Scrolling down Twitter over the weekend, I bumped into a tweet by Verité Research Director – Research Subhashini Abeysinghe. The tweet highlighted the percentage of exports that is qualified to enjoy the European Union’s (EU) Generalised Scheme of Preferences Plus (GSP+) but is not utilising the concession. The number is baffling, and so The Sunday Morning Business Market Mine decided to delve deeper into the figures and analyse the causes behind these numbers.
The term GSP+ is not a new word for Sri Lankans, and even this very column has talked about GSP+ before. According to the European Union’s (EU) official website, GSP+ is a special incentive for developing countries to pursue good governance and sustainable development, as it allows exports into the EU under incentivised tariff rates. Sri Lanka became eligible for GSP+ in 2005, but lost it in 2010 due to non-compliance with the requirements set out by the EU. However, the country once again became eligible in 2015, and today, whether Sri Lanka would be eligible to enjoy preferential trade access under this incentive scheme remains in question as the EU reviews our eligibility and compliance with its requirements. The Ministry of Trade told us, a week ago, that they expect a “favourable” response from the EU, which is ultimately to let us enjoy the GSP+ for a couple more years. But have our exports been reaping the full potential of this preferential trade access? “Not really” would be the answer to that question.
Lower utilisation of GSP+
The GSP+ utilisation rate is relatively lower in Sri Lanka. Sri Lanka’s exports to the EU have been gradually increasing, even despite the slump this trajectory witnessed in 2013, a year with no GSP+. In 2019 alone, Sri Lanka had exported about € 2.2 billion to the EU. According to the GSP Hub website of the EU, 87% of Sri Lanka’s current exports are eligible for tariff reductions under the GSP+, and 62% of them make the least use of its preferential market access among all GSP+ countries.
As per said website, Sri Lanka’s preference utilisation rate indicated a downward trend from 2011 to 2017, marking an increase only in 2018, when Sri Lanka regained GSP+ preferences again after being revoked in 2010.
“Over the regarded period, an average of 59% of eligible imports make use of the reduced tariffs granted under the GSP, which is considerably below the average of other GSP+ countries. Thus, there is room for improvement particularly given that about 85% of imports from Sri Lanka are eligible for GSP+ preferences,” the website added.
Figure 1 explains that 84% of Sri Lanka’s exports in 2018 were eligible for GSP+, yet only 60% of exports really utilised it, indicating there is room for improvement. However, GSP Hub noted that there has been an upward trend in utilisation rates over the past three years.
On the other hand, Asian peers who are also eligible for GSP+ have been better at utilising the tariff concession. For example, Pakistan’s utilisation rate – as per the country report 2018-2019 compiled by the EU – is above 95%, as evidenced by Figure 2.
In contrast, as per Figure 3, the Philippines’ utilisation of GSP+ is not as impressive as Pakistan, and yet it is higher than that of Sri Lanka.
“The Philippines has slowly increased its use of GSP+ preferences, reaching 26% of total exports to the EU in 2018. However, the GSP+ utilisation rate of the Philippines (i.e. the use of GSP+ compared to all GSP+ eligible imports) was 74%. Philippine exports benefit from the enhanced access to the EU market under GSP+ (22% growth from 2015 to 2018), particularly products like coconut oil, preserved tuna, bicycles, pineapple products, fruit jams, and some garments and footwear,” the EU-compiled country report 2018-2019 for the Philippines noted.
Mongolia, an East Asian country, has also managed to keep its GSP+ utilisation rate at impressive levels. As per the country report for 2018-2019, the value of EU imports from Mongolia using GSP+ has remained relatively steady at around $ 16.5 million in 2018, or 23% of total imports. GSP+ utilisation rates, on the other hand, are steadily increasing, and are currently above 90%. EU imports from Mongolia under GSP+ remain concentrated on articles of apparel and textiles, with it comprising 87% of total EU imports from Mongolia using GSP+. Mongolia’s utilisation rate of trade preferences under GSP+ stands at around 84% (as per Figure 4), leaving some room for improvement.
Why are we under-utilising GSP+?
Based on comments we received, the underutilisation of GSP+ in Sri Lanka can be funneled down to two main reasons. The first being that even the export Harmonised System (HS) codes that qualify for GSP+ have to meet a certain standard if they are to get this preferential trade access.
Speaking to The Sunday Morning Business, National Chamber Exports (NCE) Chief Executive Officer and Secretary General Shiham Marikar stated that exporters have to meet certain standards and requirements to obtain the GSP+, even though their HS codes are eligible for GSP+.
“Meeting these standards and engaging to obtain those standards involves a cost that Small and Medium Enterprises (SMEs) cannot afford. We as a Chamber have lobbied with various government organisations and also the Export Development Board (EDB), asking them to provide financial support,” Marikar stated.
Briefing on why other countries have a higher utilisation rate, Marikar stated that most of these Asian countries are home to export-oriented and export-friendly economic policies that encourage them to get more and more into the sector.
“In countries with higher utilisation of GSP+, you would see better economic policies, whereas in Sri Lanka these policies are volatile. Policies change suddenly; in some cases, they change overnight,” he added.
Explaining the negative impact of volatile economic policies, Marikar stated that not-so-friendly economic policies and sudden changes to such policies discourage foreign investors from coming and investing in Sri Lanka.
