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IV. TRADE POLICIES BY SECTOR 
(1) INTRODUCTION  
1. Agriculture remains an important sector in Sri Lanka with a third of the population engaged in 
agricultural or related activities;  it contributed some  20% to GDP in 2002.  The sector is also a major 
source of raw materials and earner of foreign exchange.  During the period under review, the 
provision of different subsidies (e.g. consumer, pr oducer and export subsidies) and other forms of 
assistance have failed to improve the sector's growth  and productivity, which have remained low.  
This poor performance may be attributed, inter alia,  to low levels of investment, lack of quality 
inputs, heavy dependence on regular rainfall, traditional cultivation practices, lack of credit, 
inadequate infrastructure (notably transportation), weaknesses in the marketing system, state control 
of land, and inconsistent trade policies.  Governme nt intervention in agriculture, as in other sectors, 
remains substantial.  Less protection on agricultura l goods and other forms of assistance together with 
the adoption of a more predictable trade policy regi me would lead to a better allocation of resources, 
thus raising productivity and increasing living sta ndards.  In addition, the establishment of a 
transparent land tenure system would make farmer s more willing to invest and to adopt modern 
farming technologies. 
2. Industrial policy throughout the years has aimed at diversifying the industrial base;  regional 
industrialization has also been promoted.  To this end, attempts have been  made by the Government  to 
create an environment conducive to investment, with incentives to encourage both domestic and 
foreign investment.  Nevertheless, manufacturi ng, which contributed some 16% to GDP and 
accounted for 17% of employment in 2002, remains h eavily concentrated in textiles and apparel, the 
leading net foreign exchange earner.  However,  Sri Lankan textile and appa rel exports have lost 
competitiveness;  the costs of production have ri sen as energy, telephone, and other utility prices 
increased, and labour productivity has declined.  The apparel industry faces additional challenges, 
notably the expected end to the quota system in 2005, and increasing competition from low-cost 
manufacturers in other countries and from exports  under preferential trading arrangements.   
3. State intervention in the oil sector is declini ng.  The Ceylon Petroleum Corporation (CPC), a 
state-owned enterprise, which until recently was th e exclusive importing and marketing agency for 
petroleum and petroleum products, is being reformed .  The liberalization of oil product prices also 
seems to be under way.   
4. The electricity sector went through a severe crisis  in 2001 and part of 2002, when there were 
prolonged power cuts, which had an  adverse impact on the country’s production and productivity.  In 
addition, high electricity tariffs have potentially weakened Sri Lanka's external competitiveness.  
Investment in the electricity sector has been marginal in recent years;   as a result, there have been 
delays in repairing existing plants and in estab lishing new power generation capacity.  Sri Lanka is 
therefore likely to continue to face severe power  shortages in the future.  The Ceylon Electricity 
Board (CEB), a state-owned monopoly, and its subsidiary Lanka Electricity Company (Pvt.) Ltd. (LECO), are still in charge of the generation, transmis sion, and distribution of electricity in Sri Lanka.  
However, the Electricity Reforms Act passed in 2002 stipulates the re-structuring of the electricity sector;  it calls for the separation of the generation, transmission, and distribution operation of the CEB, while paving the way for greater private sector participation. 
5. The contribution of services to real GDP increased from 59.4% in 1996  to 62% in 2002.  
Tourism, one of Sri Lanka's largest foreign excha nge earners, was severely affected by the domestic 
armed conflict;  however, it rebounded following the peace initiative and offers considerable 
potential.  Nonetheless, the inefficient delivery of  key services, such as telecommunications, financial Sri Lanka WT/TPR/S/128 
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services and transport, has burdened the economy as whole.  The modernization of the services sector 
is essential to improving the economy's productivity a nd thus its international competitiveness.  The 
Government has taken some steps to reduce direct state involvement in the sector and raise private, 
including foreign, participation.  For instance, in  financial services, foreign investment limits have 
been relaxed;  full foreign ownership in insurance and banks is now allowed.  Since the last Review, 
privatization has been concentrated in the tel ecommunications and insurance sectors.  The state 
monopoly on basic telecommunications has ended.  Moreover, the state-owned insurance company 
has been fully privatized.  However, state involve ment in banking and transport remains important.  
The banking system in Sri Lanka is weak, despite efforts to upgrade prudential supervision.  Banks 
have a high level of non-performing loans, and the two dominant banks, which are state-owned, are 
particularly weak and in need of major restructur ing.  State intervention in transportation remains 
substantial.  The provision of air services is still dominated by the majority state-owned national carrier, Sri Lankan Airlines (SLA).  Another state-owned company has the monopoly on airport services.  Some private-sector involvement was allo wed in the provision of port services in 1998, but 
there have been few reforms since then. 
(2) A
GRICULTURE  
(i) Overview 
6. Agriculture's contribution to GDP decreased dur ing the period under review, from 22.4% in 
1996 to 20.1% in 2002;  a trend that started in the late 1970s.1   Nevertheless, agriculture still plays an 
important role in the Sri Lankan economy, as a high percentage of the population depends on this 
sector for its livelihood;  it accounted directly fo r some 22.6% of export earnings in 2002, while 
directly employing 33.1% of the labour force.  Agriculture is also an important source of raw 
materials for manufacturing.  Growth in the sector  has remained low despite the various assistance 
schemes provided by successive governments.  Productivit y has also remained low, resulting in a high 
average cost of production compared with some other developing countries.2 
7. Agriculture's moderate performance can be attributed, inter alia,  to low levels of investment, 
lack of quality inputs, heavy depe ndence on rainfall, traditional cultivation practices, lack of credit, 
lack of good infrastructure, weaknesses in the tran sportation and marketing sy stem, and inconsistent 
policies.  These problems are reflected in post- harvest losses, low labour productivity, producer 
unrest, migration, and price volatility.  Government  intervention to suppor t the sector has been 
extensive;  it includes measures such as protection through high tariffs and import licensing, price 
support, subsidies, concessionary credit, etc.  These measures have proved  unsuccessful.  Inadequate 
irrigation systems increase the vulnerability of the se ctor to droughts.  Small and fragmented lots do 
not yield economies of scale, thus discouraging mech anization and capital investment.  This in turn 
raises costs of production and lowe rs international competitiveness.  Further, the subsidy-stimulated 
use of fertilizer may have enhanced productivity but could have caused deterior ation of aquifers and 
soil.  A viable response to the falling productivity in the agriculture sector is an intense research and 
extension service aimed at enhancing productivity.  However, it is often alleged that private-sector 
research is discouraged due to inadequate intellectual property ri ghts in Sri Lanka.3 
8. Agricultural policy in Sri Lanka has aimed, inter alia,  at attaining food security (by increasing 
production while maintaining low consumer prices) and raising incomes in the rural area (through 
price supports)4;  these objectives are not obviously compatib le and efforts to balance them have 
                                                      
1 Agriculture's share in GDP was 30 .5% in 1978 and 26.3% in 1988. 
2 Central Bank of Sri Lanka (2001). 
3 Central Bank of Sri Lanka (2002a). 
4 WTO document G/AG/NG/W/159, 12 April 2001. WT/TPR/S/128 Trade Policy Review 
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resulted in an inconsistent agricultural policy with constant ad hoc changes especially with regard to 
trade policy measures.  
9. Government intervention in the agriculture mark ets is common, resulting in price distortions 
and thus in a misallocation of resources.  Policy ma kers are often caught between the interests of the 
farmers and the consumers.  The frequent and unpred ictable market interventions have heightened 
market volatility, causing welfare lo sses to society as a whole.  Th ese ad hoc policy changes lead to 
uncertainty, so that potential investors may be de terred from entering the sector.  Investment in 
agriculture could be stimulated by well-specified, c onsistent policies, and by reliable infrastructure.5   
10. In 2002, the Ministry of Agriculture and Livestoc k prepared a draft policy paper, the 'National 
Agriculture Policy and Strategy' (NAPS).  The NAP S identified several problems and challenges in 
the agriculture sector.  It asserts that although food security is an important aspect, it cannot be 
pursued at the cost of increasing domestic food pr ices.  The NAPS identified the need for market 
reform, for enhancing the role of private entrepreneur s in agriculture, for the closer integration of the 
agriculture sector with the food processing industry,  and for the conservation and sustainable use of 
resources.6  Despite these attempts, contradictions rema in in Sri Lanka’s agricultural policy regime.  
As a reasonable income for farmers remains importa nt, "direct involvement in the commodity markets 
will be reduced gradually, and only by 2005 agricult ural trade policy will become more stable and 
transparent for the main food commodities".7  In addition, the authorities have stated that the 
elimination of non-tariff barriers and the reduction of tariffs in the agriculture sector have led to an 
increase in food imports, which have had an adver se effect on food productio n and consequently on 
food security.8 
11. Due to the above factors, which have been compounded by political instability and in some 
years by severe drought, the sector’s performance si nce 1996 has been mixed.  The major agricultural 
products in Sri Lanka are rice (paddy), tea, and rubber.  Sri Lanka’s trad itional export products 
include tea, rubber, and coconut;  non-traditional exports include spices, shrimp, fresh fruit, and 
vegetables, floricultural products, and organic crops .  The production of some non-traditional export 
crops has increased since 1996, with export earnings from non-traditional crops now exceeding 
combined earnings from rubber and coconuts (Table IV .1).  Sri Lanka is the world’s largest exporter 
of tea9, which accounted  for more than 14.8% of Sri Lanka's export earnings in 2001.10  B u l k  t e a  
amounts to some 60% of Sri Lanka's total tea exports. 
Table IV.1  
Agriculture, livestock, and fishing in Sri Lanka, 1995-02 
 1995 1996 1997 1998 1999 2000 2001 2002 
Contribution to GDPa 
(Rs million) .. 156,108 175,774 192,665 205,599 223,926 249,790 281,911 
Share in GDP (%)a .. 22.4 21.9 21.1 20.7 19.9 20.1 20.1 
Employment (%) 36.7 37.4 37.1 40.6 36.2 36.0 32.4 33.1 
Major crops (volume )          
Tea (million kg.) 246 258 277 280 284 306 295 310 
      Table IV.1 (cont'd) 
                                                      
