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Bangladesh-Sri Lanka Trade Ties: Issues and Prospects

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May 14, 2023 #Bangladesh, #exports, #FTA, #PTA

By Muhammad Estiak Hussain

Bangladesh and Sri Lanka are two friendly neighbors from South Asia. Although the formal diplomatic relations were established in 1972, the relationship goes beyond that dating back to C. 600 BCE. With common culture and colonial history, the connection is nurtured within the oceanscape of the Bay of Bengal and the Indian Ocean. As the global economy continues to expand, the bilateral trade relationship between Bangladesh and Sri Lanka is growing significantly. Sri Lanka is presently undergoing an economic crisis, prompting a need to deepen trade relations with its neighbors. Meanwhile, Bangladesh, which is poised to graduate from the list of Least Developed Countries (LDC) by 2026, feels the necessity to bolster its trade ties with friendly nations. To strengthen their trade relationship, both countries have been in discussions regarding a Preferential Trade Agreement (PTA). However, reaching an agreement will not be an easy task, as both nations need to address various trade-related issues.

Prospects of a Bangladesh-Sri Lanka PTA

Over the years, the Bangladesh-Sri Lanka economic partnership has been deepened. Initially, both countries signed quite a few agreements to boost bilateral trade like the General Trade Agreement in February 1977, the Shipping Agreement in November 1979, the Avoidance of Double Taxation Agreement in December 1992, and established the Joint Commission for Economic Cooperation in February 1985. The establishment of the Sri Lanka-Bangladesh Chamber of Commerce and Industry (SLBCCI) in 2006 further bolstered the partnership, resulting in a nearly 100-fold increase in merchandise trade in the past two decades. Exports from Sri Lanka to Bangladesh rose from $10 million in 2000 to a peak of $222 million in 2021, while Bangladeshi exports to Sri Lanka increased from $4 million in 2000 to $83 million in 2021. In 2022, the bilateral trade volume reached $300 million which was just around half of it five years ago.

Bangladesh and Sri Lanka are engaged in regional multilateral trade agreements such as the Asia-Pacific Trade Agreement (APTA) and the South Asian Free Trade Area (SAFTA), which have been in effect since 1975 and 2006, respectively. Under SAFTA, Bangladesh is the second-largest trading partner for Sri Lanka, next to India, accounting for 7.3% of Sri Lanka’s exports to Bangladesh and 2.2% of imports from Bangladesh in 2019. Meanwhile, trade under APTA represents only 0.6% of Sri Lanka’s exports to Bangladesh and 0.1% of imports from Bangladesh in 2019. 

This really shows the restrictive trade policies like sensitive lists of products and defined tariff lines, even under such free trade agreements, that discourage countries from pursuing bilateral and regional trade under such schemes. Moreover, bilateral trade between Sri Lanka and Bangladesh is nascent in comparison to their total trade. Sri Lanka’s trade with Bangladesh constituted less than 0.6% of its total exports and 0.3% of its total imports. Whereas, the percentage of Bangladesh’s exports to and imports from Sri Lanka as a share of total trade has remained relatively stable between 2000 and 2019, averaging 0.05% and 0.1% per annum, respectively.

However, there is huge potential for bilateral trade between Bangladesh and Sri Lanka. Bangladesh has a huge market of over 165 million consumers and the number of the middle class is growing rapidly. For instance, Bangladesh ranked 20th among Sri Lanka’s export destinations and stood as the second-largest export market within the South Asian region. In addition, Bangladesh and Sri Lanka have huge potential for cooperation through sectoral linkages like in the garment sector. Bangladesh is the second largest producer of RMG products, while Sri Lanka is known for its expertise in textiles and value-addition processes. Nevertheless, maritime connectivity can be leveraged to boost economic ties between the nations. Considering these prospects, an MoU on Economic Partnership was signed to “pave the way for the conclusion of the Free Trade Agreement (FTA) by end-2017”. Keeping in mind the long process of signing an FTA, both parties agreed to sign a PTA at the initial stage during the visit of Former Prime Minister Mahinda Rajapaksa in 2021. Now, given the ongoing economic crisis in Sri Lanka and its urgency to get back on track, Colombo has requested to resume negotiation and sign the proposed PTA early this year. 

No doubt, the signing of the PTA with Sri Lanka will boost trade relations between the two countries. Bangladeshi products such as readymade garments, medicines, jute and jute products, ceramics, food products, paper and paper boards, plastic products, leather and leather products, fertilizers, and cosmetics have a huge demand in Sri Lanka. Most importantly, on the other hand, Sri Lankan products like apparel, copra, cinnamon, and black tea have a good market in Bangladesh. A PTA will reduce bilateral trade costs by reducing tariffs and non-tariff barriers for these high-demand products. 

