FTA with China will boost exports says CB Governor | Sunday Observer

FTA with China will boost exports says CB Governor


Sri Lank has much to gain from it ties with China which could be traced back to scholar monk Fa Tsien’s visit to the country in the fifth century AD and thereafter, the many landmark agreements that strengthened the relations between the two countries, Governor of the Central Bank Dr. Indrajit Coomaraswamy said.

He said while Sri Lanka enjoyed several benefits from its bilateral relations with China in the past, the future is even more promising.

The Sino-Lanka Economic Partnership Agreement (FTA) which is expected to be completed this year will boost opportunities for Sri Lankan exports, such as high value apparel; value added tea; coir; rubber products; and gems and jewellery.

The FTA covers trade in goods and services; investment; technology and training.

He said the FTA will not only increase market access for Sri Lankan exports to China but also it would have a transformative impact on inward investment and technology transfer.

However, the governor noted that the prospects of up-scaling supplies in a number of these products are limited. Hence, it is important to adopt a dynamic rather than static approach to the composition of our export basket to China.

To maximise the benefits for the FTA, it is necessary to leverage the trade/investment nexus to produce greater supplies of a competitive and diversified range of products which can take advantage of the FTA-enabled preferential access to the massive Chinese market.

“This requires large-scale inflows of FDI along with its technology, branding, management skills and market access,” Dr. Coomaraswamy said.

The governor noted that leveraging the trade and investment nexus will not only enable the full realisation of the potential of the Sino-Lanka FTA but also pave the way to address Sri Lanka’s large trade deficit with China.

In seeking FDI from China, Sri Lanka can no longer leverage low labour costs. It cannot compete with Bangladesh, Cambodia, Laos and Myanmar. Therefore, priority should, be attached to higher value exports serving niche markets.

On the Sri Lanka side, the challenge is to provide a conducive investment climate, land for the industrial zones and human resources.

Sri Lanka does not have a labour shortage. It has too much labour in low productivity sectors. Reforms are necessary to address the distorted incentives which result in a misallocation of labour resources.

On the Chinese side, there are a number of internal push and pull factors that give cause for optimism.

Chinese companies are going abroad to overcome competitive challenges emerging from rising domestic costs (including wages); as well as the expected appreciation of the Yuan in the medium-term.

The expected massive export of capital in the coming years, as part of the OBOR initiative, offers Sri Lanka the opportunity to attract some of it. The country’s strategic location in the middle of the maritime silk route (MSR) is a considerable locational advantage in this regard.

China’s strategy to rebalance its economy from external to internal demand, combined with rising incomes, will result in a change in the composition of imports.

There is already less emphasis on raw materials and a more on consumer goods and services.

The opportunity, therefore, exists to take advantage of both outflows of capital from China and rising Chinese domestic demand.

Competitive supplies produced through Chinese FDI can take advantage of preferential access to India (FTA) and Europe (GSP Plus) as well as to import back to China.

The combination of the bilateral FTA and Chinese FDI provides a framework to trigger export expansion which is crucial for achieving Sri Lanka’s growth and employment targets.

A major objective of the Maritime Silk Route (MSR) is to improve connectivity across Asia, Africa and Europe.

Sri Lanka’s location, being equidistant between the Far East and Europe, with relatively easy access to the Middle East and Africa, offers the opportunity to take advantage of the potential generated by the MSR.

The connectivity facilitated by the MSR can support the trade and investment opportunities which will be created by the Sino-Lanka FTA, as well as open up new commercial prospects for Sri Lankan entrepreneurs in Asia and Africa.

MSR is also complementary with the priority Sri Lanka attaches to the services sector, which focuses, inter alia, on maritime and commercial activities.

The MSR also creates a conducive environment for taking advantage of mutual cultural and social ties to promote people-to-people contacts.

There has been an exponential growth in tourism.

Outbound tourism from China is growing in leaps and bounds.

The number of Sri Lankans learning Chinese is on the rise. More Sri Lankans are going to China for further education.China is also providing an increasing number of training opportunities at various levels.

Yuan is some of the five currencies in the SDR basket (USD; Euro, Yen, Sterling Pound). Germany and France have recently announced that the Yuan will be included in their reserve portfolio.

Sri Lanka too is one of the countries doing so.

The International Financial City can assist in the internationalisation of the Yuan.

“We see a qualitative shift in China’s role in supporting Sri Lanka’s development shifting away from loans to equity,” the governor said.

Going back in times the governor said relations between Sri Lanka and China were built upon in the period after Sri Lanka’s independence and the emergence of the People’s Republic of China.

The Rubber-Rice Pact, in 1952, was a major landmark: The newly independent ‘Ceylon’ defied the objections from the US, the new hegemonic power, and Britain, the former colonial ruler, to sign the Agreement. The first Economic and Technological Cooperation Agreement was signed in 1962.

Relations between the two countries have been excellent. China has been a very steadfast friend in good and not so good times. China’s role in assisting Sri Lanka in its fight against separatism was very material. Its support for Sri Lanka in international fora has also been durable and whole-hearted.

There are many examples of China’s generosity which feature prominently on the Colombo landscape. These include BMICH, and the Supreme Court Complex. In addition, China has played a major role in supporting infrastructure development in the power, highways, port, airport, flood protection and water supply sectors. In the coming years, the Port City Project and the industrial development around Hambantota Port can have a transformative impact on the economy and the lives of the people of Sri Lanka.

While Sri Lanka has enjoyed several benefits from its bilateral relations with China in the past, the future is even more promising.

The Maritime Silk Route provides the framework for a multifaceted strengthening of bilateral relations.

No other country offers anything like this, in terms of capital that is available to be deployed abroad. Also, China has been a longstanding all-weather friend of Sri Lanka. This should be taken into account when managing the bilateral relationship. Clearly, account has to be taken of geographical realities and superpower concerns. Despite this, bilateral relations with China should receive the highest priority.