5 Central Bank of Sri Lanka (2002a). 
6 Central Bank of Sri Lanka (2002a). 
7 Statement by the Sri Lankan representative at IFAD's 25th Session of the Governing Council 
[Online].  Available at:  http ://www.ifad.org/events/g c/25/speech/srilanka.ht m [16 June 2003]. 
8 Weerasinghe (2003) . 
9 In 2001, Sri Lanka retained its position as the worl d’s largest tea exporter fo r the fifth successive year. 
10 UNSD, Comtrade database.  Sri Lanka WT/TPR/S/128 
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 1995 1996 1997 1998 1999 2000 2001 2002 
Rubber (million kg.) 106 112 106 96 97 88 86 90.5 
Coconut (million nuts) 2,755 2, 561 2,631 2,552 2,828 3,096 2,796 2,392 
Paddy ('000 tonnes) 2,810 2,061 2,239 2,692 2,857 2,860 2,694 2,859 
Agricultural exports 
(US$ million) 829 961 1060 1,088 947 1,005 932 938 
Share of total exports (%) 21.78 23.47 22.85 22.68 20.54 18.20 19.35 19.96 
Major exports (US$ m illion) 695 829 916 918 783 850 796 771 
- Tea 481 615 719 780 621 700 690 660 
- Rubber 111 104 79 44 33 29 24 27 
- Coconut 103 110 118 94 129 121 82 84 
Minor export cropsb 134 132 145 170 165 155 136 168 
Fertilizer subsidy (Rs million) 1,345 1,500 1,895 2, 152 1,390 1,733 3,650 2,448c 
.. Not available. 
a Based on GDP at current factor cost prices. 
b These include cocoa, cinnamon, ca rdamom, cloves, pepper, and coffee. 
c Provisional. 
Source:  Central Bank (2002), Sri Lanka Socio-Economic Data 2002,  Vol. XXV, June 2002;  Central Bank of Sri Lanka 
(2002), Economic and Social Statistics of Sri Lanka,  Colombo;  and Epaarachc hi, R. et al. (2002), Policies and 
their Implication for the Domestic Agri cultural Sector of Sri Lanka:  1995-2000,  Research Studies:  Agricultural 
Policy Series No. 5, August 2002, Institut e of Policy Studies, Colombo, Sri Lanka.  
(b) Tea 
12. Tea production increased during 1996-00 when it reached a record high of 306 million kg.;  
production decreased in 2001, as a result of drought, before recuperating in 2002 (Table IV.1)  The 
upward trend in tea production has been attributed to the privatization of the management of the state 
plantations in 1992, which led to improved agricultu ral and management practi ces.  However, despite 
productivity improvements, the yield levels in the priv atized estates are lower than in the smallholder 
group.11  As a result, the smallholders still dominat e the tea industry, accounting for some 60% of 
total output in 2002. 
13. Sri Lanka’s value-added tea exports have increas ed recently, to some 40% of total tea exports 
in 2002.  As there is potential to increase tea expor t earnings by moving to more value-added tea, the 
authorities are interested in further increasing exports of  processed tea.  In this context, expansion of 
the tea-blending industry could make a major contri bution.  The liberalization of tea imports and the 
modernization of the Colombo tea auction would encourage further development of the blending 
industry in Sri Lanka.12 
                                                      
11 Smallholders have replanted old plantations with high yield tea plants.  Hence, the average yield of 
smallholders industry (2,212 kg. per ha.) is higher than that in the large plantations (1,365 kg. per ha.) (Central 
Bank of Sri Lanka, 2001).  
12 Central Bank of Sri Lanka (2001).  The Colo mbo tea auction is the world largest with the 
participation of almost 200 companies.  Almost 95% of the country's tea production is marketed this way.  
Auctions are held weekly and conducted by the Colombo Tea Traders Association under the aegis of the 
Chamber of Commerce (see online in formation.  Available at:  http ://www.pureceylontea.com/auctions.htm 
[7 July 2003]). WT/TPR/S/128 Trade Policy Review 
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14. The Sri Lanka Tea Board (SLTB), established under the purview of the Ministry of Plantation 
Industries in 1976, is the main government body r esponsible for the promotion and development of 
the tea industry in Sri Lanka.13   
15. Procedures for importing and exporting tea seem cumbersome.  Imports of tea are not fully 
liberalized as they are subject to quality control (i.e. quality standard).14  Certain types of tea (i.e. 
orthodox tea) may be imported unde r a permit, to be blended with  domestic tea for re-export.  
According to the authorities, speciality tea (e.g. green  tea, Assam, Oolong, Darjeeling) for which there 
is no domestic substitute can be im ported without being subject to qua lity control.  Imported tea may 
only be used after it has undergone inspection by the SLTB.  Moreover, importers are allowed to 
blend the imported tea with locally produced t ea only if the latter has been purchased through 
approved channels with export rights.  Exporters importing tea for blending and re-export are required 
to use the Temporary Importation for Export Processi ng (TIEP) Scheme (Chapter III(3)(iv)(b)).  The 
Export Section of the SLTB samples export consignments when necessary.15  Samples are taken to 
ensure that the product is not unfit for export and th erefore likely to damage the reputation of "Ceylon 
Tea" in foreign markets.  If tea is deemed unfit (i.e. does not meet the quality standard or is 
contaminated) its exportation is prohibited.16  Exporters and packers of tea need to register with the 
Tea Board.  Prior to approving the registration, th e Tea Board will ensure that the premises comply 
with sanitary conditions.  Exporters are not allowed to sell 100% of th eir production directly, at least 
75% of the product most be sold through the Colombo Tea Auction.  Exports of tea are also subject to 
export cess of Rs 2,500 per tonne, and a medical cess (to fund tea workers health care) of Rs 3.5 per 
tonne.  According to the authorities, cess revenue is used for R&D and to support small growers. 
16. A Regulatory Review Task Force (RRTF), appoint ed in 2002 to review all the regulations 
applied in the tea sector, recommended, inter alia:  the liberalization of the sale of tea;  liberalization 
of importation of tea;  and promotion and protection of Ceylon Tea.  With the exception of the latter, 
it is not clear whether these recommendations have been implemented. 
17. The SLTB has the statutory authority to regulate the price at which factories buy green leaf 
from small growers.  Since 1960, the Tea Board has applied a "reasonable price formula" for green 
leaf.  The objective of the scheme is to provide a reasonable price both for small-scale tea growers and tea factory owners who buy green leaf tea for processing.
17  Tea factories that do not purchase green 
leaf from small growers are not subject to this pricing mechanism.  The price of green leaf is calculated using the reasonable price formula, which is based on the amount of green leaf that is 
required to make a kilogram of tea, and the actua l price received by the factory at the Colombo Tea 
Auction.  The formula also sets a fixed return fo r growers and manufacturers.  The return received by 
growers and manufacturers is a percentage of the net sale average monthly price realized by the factory for a kilogram of processed tea.  At presen t, these percentages are fixed at 32% return for the 
factory and 68% to the grower (Box IV.1).
18  This pricing mechanism discourages quality 
                                                      
13 For further online information on the Sri Lanka Tea Board (SLTB), see:  
http://www.pureceylontea.co m/ [7 July 2003]. 
14 The same quality standard applies to exports of tea from Sri Lanka. 
15 Information provided by the authorities based on Sri Lanka Tea Board (Import and Exports) 
Regulations – 1981. 
16 Weeserasekera and Kananathalingam (2002). 
17 Small growers are farmers who own less than 50 hectares.  Most small grower own farms of less than 
5 ha. 
18 According to the authorities, the ratio of 68:32 is decided taking into account the cost of production 
(COP) of a kilogram of made tea. The costs of the green leaf, of manufacturing, of packaging, and of transportation are taken into account to determine the COP, which is revi sed from time to time.  The ratio of Sri Lanka WT/TPR/S/128 
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improvements in both green leaf and tea manufacturi ng.  Factories investing in improving tea quality 
to get a higher net sales average at the auction get only 32% of the benefit.  Similarly, there is little 
incentive for smallholders to improve the quality of green leaf beyond what is required to have their 
leaf accepted.  According to the authorities, to encourage the production of better quality leaf, a mark-
up is given according to the altitude.  This prici ng mechanism seems complex and arbitrary.  In 2002, 
the RRTF recommended, inter alia , an amendment of the formula so that it would take into account 
quality and variations in production costs of both f actories and smallholders so as to provide an 
incentive for growers and manufacturers to beco me more efficient and improve quality.  
Box IV.1:  Reasonable price formula for green leaf 
It is estimated that approximately 4.65 kg. of green leaf is required to manufacture one kg. of tea.  The ratio 
of input to output is 0.215 (i.e. 1/4.65).  At present 68% of the returns, go to the green leaf supplier and 32% to the manufacturer. 
The following is an example of the application of the r easonable price formula for green tea leaf based on a 
factory price of Rs 50.00 per kg. of processed tea.  This is an assumed price to explain how the pricing mechanism works, as actual prices vary from month to month depending on demand and supply at the 
Colombo Tea Auction. 
(a) Manufacturer's return Rs 50 x (32/100) = Rs 16.00 
(b) Green leaf supplier’s return Rs 50 x (68/100) = Rs 34.00 
(c) Price payable for a kg. of green leaf tea Rs 34 x 0.215 = Rs 7.31 
Sri Lanka produces tea at three elevations:  low, mid and high.  The "elevation factor" may also be included 
in the formula when the monthly net sale average pri ce of a factory is above the monthly net sale average 
price for that elevation.  The "incremental revenue"  (e.g. difference between the two prices) is shared 
between the factory and grower on a 50:50 ratio.  The sharing of incremen tal revenue is done after applying 
the formula on a 32:68 basis for the net sale  average of the factory for the month.   
Example of the application of the reasonable price form ula for green tea leaf based on a factory price of 
Rs 50.00 per kg. of processed tea including the "elevation factor" or "incremental revenue": 
Net sale average of average monthly price elevation = Rs 60.00 
Net sale average of the factory = Rs 50.00 Difference = Rs 10.00 
(a) Manufacturer’s return is:  Rs16.00 (a) + 10.00/2 = Rs 21.00 per kg. 
(b) Green leaf supplier’s return is:  34.00 (b)+ 10.00/2 = Rs 39.00 (c) Price payable for a kg. of green leaf tea = Rs 39.00 x 0.215% = Rs 8.38 per kg. 
Source:  Government of Sri Lanka. 
 
18. The Tea Small Holdings Development Authority (TSHDA) continues to play a vital role in 
supporting smallholders by providing extension services.  The TSHDA also implements various 
subsidy schemes to encourage replanting, infilling,  and new planting.  The replanting and infilling 
subsidy rates were revised upwards in 2003 so that smallholders could cope with the increasing cost 
of cultivation.19  Total payments to smallholders fo r 1996-02 amounted to Rs 603.2 million;  
assistance for replanting accounted fo r 75%, followed by new planting (18%), and infilling (7%).  The 
                                                                                                                                                                     
68:32 has been decided considering the cost incurred by growers and COP of made tea (cost incurred by 
manufacturers). 
19 Assistance to smallholders for new planting increased from Rs 36,000 to Rs 50,000.  It is not clear to 
the Secretariat whether assistance is on a yearly basis or whether all smallholders are eligible to receive it.  
Assistance for replanting in mid-up country increased from Rs 110,000 to 160,000;  and in low country from 
Rs 100,000 to Rs 150,000.  It is not clear to the Secret ariat whether outlays are on a yearly basis or whether all 
smallholders are eligible. WT/TPR/S/128 Trade Policy Review 
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authorities consider that this assistance is essentia l to smallholders, who produc e 61% of the tea in Sri 
Lanka and account for 72% of total tea exports.  In 2000, a  subsidy scheme for planting tea together 
with coconut was put in place.  In 2002, onl y Rs 28,379 were disbursed under this programme. 
19. Under the Indo-Sri Lanka Free Trade Agreement, exports of tea to India are subject to a tariff 
quota.  India’s tariff quota for tea was set at a maxi mum of 15 million kg./year at a preferential rate of 
50%.  The quota for 2000 was set at 11.25 million kg.20  Exports of tea to India under this quota 
system have been low;  the quota utilization was 4.1% in 2000;  3.1% in 2001, and 3% in 2002.  The Sri Lanka Tea Board is in charge of allocating these quotas.  There is no quota allocation system per se, quotas are allocated on a first-come first-served basis. 
(c) Rice 
20. As rice is the staple food in Sri Lankans' diet , policy in this regard has been aimed at self-
sufficiency.  However, Sri Lanka's level of rice self -sufficiency has been very costly to achieve, not 
only because of the high levels of protection grante d to the sector but also because of the financially 
unsustainable large-scale irrigation deve lopments that have been required.
21  In addition, the cost of 
production of paddy has increased significantly in rece nt years, adversely affecting the profitability of 
production and incomes to farmers.22  R&D in rice has been a priority;  nevertheless, yields tend to 
have stagnated. 
21. The rice sector has been protect ed by tariff and non-tariff barriers that are often changed in 
order to "attain food security".  For instance, in  2001, domestic prices of rice increased because of a 
decline in domestic production a nd in the quantity of imports because of licensing requirements.  In 
order to lower the domestic price, the Coopera tive Wholesale Establishment (CWE), Sri Lanka's 
former state trading agency, and the private sect or were allowed to import rice duty free.  In 
January 2002, the 35% import duty on rice was changed to a specific duty of Rs 7.00 per kg.  However, before the harvest, to contain the in crease in prices, the CWE was allowed to import 
30,000 tonnes of rice at a reduced duty of Rs 4.00 per kg.  In March 2002, the import licence imposed 
on rice in July 2000 was removed, and the specific duty was reduced to Rs 5.00 per kg. (effective as 
of November 2002).  The licence was deemed unnecessary because of the tariff protection.  The 
Central Bank notes that an efficient rice market will not develop in Sri Lanka if the authorities 
continue to take ad hoc measures, as these will only discourage producers and millers.
23  T h e  
authorities recognize that it is necessary to develop a consistent agricultural and trade policy, but also 
one that ensures the protection of the local rice producer.24 
22. Rice production has also been adversely affected  by the wheat/bread subsidy, as consumers 
substitute bread for rice.25   
(ii) Import policy 
23. The tariff is one of the Government's preferred agricultural policy instruments as it is easy to 
administer.  Hence, the tariff is modified to attain  different goals (for instance to reduce the domestic 
                                                      
