GSP plus Impact to Sri Lanka: Mountain or molehill

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Whilst the GSP plus helps significantly boost the country’s export performance, the loosing of it would not create a major vacuum on a broader level besides the loss of a strong potential trade surplus with the EU, Softlogic Equity Research said.

“On a micro level, individual businesses engaged in the export of Apparel, Agriculture, Fisheries and other industrial products would face a potential margin contraction due to the loss of concessions and lower industry growth,” the firm said in a research note.

The currency impact: A potential USD 700mn p.a. reversal

With the inclusion of Sri Lanka under the GSP plus scheme, the average trade surplus shot up by 117% during 2018-2020 c.f. the average trade surplus since losing the GSP plus status in 2010, rising from USD 581mn to USD 1,259mn (EUR 485mn to EUR 1,049mn). Export growth remained flat from 2012 – 2016, whilst growing at a 3-year CAGR of 9% from 2017-2019, before witnessing an inevitable decline due to the COVID-19 pandemic.

The industry impact: A speedbump for corporates

The loosing of a unique tax arbitrage via the GSP plus would inevitably hurt local exporters who would now be faced with a high tax regime c.f. with its peer countries who continue to enjoy the benefit. This would make their products more expensive to the European consumer resulting in a demand slump or a margin contraction by way of a haircut on the pricing structure. However, it should be noted that there are no major players in the CSE who would be impacted by this, with the exception of fabric manufacturers who may potentially face price negotiations from top apparel players.

What is the “GSP” concession?

The EU’s Generalised Scheme of Preferences (GSP) is a system of unilateral trade concessions that reduces or eliminates tariffs on a range of exports from developing countries and least-developed countries. The GSP is used to increase export revenue in developing countries in order to reduce poverty and promote sustainable development and good governance. The GSP preferential arrangements focus solely on granting tariff preferences for trade in goods.

What is applicable to Sri Lanka?

The (GSP+) is a special component of the GSP scheme that provides additional trade incentives to developing countries already benefitting from GSP, who are identified as vulnerable based on World Bank criterion. The scheme provides countries with duty free access to EU markets for over 7200 products. In return, the recipients must implement international conventions in the fields of human rights, labour rights, the environment and good governance.

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