Currently, many Sri Lankan exports benefit significantly from the Generalised Scheme of Preferences Plus (GSP+) non-reciprocal tariff concession on a considerable portion of the country’s eligible exports, promoting growth and employment.
Stakeholders highlight the importance of its protection and the need to improve the competitive growth of exports to prepare the economy in the event of its eventual withdrawal.
The European Union’s (EU) GSP+ is a special trade benefit on tariffs for developing countries that agree to follow 27 international rules on labour rights, human rights, the environment, and good governance. It aims to improve exports, employment, and economic growth of these countries.
While Sri Lanka has been eligible for GSP+ since 2005, it was temporarily suspended in 2010 until Sri Lanka regained eligibility in 2017. A recent Institute of Policy Studies (IPS) study highlights that a preference erosion at the current stage of growth would be a shock that would be difficult to manage.
SL must prepare for eventual GSP+ ineligibility
Speaking to The Sunday Morning, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe noted that while a sudden loss of the GSP+ was not an immediate concern for Sri Lanka, a more pertinent concern for the country’s export sector was the eventual ineligibility for GSP+ once Sri Lanka achieved upper middle-income country status.
“At this stage, I think the preferential access of GSP+ is unlikely to be ‘lost’ immediately, and therefore I don’t assess it to be of immediate concern. The withdrawal of GSP+ typically involves a transition period with reviews, unless there is a dramatic reason, but none can be witnessed currently. However, a more significant concern for Sri Lanka’s exports that we need to be ready for is eventual ineligibility once the country becomes an upper middle-income country,” he said.
He explained that a country became ineligible for GSP+ upon maintaining a Gross Domestic Product (GDP) per capita within the upper middle-income range for three consecutive years. Prior to the Covid-19 pandemic, this was an emerging concern as Sri Lanka had met this mark in the 2017-’18 period. However, subsequent economic contractions, including a pre-Covid recession, the pandemic, and the economic crisis, caused the GDP per capita to fall below this threshold.
Consequently, with the current economic recovery, Sri Lanka’s GDP per capita in 2024 once again reached levels that could place the country in the upper middle-income category. According to Damsinghe, if this trend persists, Sri Lanka will likely become ineligible for GSP+ by 2027.
He emphasised that this posed a more significant concern for the country as the loss of this access would be irreversible in that specific context. Regardless of short-term policy measures implemented for other reasons, this outcome is inevitable if the country sustains its economic growth.
“However, I believe the costs of GSP+ removal would differ now compared to the past. Research conducted at Frontier indicates an underlying trend of export diversification in Sri Lanka since the mid-2010s. Furthermore, we are currently witnessing substantial global shifts with trade tensions and European fiscal adjustments.
“Consequently, within the context of these broader changes, the direct impact of losing preferential access may not present as straightforward a cost as it would in a more ‘business as usual’ world,” he opined.
Significant volume of exports under GSP+
Sri Lanka’s exports to the EU stood at $ 2,711.93 million in 2023 and $ 2,739.95 million in 2024, with a 1.03% growth. In addition, exports to the UK stood at $ 846.16 million in 2023 and $ 903.72 million in 2024, with a 6.80% growth.
Exports to the EU account for 24% of Sri Lanka’s exports, which increased by 5.49% during 2024. Sri Lanka’s exports to the EU under the GSP+ from 2019-2023 mainly consisted of the apparel sector. Consequently, altogether, the EU and the UK are responsible for a significant portion of Sri Lanka’s total export revenue.
Speaking to The Sunday Morning, National Chamber of Exporters (NCE) Secretary General/Chief Executive Officer (CEO) Shiham Marikar highlighted the critical importance of GSP+ for Sri Lankan exporters, noting that it constituted the sole factor providing a competitive advantage for Sri Lankan exporters in certain international markets.
He stressed that it was necessary for Sri Lanka to align with the stipulated requirements and ensure compliance, while upholding the country’s sovereignty, which required careful studying of the conditions and adherence.
Marikar suggested that establishing a dedicated team promptly, consisting of important stakeholders, including private sector professionals, would be beneficial to monitor progress and facilitate an effective two-way dialogue with private stakeholders, thereby ensuring proper alignment to secure GSP+ benefits.
He pointed out that a significant volume of exports was conducted under the GSP+ framework. Accordingly, the loss of the GSP+ would have a significant impact on Sri Lankan exports. However, he acknowledged that the Government had the upper hand regarding these situations and therefore, these were criteria the Government must continuously examine.
While Sri Lanka currently remains eligible for the GSP+ due to its middle-income status, certain criteria, including agreements with the World Trade Organization, come into play and must be fulfilled.
“Sri Lanka previously lost the GSP+ and exporters lobbied to regain it. It is important to understand that Sri Lanka must earn the GSP+ and that it is not a mechanism the country can demand. Exporters brought this matter to light and GSP+ concessions were discussed during a recent exporters’ forum as well,” Marikar said.