20 See online information.  Available at:  http ://commerce.nic.in/ilannexure2.htm [7 July 2003]. 
21 The World Bank (1996). 
22 Ranaweera (2002). 
23 Central Bank of Sri Lanka (2001). 
24 The Sri Lankan authorities. 
25 Imports of wheat and meslin flour are duty free (Customs Notification, Revenue Protection Order 
No. 07/2002, The Gazette of the Democr atic Socialist Republic of Sri Lanka  No. 1261/12, 6 November 2002), 
and Ranaweera (2002). Sri Lanka WT/TPR/S/128 
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price of staple goods or to protect domestic farmer s), or to contain the undesired outcome of other 
policies.  Moreover, the authorities seem to have a high degree of discretion to modify tariffs.  As a 
result, tariffs on basic agricultural goods are often ch anged.  For instance, during 1996-02, the tariff 
levied on rice was modified at least ten times, the tariffs levied on potatoes was changed eight times, 
and on big onions and chillies, seven times.26 
24. The average applied MFN tariff in the agricu lture sector has been well above the overall 
average;  in 1998 it was 27.6% (WTO agriculture ) compared with an overall average of 11.8% 
(Table III.2).  The average tariff protection to th e sector has since decreased, to 21.3% in 2003 but 
remains well above the overall average of 9.8%.  Ta riffs in agriculture range from 0% to 250%;  the 
highest protection is granted to the tobacco sub-se ctor, with an average tariff of 148.6% in 1998 and 
152.9% in 2003.  This is the only sub-sector in which tariffs have increased since 1998.  Protection in 
all other sub-sectors has declined;  the highest declines have been in grains, and fruit and vegetables.  
According to the authorities, agriculture remains pr otected because it is still in a developmental phase;  
tariffs may be reduced gradually once productivity  increases have been achieved.  However, it 
remains to be seen whether these high tariffs provide  the necessary stimulus to improve productivity. 
25. In 2003, specific rates are applied to 1.2% of all tariff lines;  all are agricultural products 
(WTO definition) (Table AIV.1).  In 2002, to protect the farming community, the ad valorem  tariffs 
levied on certain food items were replaced by specific duties.27  According to the authorities, "the 
conversion from ad valorem to specific duties would provide domestic farmers with adequate 
protection, minimizing price risk due to seasonal fluctuation of commodity prices".28  However, even 
though their use may tend to stabilize producer pri ces, specific duties hinder predictability and are 
equivalent to an increase in ad valorem  duties when prices fall.  Moreover, by using specific duties Sri 
Lanka could breach its bindings;  in the case of tobacco products, for example, it appears that Sri Lanka's applied tariffs are significantly higher than  the bound rates, which according to its schedule, 
should have been implemented in 1995 (Table IV .2).  Sri Lanka bound most agricultural products 
(WTO definition) at 50%.  In all instances except for tobacco products (HS 24), the applied rates 
remain well below the bound rates. 
Table IV.2 
Lines where the MFN rate is higher than the bound rate 
HS Code Description Final bound duty ratea MFN 2003 duty rate 
24011001 Beedi tobacco 50% 75% 
24011002b Flue cured, of the Virginia type Rs 1,100 per kg. 75% 
24011009 Other 50% 75% 
24012000 Tobacco, partly or wholly stemmed/stripped 50% 75% 
24013000 Tobacco refuse 50% 75% 
24021000c Cigars, cheroots and cigarillos, contai ning tobacco 50% Rs 1,370 per kg. net 
24022002 Cigarettes, each not exceeding 60 mm in length 50% 100% 
24022003 Cigarettes, each exceeding 60 mm but not exceeding 
67 mm in length 50% 100% 
 Table IV.2 (cont'd)
                                                      
26 Epaarachchi et al. (2002). 
27 The import duty of 35% on paddy and rice was changed to a specific duty of Rs 7 per kg. with effect 
from 21 January 2002 and further reduced to Rs 5 per kg. with effect from 6 November 2002.  A specific import duty of Rs 30 per kg. on chillies, Rs 6 per kg. on big onions, and Rs 5 per kg. on red onions was imposed with 
effect from 23 March 2002.  The duty on green gram and cowpea was also changed to a specific duty of 
Rs 5 per kg. with effect from 6 November 2002. 
28 Central Bank of Sri Lanka (2002a). WT/TPR/S/128 Trade Policy Review 
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HS Code Description Final bound duty ratea MFN 2003 duty rate 
24022004 Cigarettes, each exceeding 67 mm but not exceeding 
72 mm in length 50% 100% 
24022005 Cigarettes, each exceeding 72 mm but not exceeding 
84 mm in length 50% 100% 
24022009 Cigarettes, each exceeding 84 mm in length 50% 100% 
24029000 Other 50% 250% or Rs 1,370 per kg. gross wt. 
24031001 Pipe tobacco 50% 250% or  Rs 1,370 per kg. gross wt. 
24031002 Beedi tobacco 50% 75% 
24031009 Other 50% 250% or Rs 1,370 per kg. gross wt. 
24039101 Pipe tobacco 50% 250% or  Rs 1,370 per kg. gross wt. 
24039109 Other 50% 250% or Rs 1,370 per kg. gross wt. 
24039901 Pipe tobacco 50% 250% or  Rs 1,370 per kg. gross wt. 
24039909 Other 50% 250% or Rs 1,370 per kg. gross wt. 
a Final implementation date:  1995. 
b Currently subject to renegotiation.  It is not possible to esta blish whether the applied rate is above the final bound rate a s the final 
bound rate is a specific rate. 
c It is not possible to establish whether the applied rate is above the final bound rate as the MFN rate is a specific rate. 
Source: Data provided by the Sri Lankan authorities.  
26. Import of several agriculture products (85 tariff lines at the HS eight-digit level) are also 
subject to licensing (Table AIV.2).   It seems that import licences are put in place and eliminated 
according to the Government's assessment of the imports required during a specific period of time to keep prices stable. 
(iii) Subsidies and other assistance  
27. The agriculture sector benefits from a range of subsidies in Sri Lanka;  these include 
subsidized inputs, consumer subs idies, support prices, and export subsidies.  The major subsidy 
programme, which has guaranteed funding, is th e fertilizer subsidy.  Assistance through other 
programmes seems to be smaller and somewhat ad ho c due to a lack of funds.  Since 1997, Sri Lanka 
has not made any notifications to the WTO regard ing support measures.  Sri Lanka notified the WTO 
that during 1995-97, it did not provide export subsidies to agricultural products, and in 1997 it notified a programme aimed at subsid izing the cost of international transport/freight for agricultural 
products.
29  According to the authorities, implementation of this programme has ceased due to lack of 
funds. 
28. The Fertilizer Subsidy Scheme (FSS), h as, since 1997, been confined to urea.30  Until 2001, 
the subsidy payment on urea was calculated on its import price (i.e. the higher the import price the higher the subsidy);  this resulted in urea being imported when the international price was at its 
highest with subsidy expenditures amounting to Rs 3,650 million, the highest level since the inception 
of the programme in 1997.
31  The 2002 Budget proposed a revision of the FSS with a view to 
providing a direct subsidy to small fa rmers under the Farm Input Support Scheme.32  This scheme has 
                                                      
29 WTO document G/AG/N/LKA/1, 20 May 1999. 
30 This subsidy scheme previously covered urea, potash muriate, ammonia sulphate and triple super 
phosphate (Central Bank of Sri Lanka, 2000). 
31 Central Bank of Sri Lanka (2001). 
32 Under this scheme coupons were to be issued fo r a specified amount per ac re to small farmers who 
could use the coupons to purchase agri-chemicals, fertilizer , planting material or farm implements at subsidized 
rates based on the value of the coupon. Sri Lanka WT/TPR/S/128 
 Page 81 
 
 
not yet been implemented;  instead, a revised fertilizer subsidy scheme was implemented as of 
October 2002, under which the subsidy is fixed at Rs 6,000 per tonne of urea, irrespective of the 
international market price.  The new scheme is expected to encourage imports when international 
prices are low. 33  As at end 2002, the total subsidy pa yments on urea amounted to Rs 2.4 billion 
(Table IV.1). 
29. Irrigation water is free in Sri Lanka.  This is  an important subsidy, especially for rice 
producers.  Since 1996, the Agricultural Develo pment Authority (ADA) of the Ministry of 
Agriculture, Livestock and Samurdhi has introduced two new irrigation programmes:  the agri wells 
programme to irrigate small farms (0.5–1 acre) a nd the Micro Irrigation Subsidy Programme to help 
farmers purchase pipelines for agri wells.   
30. The consumption subsidy in the form of a reduction in the price of wheat flour seems to have 
been eliminated in 2001.34  Wheat flour prices were administered by the Cooperative Wholesale 
Establishment (CWE) until 2001;  in 2000, the CWE incurred a loss of Rs 6 per kg. of flour.  However, for political reasons, the Government was reluctant to make any c onsiderable increase in 
wheat flour prices.  At that point, the CWE was the sole wheat importer.  The Government paid a 
premium of around US$10-12 for the imported wheat;  as the sole miller for the Sri Lankan 
Government, Prima (Ceylon) Ltd, was only willin g to process wheat of a specific quality.  In 
June 2001, Prima (Ceylon) Ltd. was privatized and imports of wheat we re liberalized.  The contract to 
sell Prima (Ceylon), which seems to have the force of  a law, stipulates a formula to fix the price of 
general purpose standard wheat flour for five year s (i.e. June 2006).  This formula is based on the 
f.o.b price at the Kansas City Board of Trade, and the costs of transportation and packing.  However, 
the authorities noted that Sri Lanka imports cheaper kinds of wheat from India and Argentina, so that 
Prima (Ceylon) is by law allowed for at least five years to charge a high price and make a considerable profit.  The contract also stipulates that "the tariff difference of wheat grain and wheat 
flour will be maintained at a rate of 25% for a pe riod of seven years" commencing in 2001 (i.e. until 
June 2008).  This high tariff prot ection would give Prima (Ceylon) a de facto monopoly in the milling 
of flour.
35  It seems that the authorities are not enforcing this part of the contract since tariffs on wheat 
flour are not at that level (as at March 2003).36  Nevertheless, these two policies (i.e. the pricing 
mechanism for wheat flour and the high tariff prot ection) seem to be in contradiction with the 
Government's former policy of subsidizing wheat fl our consumption;  most probably, domestic prices 
of wheat flour and related products currently  are higher than world market prices. 
31. The Department of Export Agriculture (DEA) c ontinues to assist exporters of spices through 
the implementation of subsidy schem es and the provision of necessary inputs, technical information, 
and extension services for the cultivation and processing of spices.37  In order to promote poultry 
exports, the 2002 Budget introduced an export rebate  scheme for exports of poultry meat.  As of 
October 2002, a rebate of Rs 20 pe r kg. is granted for chicken expor ted to any country.  The exporter 
receives Rs 17 per kg. while the exporter's designa ted farmer receives Rs 3 per kg.  Rebates are 
available for exports of a maximum of 6 million kg. 
                                                      