A PTA can also boost sectoral cooperation in the garment, pharmaceutical, and tourism sectors. About 25,000 Sri Lankans are working in Bangladesh and most of them work in the RMG sector. Collaboration in garment production between manufacturers of both countries is common, where basic garments are produced by Bangladeshi manufacturers and then sent to Sri Lanka for value addition and finishing. The final product is then shipped to Western markets. In January 2020, an MoU was signed between the Joint Apparel Association Forum (JAAF) of Sri Lanka and the Bangladesh Garment Manufacturers and Exporters Association (BGMEA) with the aim of boosting cooperation in the RMG sector by utilizing their comparative advantages. Similarly, a PTA can be utilized to enhance cooperative relations in the pharmaceutical sector. During Rajapaksa’s visit to Bangladesh in 2021, the Prime Minister suggested that Sri Lanka could benefit greatly from importing Bangladesh’s high-quality pharmaceutical products and medical devices, while Bangladesh could benefit from Sri Lanka’s provision of training to Bangladeshi nurses. In the tourism sector, Sri Lanka received over 2 million tourists in 2016, while Bangladesh attracts significantly fewer tourists despite having many historical and natural sites of interest. Therefore, Sri Lanka could provide policy advice and suggestions to help boost Bangladesh’s tourism industry, which could significantly contribute to its economy.

Maritime connectivity is another area that can be strengthened by a PTA, in addition to improved trade and manufacturing links. Currently, 60% of Bangladesh’s ships pass through Sri Lankan ports. Bangladesh has been granted access to Sri Lanka’s Hambantota seaport, which allows Bangladesh to expand its reach to Central Asia, West Asia, Eurasia, Russia, and China using maritime routes. Moreover, during the visit of Former PM Rajapaksa to Bangladesh, both parties agreed to operate the Chattogram-Colombo feeder service. There have also been efforts to improve maritime connection through a Coastal Shipping Agreement, which is similar to the agreement that Bangladesh signed with India in 2015.

The signing of a PTA can also create a conducive environment to attract Foreign Direct Investment (FDI). Over the years, Sri Lanka’s FDI to Bangladesh rose from $0.67 million in 2000 to $329 million in 2019, resulting in Sri Lanka being one of the top 15 sources of inward FDI stock in Bangladesh. However, Bangladeshi investment in Sri Lanka is limited due to government restrictions and a focus on domestic capital development. Now, with the liberalization of outward investment policies, Bangladesh’s investment is gradually increasing. A PTA with Sri Lanka can accelerate this development by increasing cross-country FDI flows. Besides these, trade in services like banking, information and technology, education, and power sectors can also be leveraged under the PTA between Bangladesh and Sri Lanka.

Challenges in Signing a PTA Between Bangladesh and Sri Lanka

Despite all these prospects, there remain some issues that need to be addressed before signing a PTA between Bangladesh and Sri Lanka. Firstly, to facilitate unrestricted bilateral trade, the issue of sensitive lists of products needs attention. Both Bangladesh and Sri Lanka have maintained long lists of sensitive products, with Sri Lanka listing 925 items and Bangladesh 993, which impedes bilateral trade. However, the complete elimination of the sensitive lists may be difficult due to political and economic reasons. Therefore, before signing the PTA, both countries should collaborate to limit the number of sensitive products and define them more narrowly. Secondly, addressing the trade imbalance is important, as it is currently in favor of Sri Lanka. To reduce the imbalance, both countries can explore new areas of cooperation such as blue economy and green energy. Lastly, an imbalance in relative gains from tariff elimination may also hamper signing a PTA between Bangladesh and Sri Lanka. A study suggests that if tariffs on sensitive lists are eliminated, Sri Lanka stands to gain $24.7 to $49.7 million in exports to Bangladesh, while Bangladesh will gain only $2.1 to $4.5 million in exports to Sri Lanka. However, one should keep in mind that any increase in bilateral trade is beneficial for the future, regardless of its size.

Bangladesh and Sri Lanka share a long history of culture and trade ties go beyond 51 years of their modern-day connectivity. The signing of a PTA between the two countries can be a significant step toward boosting bilateral trade and investment. Despite the challenges, the future of Bangladesh-Sri Lanka trade ties looks promising, and with the right policies and leadership, both countries can unlock the full potential of their multifaceted relations.

(Muhammad Estiak Hussian is a Research Analyst at the KRF Center for Bangladesh and Global Affairs (CBGA).

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