Expressing similar concerns, Ceylon National Chamber of Industries (CNCI) Chairman Kevin Edwards highlighted that if the GSP+ was lost at this stage, the Sri Lankan export market would contract heavily, with global markets refraining from acquiring imports from the country, instead opting for countries with favourable tariff rates.
He also noted the disastrous impact this could have on employment rates, as it could potentially lead to the shutting down of industrial factories as well as unrest.
Tea exports, however, will only be marginally impacted.
Tea Exporters’ Association Sri Lanka Chairman Huzefa Akbarally noted that as far as tea was concerned, the impact was minimal as black tea imports to the EU were not subject to any duty (i.e. zero duty) when it came to all tea producing countries and that there would be no adverse impact on employment in the tea industry due to the potential withdrawal of the GSP+.
However, green tea imports to the EU in packages/bags are subject to 3.2% Customs duty (green tea in bulk form has no duty). He noted that the export of green tea in value-added form may be affected if the GSP+ was withdrawn. However, Sri Lanka exports comparatively small quantities of green tea in value-added form to the EU.
“Therefore, even if the GSP+ is withdrawn, it will not have any impact on our black tea exports to the EU as there is no Customs duty on these imports. From our total tea exports, about 8% goes to the EU countries,” Akbarally explained.
Meanwhile, a recent IPS study titled ‘Who Stands to Lose? The Effects of GSP+ Withdrawal on Sri Lanka’s Exports and Labour Force’ notes that if Sri Lanka loses its GSP+ trade benefits, its exports would likely face higher tariffs, up to Most Favoured Nation (MFN) rates which are notably higher than preferential tariffs.
The study also highlights that this will likely lead to a decrease in exports and negatively impact associated employment in the country. It highlights that renewed concerns regarding compliance with the conventions arose in 2021, generating uncertainty on the continuity of GSP+ benefits.
According to the IPS, among total eligible exports of Sri Lanka, 60.9% benefit from the GSP+ and losing these trade benefits in the EU (EU-28) market is a significant concern. The study estimates that this could lead to an approximately $ 1.23 billion decrease in exports, which accounts for an export loss of 36.7% of the base year export value for Sri Lanka, reducing the overall export value of the country and impacting diversification of the export basket.
Additionally, the impact on employment due to the removal of GSP+ is predominantly concentrated on low-skilled workers and women workers.
Risks of over-reliance
Commenting on the economic aspect, University of Peradeniya (UOP) Department of Economics and Statistics Professor J.M.A. Jayawickrama explained that Sri Lankan exports must not be over-reliant on the GSP+ facility.
Sri Lanka will become ineligible for the GSP+ upon reaching a higher economic status. In this context, Prof. Jayawickrama noted that ideally, Sri Lankan exports should not be dependent on the GSP+, as it represented an artificially created market condition based on preferential treatment, rather than stemming from inherent competitiveness or efficiency of the markets that benefited from the scheme.
Therefore, he highlighted the necessity of achieving competitiveness in the global market. Accordingly, if the country faces challenges in competing in terms of labour costs, adopting technology and focusing on higher quality to enhance competitiveness are viable options, which could eventually contribute to reducing labour costs as well.
Advancing Research and Development (R&D) to increase labour productivity and output and developing specialised products are also aspects that industries must prioritise. He highlighted that the majority of the Sri Lankan industrial sector currently lagged behind in terms of R&D.
“It is important to ensure that there isn’t an over-reliance on the GSP+, as it is a temporary condition, and any sudden withdrawal will divert investments. Therefore, Government support is necessary in promoting competitiveness in Sri Lankan exports, especially in terms of technology adoption and increasing quality, which can secure a more sustainable market presence,” he said.
Prof. Jayawickrama also noted that currently, the GSP+ provided a significant export opportunity for the country by enabling Sri Lankan products to be priced more competitively compared to those from states without GSP+ benefits. This implies that if Sri Lanka produces goods of comparable quality, the country stands to gain a competitive advantage.
“The GSP+ facilitates the entry and sustained presence of Sri Lankan products in the market and its loss would contribute to a considerable decline in exports. Countries such as Bangladesh and Vietnam are effectively competing in the market due to their lower labour costs. However, Sri Lanka’s labour costs are higher than these markets, making cost-effective market competition a challenge,” he observed.
Therefore, he noted that the potential loss of market access would lead to serious complications for the export sector, particularly the apparel industry, and it was the ultimate responsibility of the Government to secure it.
Prof. Jayawickrama highlighted that an unexpected withdrawal of the GSP+ would not only result in a loss of market share but also impact overall industries and indirectly aligned sectors through backward linkages, as well as investments. This is because importers would likely shift to locations with lower production costs.
He noted that this would subsequently drive unemployment rates higher as well as create a production shock in the country, especially given the current inadequate diversification in manufacturing sectors to replace the positions of major export industries.
He also emphasised that such circumstances would worsen the economic position of rural or low-income earning segments, as they were especially reliant on many of the major exporting industries such as apparel.
Attempts by The Sunday Morning to reach out to the Export Development Board (EDB) and the Deputy Minister of Industries and Entrepreneurship Development were unsuccessful.