33 Central Bank of Sri Lanka (2002a). 
34 However, according to other sources the subsidy seemed to still be in pl ace in 2002 (Ministry of 
Finance, 2002). 
35 An Agreement made on 26 April 2001 between the Government of the Democratic Socialist 
Republic of Sri Lanka and Prima Ceylon Limited (which means and includes the said Prima Ceylon Limited, its 
successors and permitted assigns) (Agreement provided by the Sri La nkan authorities).  
36 In March 2003 the tariff on durum wheat was zero per cent and that on wheat flour was 10%. 
37 The subsidies disbursed under the Export Agri culture Assistance Scheme  (EAAS) declined from 
Rs 72 million to Rs 25 million during 2002 due to lack of funds;  more than 50% of the subsidy payment was for pepper (Central Bank of Sri Lanka, 2002a). WT/TPR/S/128 Trade Policy Review 
Page 82 
 
 
32. Concessionary credit is also available to farmers through the state banks and local commercial 
banks.  No information was provided to the Secretar iat as to the percentage of credit provided to the 
agriculture sector at subsidized or preferential rates.  Under the New Comprehensive Rural Credit 
Scheme (NCRCS), in place since 1999, loans are prov ided to farmers at an interest rate of 12%.38  The 
Government gives an interest subsidy of ten per centage points to the banks.  The total amount of 
credit granted during the 1998/99 culti vation year amounted to Rs 463 million.39  It is not clear to the 
Secretariat whether this programme is still in pl ace.  At the end of 2002, the Agriculture and 
Livestock Ministry launched a loan scheme to boost multi-seasonal crops.  Under the scheme, loans 
ranging from Rs 50,000 to Rs 13 million will be granted at 12.08% interest rate with a grace period of 
one to four years;  loans have to be repaid in ten years.  In additi on to providing subsidized lending, in 
the past the Government has written off farmers' loans. 
(iv) Marketing 
33. The Government has also intervened in mark eting activities to stabilize prices of several 
goods at both upper and lower levels through the C ooperative Wholesale Establishment (CWE).  The 
main objective of the CWE was to stabilize prices and assure food security.  When the Government 
attempted to stabilize farm-gate pric es through the CWE, the latter had to intervene in the market 
when the "market price" went below the minimum producer price.  The CWE was the only state trading agency involved in buying and selling major agricultural commodities.
40  At present, it seems 
that it is not operating.  Since 1996, the CWE has imported, inter alia,  chillies, lentils, onions, 
potatoes, rice, sugar, and wheat.  The CWE had the monopoly on imports of wheat grain until 2001.41  
CWE’s operations often failed and the institution incurred substantial losses.42  According to the 
Central Bank, the Government s hould not get involved in commercial activities.  Instead, it could 
implement consistent policies and provide good in frastructure, and other essential public goods and 
services, which the private sector fails to supply.43 
34. In order to improve marketing infrastructur e, dedicated economic centres (DECs) were 
established in the main fruit and vegetable growing areas.  These centres provide a trading floor for 
farmers to sell directly their products to retail and wholesale dealers.44  In 1999, the Central Bank 
introduced a forward sales contract system, which at present covers, inter alia , big onion, chillies, 
gingelly, maize, paddy, and medicinal plants.  Under this mechanism, farmers are encouraged to enter 
into forward contracts with buyers at pre-determin ed prices.  This scheme is expected to reduce the 
volatility of farmer incomes and to promot e agri-business and agri-processing enterprises.45   
(v) Privatization 
35. As in other sectors of the Sri Lankan economy, public ownership in the agriculture sector has 
historically been substantial, especially since the ma jority of land is under public control.  Major 
                                                      
38 In 1999, the average prime lending rate at commercial banks was 15.16%, but interest rates ranged 
from 12% to 24% (Central Bank of Sri Lanka, 2002a). 
39 Central Bank of Sri Lanka (1999). 
40 The Paddy Marketing Board (PMB) was closed in 1996.  The State Trading Corporation (STC), 
which had the monopoly on imports of over 90 agriculture-related items, today has the monopoly to import only 
three chemical compounds, for security reasons.  
41 Epaarachchi et al. (2002). 
42 For instance, in 2001/02, to avoid plummeting farmgate paddy prices, the Government told CWE to 
purchase paddy at a specific price during the peak harvesting season.  However, the CWE was not able to intervene, inter alia , because it was unable to store the grain. 
43 Central Bank of Sri Lanka (2002a). 
44 Central Bank of Sri Lanka (2002a). 
45 Weliwita and Epaarachchi (2003). Sri Lanka WT/TPR/S/128 
 Page 83 
 
 
reform of the plantation sector (tea, rubber, and coconut) began in 1992, when  management (but not 
the land or assets) was privatized.  During th e period 1995-02 the Gove rnment progressively 
privatized the management of paddy, sugar,  and seed farms, and sold some dairies and 
20 plantations.46  More recently the Government sold the ma jority of the shares it held in two sugar 
plantations.47 
36. The crop insurance market was liberalized in 1999 when private insurers were allowed to 
enter this market.  In 1999, the former Agricultu ral Insurance Board (AIB), which held the monopoly 
on crop insurance, was reconstituted with wider sc ope and re-named the Agricultural and Agrarian 
Insurance Board (AAIB).48   
(vi) Land policy 
37. Sri Lanka has not made much progress in reformin g the land market, and the lack of a well 
developed land market has constrained performance of the agriculture sector.49  The land market in Sri 
Lanka is characterized by heavy state presence.  The Government owns 55% of non-plantation crop 
land, mainly in large-scale irrigation projects.  St ate-owned land is for lease only;  inter-generational 
transfers are allowed, but no sales or subleases.  Private-sector land is mainly in older, village-based 
minor irrigation schemes.  Private-sector land sales, the only ones allowed by law, are few, as 
disputed titles make these very difficult.  Government  policy, aimed at equitable distribution of land, 
has fostered smallholder agriculture.  Population pr essure and inheritance practices have contributed 
to the substantial fragmentation of both private a nd public land, leaving average farm-size well below 
the public-sector irrigation-scheme norm of 1 ha ;  overall, 72% of farms are below 1 ha.50  
(3) MANUFACTURING  
38. The "export-oriented industrialization strategy" adopted by Sri Lanka in 1977, which aimed at 
diversifying the industrial sector, is still in place.  In order to encourage both domestic and foreign 
investment in manufacturing and strengthen region al industrialization, the Government offered a 
series of incentives, while attempting to create an  environment conducive to investment.  However, 
despite the incentives and other assistance, at pr esent, the manufacturing sector remains highly 
concentrated on a few products, particularly apparel,  and dependant on a few external markets, hence 
its vulnerability to changes in  the external environment.51  The authorities consider that the 
diversification of both manufactured  products and export markets is critical for improving the future 
growth prospects of the sector.  Other policy goals  include moving into higher-value-added industries 
and increasing access to the Indian market and othe rs through the existing free-trade agreement and 
the negotiation of new ones.52  However, according to the authoriti es, to achieve sustained growth in 
the sector, several issues need to be addressed, incl uding the distortions in the tariff and in the labour 
                                                      
46 Information provided by the authorities. 
47 The Government sold 90% of the shares held in Sevanagala Sugar Industries to a private 
entrepreneur for Rs 550 million.  The remaining 10% of the shares was given to the employees.  Meanwhile, 
53% of the shares in Pelwatta Suga r Industries Ltd were also sold. 
48 Central Bank of Sri Lanka (1999). 
49 Jogaratnam (2001). 
50 World Bank (1996).  
51 In 2002, textiles and clothing accounted for 40% of the Sri Lankan manufacturing production and 
66.8% of total manufactured exports.   Moreover, in 2001 the United Stat es accounted for 64% of Sri Lanka's 
garment exports, and the European Union (EU) accounted for another 30% (the United Kingdom alone 
accounted for 19%) 
52 Central Bank of Sri Lanka (2001). WT/TPR/S/128 Trade Policy Review 
Page 84 
 
 
market, the quality of infrastructure, the removal of inefficiencies in the legal system and the 
excessive controls/regulations, and the unfavourable  terms and conditions in international trade.53 
39. The manufacturing sector contributed 15.9% to GDP in 2002 (Table I.1).  The textiles and 
clothing sector, the leading net foreign exchange ear ner, is the largest industrial sector, accounting for 
40% of industrial output (Chart IV.1).  Food, beverages and tobacco is the second most important 
industry, followed by the chemicals, petroleum, and rubber.  Production in the latter industries is 
dominated by state-owned enterprises.54  Growth in manufacturing was 2.8% in 2002, reflecting a 
partial reversal of the 3.9% decline in 2001 (Chart IV.2).55  The three largest sub-sectors (i.e. textiles 
and clothing, food and beverages, and chemicals) ac counted for 92% of the manufacturing growth in 
2002.  In 2001, the performance in the manufacturing sector was adversely affected by weak demand, 
power cuts, and increased costs of production.  The subsequent recovery may be attributed to an 
increment in export orders received in the second half of 2002, supported by a gradual improvement 
in global markets, an increase in domestic dema nd reflecting improved consum er confidence, and the 
end of the power cuts in mid 2002.56   
40. Labour productivity in manufacturing grew onl y marginally in 2002.  Growth in labour 
productivity has been constrained by stringent labo ur laws, poor working conditions, the lack of a 
proper transport network, insufficient investment in modern technology, and strained employer-
employee relations.  In addition, the lack of skilled labour has become a constraint on the 
development of certain industries.  In response,  the Skills Development Fund was set up in 1999 to 
encourage employers to train, retrain, and upgrade the skills of their employees.  The 2003 Budget 
proposed replacing this Fund with the Human Resources Endowment Fund, which would be used to 
provide tertiary education and vocational tr aining to students to upgrade their skills.57 
41. Historically, foreign direct investment (FDI) has played an important role in the expansion of 
manufacturing exports;  almost 85% of the total increment in manufactured exports between 1985 and 
1995 originated in foreign firms.58  FDI, which had showed a declining trend in 2000-01, rose in 
2002, with the peace initiative.  In 2002, the Boar d of Investment (BOI) approved 504 projects, 
amounting to total investment co mmitments of Rs 70,604 million.59  The foreign investment 
component of the projects was 52%, and 60% of the projects were in the manufacturing sector.  Within the manufacturing sector, 72 projects were approved in the textiles, clothing and leather products category. 
                                                     
