signing an agreement with Thailand that provides access to a market worth USD 2.2 billion. This agreement is seen as a significant step forward for Sri Lanka's economic prospects, and the government is hopeful that it will serve as a model for future agreements.

There are also success stories that highlight the potential benefits of FTAs for Sri Lankan businesses. For example, the country's apparel industry has been able to take advantage of preferential trade agreements with the European Union and the United States, allowing it to become one of the largest exporters of clothing in the world.

Challenges and Obstacles

However, Sri Lanka's pursuit of FTAs is not without its challenges and obstacles. One of the biggest challenges is the political opposition that these agreements often face, particularly from trade unions and other interest groups that are concerned about the potential impact on domestic industries.

Another challenge is the complexity of negotiating FTAs, which often involve sensitive issues such as tariffs, intellectual property rights, and labor standards. These negotiations can be long and arduous, and there is always the risk that they may fail or result in an agreement that is less favorable than anticipated.

Looking Ahead: A Brighter Future?

Despite the challenges and obstacles that Sri Lanka faces, there is reason for cautious optimism about the country's economic prospects. The pursuit of FTAs with key partners such as India, Indonesia, Malaysia, Vietnam, and China represents a significant opportunity for Sri Lankan businesses to access new markets and diversify their export baskets.

If these agreements can be successfully negotiated and implemented, they could provide a much-needed boost to Sri Lanka's economy, helping to create jobs, attract foreign investment, and ultimately improve the standard of living for the country's citizens.

However, it is important to note that the success of these FTAs will depend on a number of factors, including the political will of the Sri Lankan government to overcome opposition and negotiate favorable deals, the ability of Sri Lankan businesses to take advantage of the new market opportunities, and the overall stability and growth of the global economy.

Conclusion

Sri Lanka's pursuit of FTAs represents a bold and ambitious strategy for reviving its ailing economy. While the path ahead is not without its challenges and obstacles, the potential benefits of these agreements are significant, and they could play a crucial role in helping Sri Lanka to overcome its current economic challenges and chart a course towards sustainable growth and prosperity.

As the government continues to negotiate and finalize these agreements, it will be important for all stakeholders – including businesses, trade unions, and civil society organizations – to work together to ensure that the benefits of these FTAs are widely shared and that the potential risks and challenges are carefully managed.

With the right approach and a shared commitment to economic reform and growth, Sri Lanka has the potential to emerge from its current crisis stronger and more resilient than ever before.