“I am not talking only about export policies, but also other incidents happening in this country. For example, the Ceylon Electricity Board (CEB) Union protests, teachers’ protests, and all the other incidents are captured by the international media. These reports portray a negative image of our country. This means Foreign Direct Investments (FDIs) will take a slump. For an exporter, FDIs, joint ventures, and partnerships are very crucial to get into the next level, rather than languishing around the same amount of exports to the same destinations in a time where competitors are ahead of us,” Marikar further noted the downside of economic volatility.
He noted that even if we disregard what the western countries are doing in terms of exports on the basis that most of them are already developed countries, Sri Lanka cannot turn a blind eye towards what our neighbouring countries are doing to develop their exports.
“Look at the support Bangladesh and India are giving to their exporters. India, during the pandemic, was offering 50% of the trade cost for their dairy exports. When we go to overseas trade fairs, we can witness banners for Indian products on both sides of the roads. We asked Indian exporters and exhibitors how they can afford these banners. They said this banner displaying is done by our Export Promotional Agency. (In comparison) what have we done?” Marikar questioned.
Moving on to the second reason, Marikkar stated that the lengthy documentation process to obtain GSP+ from the EU is considered another impediment.
Speaking on this, Advocata Institute Chief Operating Officer (COO) Dhananath Fernando stated that as far as he knows, the documentation process to export under GSP+ preferential tariff is lengthy and costly.
“This is an insight from Prof. P. Athokorala. The reason could be that, even in trade agreements, to prove that you are eligible you have to provide many documents. Now, this is a hassle most of the exporters do not want to go through. It is too complicated,” Fernando added.
Meanwhile, University of Colombo Department of Economics Professor Sirimal Abeyratne told us that the reasons for the underutilisation of GSP+ are internal, and that the country does not have the capacity, facilities, and assistance for exporters to utilise.
According to the EU GSP+ Business Guide for Sri Lankan Exporters, there are five steps for an exporter to enjoy his exports to the EU under the GSP+ preferential trade access. One is checking product eligibility under EU GSP+. Accordingly, exporters first need to establish the tariff classification of the product according to the EU’s code of products. This is to ascertain that the product is covered by the EU’s GSP+ scheme.
The second step is applying for a concession under GSP+. Accordingly, exporters need to identify the conventional most-favoured nation rate, check the composition of the relevant duty (i.e., whether it is made of an ad valorem duty, a specific duty, or a combination of the two, as the GSP+ tariff suspension applies to the ad valorem part only, where the duty is a combined duty) and apply the reduction granted.
The third step is ensuring rules of origin under the GSP+. Exporters need to ensure that the product concerned complies with the origin criteria applicable under the GSP Regulation.
Fourth is ensuring consignment conditions. Exporters need to ensure that the modalities for the transport of goods from Sri Lanka to the EU market fulfill the provisions laid down in the relevant EU framework.
The final step is providing documentary evidence. Exporters must complete either the Certificate of Origin Form A, or the invoice declaration, correctly. These are the official documents on which the EU customs authorities rely on in order to grant the applicable tariff concessions to products. From 1 January 2018, Sri Lanka applied the new registered exporter system (REX), and exporters will have to be registered exporters.
By the time this edition went to print, the EU Sri Lanka office had not responded to the email query we made requesting for their comments on the under-utilisation of GSP+ in Sri Lanka. We also attempted to contact Trade Minister Dr. Bandula Gunawardena through calls during last week, yet it proved futile. The EDB did not respond to our query at the time of going to print either.
While anti-Government parties and trade bodies keep raising concerns about the economic perils that might occur if Sri Lanka loses its GSP+ offered by the EU, politicians have been somewhat positive, hoping that Sri Lanka’s exports could survive the loss. Some are even posing the question of why Sri Lanka should adjust its policies as per the EU’s wish just to retain the GSP+.
Sri Lanka receives foreign exchange earnings primarily through a number of ways; exports, tourism, and worker remittances. Worker remittances witnessed a dive during the peak of the first global wave of the pandemic, but since then has been rather resilient, keeping up with its pre-pandemic performance, recording an average yearly inflow between $ 6-7 billion. Tourism is the sector most cursed by the pandemic, with it being deprived of an average annual earnings of $ 4-5 billion altogether. In 2019, tourism witnessed a slump after the Easter Sunday incident, which affected tourists as well.
The biggest hope for more foreign exchange earnings for Sri Lanka, apart from worker remittances, is exports. Sri Lanka relies heavily on exports for its foreign exchange earnings. Withdrawal of EU GSP+ in 2010 drove Sri Lanka’s gradually growing export trajectory to a considerable slump, yet it managed to record a recovery soon. However, after the EU GSP+ was reinstated under the Yahapalana Government, the export witnessed a noticeable growth to the EU region.
The EU Parliament has been calling the Sri Lankan Government to repeal the Prevention of Terrorism (Temporary Provisions) Act No. 48 of 1979, which, if Sri Lanka failed in doing, might threaten the continuity of the GSP+ preferential trade access for Sri Lankan exporters. Reportedly, the 24th Session of the EU-Sri Lanka Joint Commission in the first quarter of 2022 will witness the review of all aspects of bilateral co-operation.
The Ministry of Trade, speaking to The Sunday Morning Business two weeks ago, stated that they are expecting a favourable response from the EU Parliament, indicating that they are hopeful of a positive response. While the cancellation of GSP+ would not be catastrophic as is being speculated, given we are heavily under-utilising it, it would certainly be a hit for selected sectors, including apparel. No matter what politicians claim, we will experience significant disadvantages if we are to lose GSP+ – and that will mostly be for the apparel sector, the number one export product of the country for many decades now.