 
53 Central Bank of Sri Lanka (2002a). 
54 The output of state-owned enterprises operating in the manufacturing sector increased by 7.5% in 
2002, recovering partially from the drop of 11.3% in 2001.  The production of the Ceylon Petroleum Corporation (CPC), which accounted for over 90% of public-sector manufactured output, increased by 8.5% in 
2002.  This increase in output was the result of the CPC's uninterrupted production throughout 2002.  In 2001, 
the petroleum refinery was closed for about two months for routine maintenance.  However, the share of manufactured output produced by state-owned enterprises, excluding petroleum products, decreased by 21.8% 
in 2002. 
55 Growth in the manufacturing sector was estimated by the Central Bank of Sri Lanka based on 
information collected from the Industri al Production Survey 2002 of the Central Bank of Sri Lanka, production 
data of public sector industries, and export data relatin g to BOI enterprises.  These estimates cover only factory 
industries;  the other two sub-sectors of manufacturing, i.e. agriculture processing and small-scale industries, are 
estimated separately. 
56 Central Bank of Sri Lanka (2002a). 
57 It is not clear whether the fund was established. 
58 Athukorala and Rajapatirana (2001). 
59 This includes 300 projects approved under Section 17, and 204 projects under Section 16 of the BOI 
Act. Sri Lanka WT/TPR/S/128 
 Page 85 
 
 
 
42. In 2003, the average applied MFN tariff w as 8% for the manufacturing sector as a whole 
(WTO non-agricultural products)60, with tariffs ranging from 0% to 25%.  Average protection to the 
sector has decreased since 1998, when it was 9.3% .  The industries that benefit from higher-than-
average protection include leather, rubber, footw ear, and travel goods, with average rates of around 
14.9%.  Sri Lankan manufacturing continues to be highly dependent on importe d intermediate goods;  
thus average protection for fully processed goods a nd primary goods is high,  at 12.1% and 12.4% 
respectively, while protection for interm ediate goods is 4.4% (Table AIV.3).61  
43. In the Uruguay Round, Sri Lanka bound l ess than 10% of the tariff lines covering 
manufactured products.62  Thereafter, it bound all tariffs affecting textiles (HS Section 11).63  
Nevertheless, Sri Lanka’s per centage of bound lines covering manufactured products (WTO 
definition of non-agricultural products) remains low, at 26%.   There are sectors, such as plastics and 
rubber (HS Section 7), and arms and ammunitions (HS Section 19), in which no tariff lines have been 
bound. 
                                                      
60 For industrial products (HS 25-97) the average protection was 7.9%. 
61 The textile industry, which is high ly dependant on imported inputs, is  an example of this pattern of 
protection:  protection for semi-processed goods is 0.1%, while for fully processed and primary goods average protection is 8.7% and 4.3%, respectively. 
62 WTO (1996). 
63 Textiles and clothing using the WTO definition is not fully bound.  This classification includes 
unbound tariff lines from HS Chapter 39, 65, 66, 77. Chart IV.1
Structure of production in manufacturing, 2002a
Source :   Central Bank of Sri Lanka, Annual Report 2002.Food, beverages & tobacco
22.7Textiles, clothing & leather products
39.9
Paper & paper products
1.7Other   2.9
Chemicals, petroleum, rubber & 
plastic products
19.5Per cent
Non-metallic mineral products
7.8Fabricated metal products   4.5
Basic metal products   1.0
a               Provisional.WT/TPR/S/128 Trade Policy Review 
Page 86 
 
 
 
44. Whereas the tariff is the Government's preferred policy instrument to assist domestic 
agriculture, incentives are the preferred instrument to  assist manufacturing.  Through the years, Sri 
Lanka has offered a wide range of incentives (e.g. tax holidays and tariff concessions) to 
manufacturing, to promote diversification and th e acquisition of modern technology in the sector.64  
The incentive regime is complex and has been changed several times since 1996 in an effort to attain 
specific goals and to target mainly export-oriented enterprises.65  However, as already stated, the 
provision of various incentives has not proved effectiv e in diversifying the industrial base.  Regional 
industrialization has also been encouraged throu gh the provision of tax incentives and infrastructure 
facilities in the remoter districts.  However, most of  the industries in Sri Lanka are still located in the 
Western Province due to the proximity to the harbour and airport, and close access to product and 
labour markets.  In a new attempt to promot e regional development th e 2003 Budget announced a 
special tax incentive package for enterprises a pproved under the new BOI Act passed in 2002 and 
located in specific regions. 66 
                                                      
64 These incentives include tax conc essions (especially tax holidays) a nd tariff concessions (duty-free 
entrance of machinery, equi pment, and raw materials) 
65 Central Bank of Sri Lanka (2000).  
66 The new BOI Act was passed by Parliament but has not been implemented yet;  hence, it is not clear 
to the Secretariat whether these new incen tive programmes have been implemented. 0102030405060708090100
-6-4-2024681012Chart IV.2
Manufacturing indicators, 1996-2002
Billion ru pees
a                 Provisional.
b                 Measured as the output of "factory industries" only.Note:          Data are based on 1990 constant prices.
Source :      Central Bank of Sri Lanka , Annual Re port 2002;  and the Sri Lankan authorities .Right-hand scale:  growth in industrial outputb
Textiles, clothing and leather 
Non-metallic minerals Food, beverages and tobaccoChemicals, petroleum, rubber and plastics Left-hand scale:  Performance in major industrial sub-sectors1998          2002a      2001     2000          1999          Per cent
1996          1997          Sri Lanka WT/TPR/S/128 
 Page 87 
 
 
45. Commercial banks provide short and medium-t erm credit to the manufacturing sector at 
market rates, while the development banks (i .e. the National Development Bank (NDB) and the 
DFCC Bank) provide long and medium-term assistance under special credit schemes in the form of subsidized direct loans and equity participation.   The NDB has continued to grant credit under the 
second stage of the Small and Micro Industri es Leader and Promotion Project (SMILE 2) 
implemented in 2001.  In 2002, credit amounting to  Rs 506 million was granted under SMILE 2.  The 
NDB also provided Rs 2,531 million in direct financial assistance to the manufacturing sector.
67  
Interest rates on these loans ranged from 10%-20%.  Credit granted to the manufacturing sector by Development Finance Corporation of Ceylon (D FCC) Bank increased from Rs 2,432 million in 2001 
to Rs 4,190 million in 2002.
68  
(i) Textiles and clothing 
46. In 2002, exports of textiles and clothing accounted for 53% of Sri Lanka's total export 
earnings and amounted to 5.3% of GDP (about  40% of manufacturing output).  There are 
approximately 830 factories operating in Sri Lanka , providing employment to 330,000 people.  
Production and employment in the clothing industry in Sri Lanka are highly concentrated in a few 
large-scale manufacturers.  The 50 largest factories accounted for over 50% of total output of the 
industry and the top 12 exporters account for about 72% of exports.69  Sri Lanka's apparel exports are 
also heavily concentrated in a fe w markets.  In 2002, some 94% of clothing and textile products were 
exported to U.S. and EU markets. 
47. The textiles and clothing sector recovered in 2002, growing by 1.2% after undergoing a sharp 
decline (of 8.5%) in 2001.  The global demand for textiles and clothing, which had been declining 
since the first quarter of 2001, showed signs of recovery during the second ha lf of 2002.  However, 
the full recovery of the sector will depend on in ternational demand, as more than 90% of apparel 
products are manufactured for export.  The price of  Sri Lankan textiles and clothing exports declined 
by 6% in 2002, and the cost of production increased sharply because of increases in energy, 
telephone, and other utility prices, and a decline in labour productivity.  In order to face this 
unfavorable environment, a few apparel manufac turers reduced their scale of operations and 
restructured their factories, while others have b een able to rationalize costs of production, improve 
product quality, reduce turnaround time, and find new mark ets.  In addition, greater attention has been 
paid to the selection of fabrics, design, and quality.70 
48. The Sri Lankan garment industry relies heavily on imports of fabric and other accessories 
(e.g. buttons, zippers, labels, a nd packing material).  Imports of textiles and related products 
accounted for 39% of intermediate- goods imports in 2000.  It is estimated that imports account for 
nearly 85-90% of the fabrics used by exporters.  Th is results in long turn-around times to meet export 
orders and keeps the net foreign exchange earnings of the garment industry low.  The local textile 
industry appears to be unable to supply the type of fabrics demanded by the export garment industry 
due to technical handicaps.  The authorities consider that the high dependence on imported raw 
materials is an impediment to the sector’s future growth. 
                                                      
67 Of the total credit approved by NDB in 2002, 19 % was granted to the food, beverages and tobacco 
industry, 21% to the chemicals, petroleum, rubber, and plastics sub-sector, and 9.7% to the textiles, clothing and 
leather industry. 
68 In 2002, the DFCC Bank approved Rs 1,765 milli on to the food, beverages and tobacco industry;  
Rs 734 million to the chemical, petroleum, rubber, and plastics industry;  Rs 459 million to non-metallic mineral 
products;  and Rs 452 million to textiles, clothing, and leather products. 
69 Central Bank of Sri Lanka (2002a). 
70 Central Bank of Sri Lanka (2002a). WT/TPR/S/128 Trade Policy Review 
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49. The average tariff protection on textiles and clot hing has declined since 1998, to reach 5.8% 
in 2003, with tariffs ranging from 0-25% (Table AIV.4) .  Most intermediate inputs enjoy low levels of 
protection and some bear none at all.  Duties on tex tiles and other related raw material were abolished 
in the 1998 Budget to overcome the cu stoms-related problems faced by exporters who rely heavily on 
imported raw materials.71  Imported textiles and textile articl es (i.e. goods classified under Chapters 
50 to 63 both inclusive) are exempt from the import surcharge.72 
50. Textiles are subject to a reduced VAT rate of 10%.  However, to assist this sector the 
2002 Budget proposed that fabrics should be exem pt from VAT.  This exemption was expected to 
simplify procedures and eliminate delays, allowing a pparel exporters to respond to buyers promptly.  
It is not clear to the Secretariat how this measure would “simplify procedures and eliminate delays”.  
The 2002 Budget  also announced that the VAT on ga rments would be replaced with a flat fee of 
Rs 25 per garment sold in the local market  by Board of Investment (BOI) enterprises.73  It is unclear 
to the Secretariat whether this measure was implemented. 
51. Sri Lanka's exports of textiles a nd clothing have been subject to quotas, to varying extents, in 
Canada, the European Union, and the United States.  Sri Lanka has signed administrative 
arrangements with Canada74, the United States75, and the EU76 to implement the textiles and clothing 
restraints under the ATC.  In December 2000, the Gove rnment of Sri Lanka signed an agreement with 
the EU to lift by March 2001 all quantitative restricti ons on exports of Sri Lankan garments to the EU.  
As a quid pro quo, the agreement also provides for ta riff reductions by Sri Lanka  and binding of all its 
tariffs for the textiles and clothing sector:  Sri Lanka  bound its rates for the entire sector at 0% for raw 
materials, 5% for fibres and yarns, 10% for fabrics,  and 17.6% for clothing products.  As a result, the 
EU suspended the application of four restraints on imports of textiles and clothing from Sri Lanka.77 
52. In 2002, the number of items subject to quotas in the U.S. and Canadian markets declined.  In 
2002, Sri Lanka exported 30 different clothing and textiles items to the U.S. market and 11 items to 
the Canadian market.  According to the authorities, the quota utilization in the U.S. market declined 
by 8.9% in 2001 (due to the slowdown in the U.S. market);  as a whole Sri Lanka used 72.2% of the 
available U.S. quotas.78  The quota utilization rate in the Cana dian market also declined, from 42.3% 
in 2001 to 33.3% in 2002.79  According to the authorities, quota utilization is decreasing because 
manufacturers have concentrated in production of higher-value-added non-quota items to export to the 
EU market.  However, the decline in quota utilizatio n in these markets might also be the consequence 
of a fall in the competitiveness of Sri Lanka's produ cers and/or trade diversion owing to the NAFTA. 
                                                      
