Realizing the Full Potential of Pakistan - Sri Lanka Free Trade Agreement A Critical Analysis Based on the Trade Complementarity Index

Abstract

The Pakistan - Sri Lanka Free Trade Agreement (PSFTA) was signed in August 2002 between the two governments and it came into effect in July 2005. Sri Lanka was given immediate duty-free market access to 206 products whereas Pakistan received duty-free access to 102 products. The terms of the PSFTA granted 100 percent immediate concession to Pakistan and Sri Lanka on major exports items. Pakistan’s exports to Sri Lanka grew from US$ 97 million in 2004 to US$ 355 million in 2018, almost 3.6 times higher over the period of 14 years ostensibly due to the positive impact of PSFTA on trade. Similarly, Sri Lanka’s exports to Pakistan grew from USD 47 million in 2004 to US$ 105 million in 2018, almost double over the same period.

The study, examining the trade between Pakistan and Sri Lanka under their free trade agreement (FTA), finds that the PSFTA has provided significant market share to both Sri Lanka and Pakistan. The Study reveals that emerging Pakistan - Sri Lanka trade relations possess numerous opportunities and potential to increase the current bilateral trade to over US$ 2.7 billion. Currently, the trade volumes stand at just US$ 460 Million.

The second part of the study covers the terms of Pakistan - Sri Lanka Free Trade Agreement structure and briefly discusses the mutual prospects and benefits under the PSFTA. The third part of the study covers a detailed comparative analysis of the benefits of PSFTA and compares it with the trade under bilateral agreements. The study uses the trade complementarity index tool in order to see whether Sri Lankan exports meet the import demand of Pakistan and establish an extent to sectoral match or mismatch between Sri Lanka and Pakistan.

Furthermore, the study examines that a trade expansion has occurred significantly for both countries, but Sri Lanka trade deficits remained high with Pakistan. Under the PSFTA, tariff restrictions and non-tariff barriers have overshadowed the impacts of tariff rationalization and thereby this situation has been the major impediment to export performance for both countries.

The study highlights the potential goods that can meet their market demand. Due to the lack of awareness, exporters of both countries do not make full use of the market potential and benefits under the free trade agreement. The study also draws attention of entrepreneurs and exporters of the two countries to explore new markets and avenues in their economies.

In order to increase the current bilateral trade, the study suggests that both countries need to diversify their products through research, innovation, and value addition adjusting according to the demands of each other’s market. Since the opportunities have been documented, a channel for the exchange of ideas and proposals must be developed to translate the available opportunities into a real trade volume. Therefore, the study recommends that trade bodies in both countries should facilitate trade delegations, unrestricted communication between the business communities of the two countries to increase and strengthen the bilateral trade and trade relationships between Pakistan and Sri Lanka.