71 Central Bank of Sri Lanka (1998). 
72 Sri Lanka Customs (undated e). 
73 Central Bank of Sri Lanka (2002a). 
74 WTO document G/TMB/N/170, 16 July 1996. 
75 WTO document G/TMB/N/286, 22 July 1997. 
76 WTO document G/TMB/N/261, 18 July 1997. 
77 These quotas covered trousers (category 6), cotton bl ouses (category 7), cotton shirt (category 8), and 
anoraks (category 21) (Kelegam a and Epaarachchi, undated). 
78 The quota utilization rate in the United States declined during 2001-02 from 80.1% to 75.2% for 
apparel and from 13.9% to 4.8% for fabrics.  In 2002, Sri Lanka used 90% of the U.S. quota for dresses, knit 
shirts and blouses, skirts, nightwear, trousers, and underwear;  and less than 25% of the quota for playsuits, fabric poplins and spun-cell, suit-type coats, dressing gowns, non-suit coat s, playsuits, coveralls, and overalls. 
79 The most popular quota items in the Canadian mark et were winter outerwear, trousers, overalls and 
shorts, shirts, underwear, and blouses.  In the Canadian market, the quota utilization rate was below 5% in respect of swimwear, baby garments, and bed-sheets. Sri Lanka WT/TPR/S/128 
 Page 89 
 
 
53. Textile quotas are allocated by the Textile Quot a Board (TQB), a statutory body with private-
sector participation80, under the Ministry of Enterprise Develo pment, Industrial Policy and Investment 
Promotion.  In general, quotas have been dist ributed to manufacturers depending on their past 
performance.  However, a certain percentage (som e 3%) is left for small-scale manufacturing units 
and residual/unutilized quotas are allocated according to  the number of employees involved or at the 
TQB's discretion.81 (Box IV.2).  The complexity and consequent lack of transparency of the quota 
allocation system renders it susceptible to admini strative discretion;  hence, there have been 
allegations of corruption in the distribution of quotas.82  The private-sector representatives of the TQB 
have deplored the interference of various inte rested individuals in the allocation of quotas.83  A s  a  
result, in 2002, the Sri Lanka Apparel Exporters Association (SLAEA) launched a special unit to 
monitor the allocation of quotas and their use.  The SLAEA considered that there were many 
irregularities in the process of allocation, and that transparency was key to keeping track of the quota 
movement.84  The authorities claim that these allegations  are false, and that the quota allocation 
process is transparent. 
Box IV.2:  Quota-allocation System 
Main criteria of allocation 
(i) 90% of the quotas are allocated on the basis of past export performance.  Allocations on this basis 
are referred to as "Perform ance Quota" or "Main Quota". 
(ii) Approximately 3% of the quota available in a year will be reserved for small-scale manufacturing 
units;  this will be allocated on the basis of the number of employees. 
(iii) 50% of any remaining quotas (after allocations  on the basis of (i) and (ii)) are reserved for 
resuscitation of sick factories or any other purpose determined by the Textile Quota Board from time to time. 
(iv) Any quota balances remaining after allocation of (i), (ii), and (iii) will be  put to a "common pool" 
and allocated under the common pool scheme. 
These quotas may be transferred. 
Common pool quota schemes 
Pool quotas are not transferable. 
The pool quota scheme is divided in two schemes  
(a) Cold Category (i.e. less the 80% quota utilization in previous year) pool quota scheme:  allocation 
is in two phases Phase I:  The basis of allocation and the quantities to be allocated will be decided by the TQB.  
Phase II:  Any quantity remaining after operation of Phase I will be made available via an application.  
(b) Main pool quotas scheme:  allocation is primarily on the basis of the number of employees. Source:  Government of Sri Lanka.
 
 
54. The Two-Hundred-Garment Factory Programme and the Fifty-Garment Factory Programme, 
which were implemented in 1992 a nd 1994, respectively, to promote the production of textiles and 
                                                      
80 The private sector is represented through five associations:  the Sri Lanka Apparel Exporters 
Association, the Free Trade Manufact urers Association, the Sri Lanka Garm ent Buying Offices Association, the 
National Apparel Exporters Association, and the Sri Lanka Chamber of Garment Exporters. 
81 A small-scale manufacturing unit is a unit that employs a minimum of 50 and a maximum of 
200 employees and whose quota holding in all fast moving categories is 4,000 dozens or less. 
82 Sunday Times [Online].  Available at:  http://www.sundaytimes.lk/020602/bus/bus2.html. 
83 Daily News,  5 June 2002 [Online].  Available at:  http://origin.dailynews.lk/2002/06/05/bus03.html. 
84 Daily News,  31 July 2002 [Online].  Available at:  http://origin.dailynews.lk/2002/07/31/bus05.html. WT/TPR/S/128 Trade Policy Review 
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clothing in backward areas, are still in place.  Under these schemes, tax exemptions are granted and 
quota allocations are guaranteed.  The size of the quot as allocated to these factories is contingent on 
location and number of employees.  The more backwa rd the area and the more labour employed the 
bigger quota.  This acts as a disincentive for fact ories to use more capital-intensive technologies.  
According to the authorities, these programmes have  been very successful.  At present, there are 
160 factories operating under the Two-Hundred-Garme nt Factory Programme, and 69 factories under 
the Fifty-Garment Factory Programme. 
55. The Sri Lankan clothing industry is now facing sev eral challenges including the expected end 
to the quota system in 2005, increasing competition from low-cost manufacturers and exports under 
preferential trading arrangements, and the slow progress in domestic infrastructure development, 
which impairs external competitiveness.  In orde r to remain competitive, the industry needs to, 
inter alia , upgrade its technology, rationalize costs of production, improve product quality and speed 
of delivery, maintain high labour stan dards, and develop a domestic inputs base.85 
56. At present, most of Sri Lanka’s exports ar e subject to quotas;  however, it seems that 
dependence on quotas has declined somewhat over th e years.  Quota-based exports have declined 
from 63% in 1996 to 53% in 2002.  Many large-scal e manufacturers have already established strong 
marketing links with foreign buyers to decrease their dependence upon quota availability.  Therefore, 
the loss of exports following the abolition of the quota system may not be as high as many fear.  Large-scale manufacturers have started to upgrade technology and skills, but not smaller producers.  
Some manufacturers had already upgraded their production in 1998 when tariffs on textiles were 
reduced.  The Textile Restructuring Programme was introduced in 1998 to assist the sector in this 
process.
86 
57. The authorities consider that the growing trad e of textiles and clothing under preferential 
arrangements is becoming a severe threat to small,  middle-income countries like Sri Lanka.  To face 
this challenge, Sri Lanka is also lobbying for pref erential trade concessions in major markets (e.g. the 
United States and the EU), forming regional trad ing blocks, and entering into bilateral trade 
agreements.  In this regard, Sri Lanka has si gned an agreement with the EU and has initiated 
discussions to obtain preferential treatment in the U.S. market. 
(ii) Petroleum 
58. The two main developments in the petroleum sector since 1996 have been the introduction of 
competition in the sector and of a formula to determ ine the local price of petroleum products.  Until 
February 2003, the Ceylon Petroleum Corporation (CPC) had the monopoly to import, export, refine, 
distribute and market petroleum and petroleum products  in Sri Lanka.  It was prohibited for any other 
person or entity to engage in any of these activ ities without a written approval from CPC.  Most 
imports of petroleum products (HS 27.10) are duty free.87   
59. The restructuring of the petroleum sector in Sri Lanka started in the early 1990s.  As a result, 
the loss-making Ceylon Petroleum Corporation (C PC) was separated into subsidiaries, which 
undertook different activities.  Of these subsidiaries, Lanka Lubricant (import, blending, distribution, 
and marketing of lubricant oil), Colombo Gas (imp ort and distribution of liquefied petroleum gas 
(LPG)), and Lanka Marine Services  (bunkering oil) have already been  privatized and their related 
activities liberalized.  
                                                      
85 Central Bank of Sri Lanka (2002a). 
86 No information was provided to the Secretariat on this programme. 
87 Department of Imports and Exports Control (2002). Sri Lanka WT/TPR/S/128 
 Page 91 
 
 
60. CPC previously had monopoly rights, among othe r things, to import crude oil and refined 
petroleum, to refine crude oil, and to distribut e petroleum products throug h approximately 300 filling 
stations.  CPC has been restructured and the importation and distribution of refined petroleum liberalized in February 2003. 
61. The restructuring of CPC has four features.  Fi rst, the market for refined products was divided 
among three players:  the CPC, the Lanka Indian Oil Company (LIOC), and a third party licensee to be selected through a competitive bidding process.
88  Second, a separate company will be established 
to manage CPC's common user facilities, such as oil te rminals, storage facilities, and pipelines.  Third, 
the aviation fuel operations of CPC (the Aviation Fuel Company) will be restructured through a 
competitive bidding process.  Fourth, CPC will be c onverted into a fully state-owned public limited 
company in charge of operating the refinery and th e remaining facilities (used to supply and distribute 
petroleum products). 
62. Once the sector is fully rest ructured, the Government will play only a regulatory role.  
However, this is somewhat confusing, as it seems that CPC will continue to be a fully state-owned 
company competing with the other suppliers.  It would control a third of the market through its 
distribution/service network and operate the refinery on commercial terms.89  CPC’s infrastructure 
(e.g. storage tanks, pipelines, loading facilities, and distribution network) will become a "common 
user facility (CUF)", which will be available to a ll users.  A regulatory mechanism will be set up to 
ensure competition, adequate supply, service standa rds, and consumer safety.  The oil and gas sector 
will eventually operate under the regulatory framewo rk stipulated in the envisaged Public Utilities 
Commission of Sri Lanka Act No. 35 of 2002 , which is to encompass the Ceylon Petroleum 
Corporation Act No. 28 of 1961 and the Energy Supply (Temporary Provisions) Act No. 2 of 2002.  Until the regulatory arrangements are put in place,  non-commercial and regulatory functions will 
remain under the purview of the CPC a nd will be governed by the CPC Act. 
63. Lanka Lubricants Limited, originally the lubricating oil blending plant of the CPC, was 
incorporated as a government-owned company in D ecember 1992.  The company was in charge of 
blending, importing, distributing, and marketing lubricating oils and greases.  The company blended 
95% of its production locally, using imported base o ils;  it supplied 98% of the domestic demand.  
Lanka Lubricants Limited was privatized in 1994 w ith the sale of 51% of its shares to Caltex Trading 
and Transport Corporation.
90  The monopoly on the importation and distribution of finished lubricants 
expired on 31 March 1997.  Import licences have been  issued to six companies to import and market 
finished lubricants.  However, the monopoly on local manufacturing and distribution through CPC's 
owned and managed service sta tions will continue until 2004.91 
64. Shell Gas Lanka Limited (SGLL), formerly  known as Colombo Gas Company, provides 
liquefied petroleum gas (LPG) to over one million dom estic and industrial customers in Sri Lanka.  A 
                                                      
88 In February 2003, a subsidiary of the Indian Oil Company called Lanka Indian Oil Company (LIOC) 
signed an agreement with the Government of Sri Lanka to enter the market by taking over 100 of CPC's 
300 filling/service and importing refined petroleum products.  In addition, the Trincomalee Tank farm 
comprising 99 tanks was handed over by CPC to LIOC unde r a lease agreement.  The targeted completion of the 
privatization of the 100 filling stations earmarked for Lanka Indian Oil Company (LIOC) is November 2003.  
CPC’s common user facilities w ill be transferred to one company and valued.  The target date for completion of 
the valuation exercise is June 2003.  The transfer to LIOC of one third of  the common user facilities is expected 
to take place soon after.  Id entification of the third player/investor will begin in July 2003 and is expected to be 
completed in April 2004 (Public Enterprises Reform Commission of Sri Lanka (undated e). 
89 Because of the small size of the market, during the first five years only three companies will be 
allowed to engage in the marketing of oil. 
90 Public Enterprises Reform Commission of Sri Lanka (undated c) and (undated d). 
91 Public Enterprises Reform Commission of Sri Lanka (undated c), (undated d), and (undated f). WT/TPR/S/128 Trade Policy Review 
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51% stake of SGLL is held by Shell Overseas Investments;  the remaining 49% of the shares, which 
are still owned by the Government of Sri Lanka, are in the process of being sold.92  A new local 
company entered  the LPG market in 2001 and it is claimed that consumers have already benefited 
from the competition through lower prices and improved services.93  However, the press has reported 
that the price of LPG has been on the increase in 2002.94 
65. Lanka Marine Services Ltd. (LMSL), a fully  owned subsidiary of CPC, was the monopoly 
provider of bunker-oil in Sri Lanka.  LMSL operated within the harbour by providing bunker-oil to 
ships calling at the Colombo Port.  LMSL was priv atized in 2002.  However, according to the 
authorities, the buyer of LMSL has been granted excl usive rights to provide bunkering within the Port 
of Colombo for 18 years.  The Government is pla nning to allow all parties who own, or have access 
to, vessels certified by the Marine Pollution Pr evention Authority (MPPA) as being suitable for 
bunkering, to import and sell marine fuel.  Ther e will be no price regulation and licensees are 
expected to practice self-regulation with regard to price and quality.  Licences are to be issued by the 
Minister of Power and Energy at no co st to locally incorporated companies.95 
66. In January 2002, an automatic price adjustme nt mechanism to determine local prices of 
petroleum products was introduced.  The new pricing methodology has prevented CPC from 
accumulating further losses.96  Under the new pricing policy, local prices of major petroleum products 
(i.e. petrol, diesel, kerosene, and furnace oil) are regulated through a formula.  The formula is expected to be revised monthly, based on changes in the cost of production.  With this pricing system, 
any gain or loss due to the fluctuation of internatio nal oil prices, any other input or the exchange rate 
will be passed on to consumer s according to the formula.
97  The price of LPG is not regulated by the 
formula;  the two market players set it.  Prices were previously revised on recommendations made by 
the CPC to the treasury. According to the authorities, price adjustments were highly political.  Prior to 
2002, the price of petroleum products was subsidized .  However, in 2000, the Government, no longer 
able to subsidize fuel in view of the rising oil pr ices and the cost of war, announced a series of price 
increases on diesel, kerosene, fuel oil, and transport. 
(4) ELECTRICITY  
67. In 2002, Sri Lanka's state-owned installed el ectrical capacity of 1,704 MW consisted of 
1,137MW of hydropower, 564MW of thermal power and 3MW of wind power;  the private sector owned an additional capacity of 228MW.
98  Sri Lanka is heavily reliant on hydropower for its 
electricity, making it vulnerable to fluctuations in rainfall.  Although thermal power capacity has 
doubled since 1996, it has not been enough to meet demand during periods of low rainfall.  Most of 
the thermal plants use diesel.  Investment in the el ectricity sector has been marginal in recent years, 
resulting in serious power shortages during drought pe riods.  Sri Lanka is likely to continue facing 
severe power shortages in the future owing to delays in establishing  new power generation capacity 
and in repairing existing plants. 
68. The electricity sector underwent a severe cr isis in 2001, which ex tended until mid-2002.  
There was a significant drop in the generation of hydropower due to poor rainfall, delays in power 
                                                      
92 Public Enterprises Reform Commission of Sri Lanka (undated f). 
93 Central Bank of Sri Lanka (2001). 
94 The Island , 29 October 2002 [Online].  Available at:  http://origin.island.lk/2002/10/29/news04.html  
[24 June 2003]. 
95 Public Enterprises Reform Commission of Sri Lanka (2001). 
96 Central Bank of Sri Lanka (2002a). 
97 Central Bank of Sri Lanka (2001). 
98 Central Bank of Sri Lanka (2002a). Sri Lanka WT/TPR/S/128 
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plant repairs and the discontinuation of hiring power pl ants.  This led to prolonged power cuts in the 
second half of the year, which disrupted economic ac tivity, and thus had an adverse impact on the 
country’s production and productivity.  At present, pow er tariffs in Sri Lanka are the highest in the 
region, potentially weakening Sri Lanka's extern al competitiveness.  Power generation capacity 
increased by 7% in 2001 with the commissioning of a combined cycle power plant (110MW), 
reducing hydro dependence to 61%.  However, ef fective generating capacity  remained below its 
potential due to low water levels in reservoirs.  Th e demand for electricity has increased at a faster 
rate than the expansion in power generati on capacity, aggravating the power shortage.99  Thus, 
electricity generation needs to be  expanded not only to eliminate the existing excess demand, but also 
to meet increasing new demand.  
69. The Ceylon Electricity Board (CEB), a state-owned monopoly, and its subsidiary Lanka 
Electricity Company (Pvt.) Ltd. (LECO), are still in  charge of the transmission and distribution of 
electricity in Sri Lanka.100  There is some private participation in the generation of electricity.  The 
Ceylon Electricity Board (CEB) has run a deficit for several years as electricity tariffs are not adjusted to cover costs.  In 2001, the average tariff (Rs 5.53 per unit) was kept below the average cost (Rs 7.20 
per unit) resulting in losses of about Rs 12 billion for the CEB.
101  In addition, many large industrial 
and commercial organizations ha ve standby generators, which are used under a CEB subsidy 
programme102, and the Government uses high-cost generators  hired on a short-term basis to meet the 
power shortages, at CEB's expense.  The introductio n of an automatic tariff adjustment system and the 
elimination of subsidies could reduce CEB's losses. 
70. The 2001 crisis was a repetition of the 1996 crisis and demonstrated the power sector's 
continued weakness.  To avoid future crises, the indu stry needs to be restruct ured, the repairs to the 
CEB's power plants need to be completed, and a tr ansparent automatic power tariff adjustment system 
needs to be introduced.  Dependence on hydropower h as to be further reduced by diversifying power 
generation to other sources to minimize the vulne rability of the electricity supply to rainfall 
variation.103 
71. The Electricity Reforms Act passed in 2002 sti pulates the re-structuring of the electricity 
sector.  The Act calls for the separation of the gene ration, transmission, and distribution operation of 
the CEB paving the way for greater private-sector participation.104  Private participation is envisaged, 
although it is not clearly stated in the law.  The Act proposes the creation of several state-owned companies:  one generation company to take over the functions of Ceylon Electricity Board;  one 
company to take over the transmission functions of CEB,  three or more distribution companies;  and 
one or more companies to take over the other functions of CEB and LECO.
105  According to the 
authorities, creation of eight new state-owned co mpanies to take over the functions of CEB and 
LECO has been approved.106  CEB will eventually disappear in accordance with Section 66 of the 
Act, which refers to the repeal of the CEB Act and the Electricity Act.  Despite the efforts to 
                                                      
99 Central Bank of Sri Lanka (2001). 
100 Bureau of Infrastructure Investment (undated). 
101 Central Bank of Sri Lanka (2001). 
102 In 1997, under this programme, large industrial and commercial consumers were granted a subsidy 
of Rs 3,000 per kVA subject to the following conditions:  for a specific period of five months from 1997-00 
beneficiaries could consume only 25% of their average monthly consumption from the national grid.  
103 Central Bank of Sri Lanka (2001). 
104 Central Bank of Sri Lanka (2002a). 
105 Section 45 of the Electricity Reform Act, No. 28 of 2002, 11 December 2002. 
106 There will be one generation company, one transm ission company, five distribution companies, and 
one company to deal with the other functions. WT/TPR/S/128 Trade Policy Review 
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reorganize the sector, Sri Lanka is moving from one monopoly situation to another, competition will 
be allowed only in distribution.  Moreover, pr ivate involvement is at present not allowed. 
72. A shortcoming of the Electricity Reform Act is that it only deals with the generation of 
thermal and hydro power.  It makes no provision for the development either of alternative energy 
sources or for privately owned supplies. 
73. Under the Electricity Reform Act, licensees should submit their tariff proposals according to 
"cost reflective methodology" to the Public U tilities Commission (PUC);  the PUC reviews the 
proposal prior to approving the tariff.  If the Govern ment decides that a tariff needs to be subsidized, 
it undertakes to compensate the li censee for the lost revenue. 
(5) SERVICES  
(i) Overview 
74. Services (including construction, and electricity, gas, water, and sewerage) contributed some 
62.2% to Sri Lanka's GDP in 2002, up from 59.4% in  1996 (Chapter I).  Real growth of 6% in 2002 
(negative in 2001) reflected further expansion in  telecommunications and financial services, and 
restored growth in wholesale and retail trade, tourism, and port services.  Services employed some 
31% of the labour force in 2002.  The largest ser vices subsectors in 2002 were wholesale and retail 
trade (21% of GDP), transport and communication (12.4%), and banking, insurance, and real estate (9.2%).  Key services, such as tourism, buoyed also  by rekindled foreign investment, have expanded 
recently following the domestic peace initiatives.  Services, mainly transportation and travel 
(tourism), accounted for about one fifth of exports in  2002 (one sixth in 1999);  Sri Lanka is a net 
services exporter (Chapter I).  More efficient services delivery is a government priority;  several state 
utility monopolies exist, often incurring large losses.  
75. Sri Lanka's specific commitments in the Uruguay Round covered only tourism.
107  Sri Lanka 
subsequently participated in the extended nego tiations on basic telecomm unications and financial 
services and accepted the GATS Fourth Protocol (b asic telecommunications) and Fifth Protocol 
(financial services) on 27 November 1 997 and 20 January 1999, respectively.108  The monopoly on 
basic fixed wire telephony services (international) of  the majority state-owned Sri Lanka Telecom was 
scheduled to last until at least 2000, when issuan ce of another licence would be conditional on 
satisfactory progress in tariff re-balancing.  Sri Lanka  also reserved the right to issue no new licences 
for mobile services until at least 2000 and to reta in the duopoly on basic telephony services supplied 
by wireless local loop (WLL) for five years (i.e. 20 02).  Foreign equity caps were scheduled, at 35% 
for Sri Lanka Telecom and 40% for other operators  unless the Board of Investment (BOI) approved 
on a case-by-case basis higher levels (up to 100%).   Sri Lanka adopted the Reference Paper on 
Regulatory Principles as an additional GATS commitment.   
76. Sri Lanka's commitments in financial services allow for an economic needs test to govern 
approval, registration and licensing of banks and ot her financial institutions, foreign branches, and 
maximum foreign equity of 49%.  Moreover, th e entry for direct insurance provides for new 
establishments to be subject to government licensing;  the relevant criteria are not further specified in 
the schedule.  Foreign equity pa rticipation throughout the financial service sector is limited to 49%, 
except for reinsurance and retrocession where Sri Lanka has not accepted any bindings on commercial 
presence. 
                                                      
107 WTO document GATS/SC/79, 15 April 1994. 
108 WTO document S/DCS/W/LKA, 24 January 2003.  Sri Lanka WT/TPR/S/128 
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77. The only MFN exemption listed by Sri Lanka relates to telecom accounting rates on 
international calls. 
78. Sri Lanka grants most-favoured-nation (MFN) treatment in services to all WTO Members.  
The only MFN exemption listed is to reserve the right  indefinitely to apply different accounting rates 
on international services under bilateral Interna tional Telecommunications Agreements between 
Sri Lanka Telecom and foreign operators , including from SAARC partners.  
79. Notwithstanding the limitations inscribed in Sri Lanka's schedule the authorities view services 
liberalization as important in attracting foreign inve stment and developing infrastructure, and this is 
reflected in recent decisions to allow full foreign ownership in certain key services, especially banking 
and insurance.  They are examining the possibility of further commitments in a number of non-
infrastructural services, such as tertiary educati on, retail trade and professional services.  Sri Lanka 
believes that GATS Article IV must more effect ively raise developing-country participation in 
services trade.  It has suggested that developed c ountries be required to provide meaningful access in 
services of export interest to developing members,  and to limit their liberalization requests to 
developing countries.109 
(ii) Financial services 
80. The main laws regulating financial services are the Banking Act, the Monetary Law Act 
(amended in 2002), the Finance Companies Act, the Insurance Industry Act, the Insurance Board of 
Sri Lanka Act, the Securities and Exchange Comm ission Act, and the Finance Leasing Act.  The 
Monetary Law Act and the Banking Act are to be  fully overhauled within the next two years.110  Anti-
money-laundering legislation is also being draf ted, covering most institutions, such as banks, 
insurance firms, stock brokers, finance companies, and leasing firms.111 
81. The Central Bank, the Securities and Excha nge Commission, and the Insurance Board 
regulate the financial sector.112  The Government has considered forming a single regulator, the 
Financial Services Authority (FSA).113  However, the Ministry of Finance recently deferred its 
creation.114  The FSA would regulate non-bank financia l institutions, such as securities firms, 
insurance companies, employer-sponsored priv ate pensions funds, an ti-money-laundering, and 
oversee accounting and auditing standards.  However,  the subsequent transfer  of bank supervision 
from the Central Bank to the FSA appears no longer to be planned. 
(a) Banking 
82. The Central Bank regulates four types of banking  institutions:  commercial banks, specialized 
banks, leasing companies, and finance companies.115  Commercial and specialized banks require a 
                                                      
109 WTO document S/CSS/W/131, 6 December 2001. 
110 Central Bank of Sri Lanka (2002a). 
111 Preliminary draft laws have been prepared on combating financing of terrorism (Ministry of Foreign 
Affairs), prevention of money laundering (Ministry of Justice), and financial transaction reporting (Central 
Bank).  
112 Central Bank of Sri Lanka (2001). 
113 The FSA's creation was recommended by the Government’s Financial Sector Reform Committee, 
which was set up in March 2002 to evaluate financial sector reforms (Asian Development Bank, 2003, p. 10). 
114 The Ministry of Finance (Department of Fiscal Policy and Economic Affairs) and the Central Bank 
advise on financial sector reforms, including legislative changes; the Cabinet Sub-Committee on Economic 
Policy must approve all reforms. 
115 Licensed banks are supervised by the Bank Supervision Department of the Central Bank while the 
Department of Supervision of Non-Bank Financial Institutions supervises leasing and finance companies. WT/TPR/S/128 Trade Policy Review 
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license (Banking Act), and leasing and finance comp anies must be registered under the Leasing Act 
and Finance Companies Act, respectively.   Bank licence applications are considered case-by-case and 
licence numbers are not limited.  Factors used in deciding whether to issue a licence are the 
applicant’s economic viability, the bank’s potential, and the "economic need" for its services and 
operations.  "Due diligence" checks are performed on directors and owners/shareholders.  The Central 
Bank issues prudential regulations for licensed  banks, for example on minimum capital, capital 
adequacy, and liquid assets.  Banks listed on the st ock exchange are also subject to the disclosure 
requirements of the Securities and Exchange Commi ssion.  While the Ministry of Finance does not 
directly regulate banking institutions, the Minister's c onsent is needed in certain situations, such as an 
investor acquiring a material interest (above 10% of issued share capital) in a commercial bank. 
83. Services provided by commercial banks include  accepting deposits repayable on demand, and 
dealing in foreign currency (subject to Minister of Finance approval).   Specialized banks provide 
specific services such as mortgages and housing loans, and financing for rural and development 
projects.  They provide interest-bearing savi ngs products and can accep t time deposits, but not 
demand deposits.  Registered finance companies can accept time deposits from 6 to 60 months, and 
lend, mainly for hire purchase, leasing, and real  estate. Licensed banks and registered finance 
companies cover about two thirds of Sri Lanka’s banking business.  Other financial institutions are 
not supervised.   
84. In 2002, there were 23 commercial banks;  12 we re foreign banks (Table IV.3).  Foreign 
equity limits were raised from 49% to 60% in 2000 , and eliminated in May 2002.  According to the 
authorities, there are no restrictions on forei gn competition in banking, including from overseas 
(unincorporated) branches, and forei gn suppliers receive national treatment. 
Table IV.3 
Sri Lanka's banking system, 2002 
(Per cent and Rs million) 
Number of banking 
institutionsa Total assets Total deposits Type of banking 
institution  
Number Per cent of 
total Amount Per cent of 
total Amount Per cent of 
total Percentage 
of NPLs 
Commercial banks 23 (26) 63.9 (100.0) 953,601 79.6 640,575 81.0 15.3 
Domestic banks 11 (8) 30.6 (30.8) 828,810 69.2 565,024 71.4 16.3 
 Bank of Ceylon 1 (1) 3.8 (3.8) 258,013 21.5 170,603 21.6 15.6 
 People's Bank 1 (1) 3.8 (3.8) 206,909 17.3 141,205 17.9 20.4 
Foreign banks 12 (18) 33.3 (69.2) 124,790 10.4 75,550 9.6 7.7 
Specialized banks  13 (0) 36.1 (0) 244,370 20.4 150,492 19.0 13.7 
Total 36 (26) 100.0 (100.0) 1,197,971 100.0 791,067 100.0 100.0 
a Figures in brackets are for 1999. 
Source: Sri Lankan authorities. 
85. The banking sector suffers from high levels of NPLs and low provisioning, inefficient state 
banks, insufficient bank capitalization, and inad equate prudential supe rvision and regulation.116  
Capital injections have strengt hened many banks;  average capital ratios are around 10%.  NPLs of 
commercial banks improved in the last half of 2002 from 16.5% to 15.3%.117  They were higher for 
                                                      
116 IMF (2002d), p. 17.  
117 World Bank (2002a), p. 1, and Central Bank of Sri Lanka (2002a), p. 243. Sri Lanka WT/TPR/S/128 
 Page 97 
 
 
the state banks (rising from 17.0% to 18.7%).118  In general, the Government does not provide blanket 
deposit guarantees, but it has guaranteed depos its of one specialized savings bank. 
86. The two state banks, Bank of Ceylon and the Peopl e's Bank, continue to account for over half 
of deposits and credit.  Their ope rations have not always reflected commercial criteria;  past 
government intervention, including in management, dividend, credit, and investment policies had 
directed credit into high-risk state and private enterprises.   Both state banks need to be restructured.119  
They were re-capitalized in 1993 and 1996, but need ed large capital injections again by 1998.  While 
the Bank of Ceylon's performance has improved, th e People’s Bank remains technically insolvent 
(negative net worth).120  However, restructuring plans to im prove long-term viability were announced 
in 2002 and the government guarantee on certain probl em loans was withdrawn in July 2002.  The 
Government intends to sell the People's Bank as a single entity and has formed a Restructuring 
Committee to examine options.121 
87. The Monetary Law was amended to strengt hen the Central Bank's regulatory role by 
clarifying its powers to examine company records and to obtain additional information to ascertain compliance with prudential requirements.  Bank inso lvency provisions were also extended to licensed 
specialized banks, and "winding up" procedur es to liquidate insolvent banks enhanced.
122  Takeovers 
and mergers are unrestricted but must be approved by the Monetary Board and the Minister of Finance to safeguard prudential requirements. 
88. The Central Bank has tightened prudential regul ations and introduced stricter compliance 
based on BIS standards, but they do not yet full y reflect the Basel pre-conditions for effective 
supervision.
123  These regulations are applied uniformly to local and foreign commercial banks.  
Prudential requirements for commercial banks we re extended to offshore banking units in 
December 2002.  In 2003 the (risk weighted) capita l adequacy ratio of commercial and specialized 
banks was increased from 9% to 10%.  The Bank's S upervision Department has issued new directives 
and regulations in key areas, such as loan classifica tion, provisioning, and single borrowers.  It has 
reviewed bank loan portfolios and insisted on add itional provisioning where required.  State-directed 
lending has been phased out;  outstanding loans of the two state banks fell from Rs 139.6 billion at 
end 2001 to Rs 81.1 billion at e nd June 2003.  Financial reporting and disclosure requirements have 
also been upgraded, along with additional off-site and at least bi-annual on-site inspections.  The 
Central Bank released in June 2002 a voluntary , but strongly recommended, Code of Corporate 
Governance for banks and other fina ncial institutions, comprising 12 principles to protect the financial 
system’s integrity.124  Banks are encouraged to obtain credit ratings from Fitch Ratings Lanka Ltd 
(joint venture of Fitch Inc (USA), the Cent ral Bank, and several other institutions).  
                                                      
118 The Government is to establish an Asset Management Company to expedite bank restructuring, loan 
recoveries, and NPL liquidation;  legislation is at the draft stage. 
119 Central Bank of Sri Lanka (2001). 
120 Fitch rated the Bank of Ceylon in 2002 as AA  (very high credit quality) for long-term debt. 
121 IMF (2002d), p. 9. 
122 Central Bank of Sri Lanka (2002a), p. 40. 
123 IMF (2002d), p. 17.  According to the authorities, the main areas of non-compliance are the 
principles of consolidation supervision, information sharing, globally consolidated supervision, host country 
supervision, and supervision over foreign banks' estab lishments.  The Banking Act is to be amended to allow 
comprehensive risk-based consolidated supervision.  Th e authorities do not currently give priority to compliance 
with cross-border supervision principles because the presence of foreign banks in Sri Lanka is not very large. 
124 The guidelines cover the board's conduct, including qualification and appointment of directors and 
senior managers;  transparency, such as  external audits and financial disclosu re;  risk management systems, such 
as monitoring all material business risk;  and prudential regulation and supervision.  WT/TPR/S/128 Trade Policy Review 
Page 98 
 
 
89. The wide spread between commercial bank lending a nd deposit interest rates, of some four to 
eight percentage points, reflects many factors, including high exposure to NPLs, risk premiums on 
loans with inadequate collateral, high cor porate risk, and domestic security concerns.125  It also 
indicates banking sector inefficiencies.  Spreads ha ve narrowed substantially since peaking in 2000 
(Chart IV.3).  However, while deposit and lending rates both fell in 2002, the spread widened as 
lending rates declined more slowly. 
0.05.010.015.020.025.0
1990 1998 1999 2000 2001 2002Chart IV.3     
Interest rate spreads of commercial banks, 1990 and 1998-2002
Per cent
Central Bank of Sri Lanka, Annual Report - 2002, Key Economic Indicators. Source : Weighted average
deposit rate
SpreadWeighted average
 prime lending rate
 
 
(b) Insurance 
90. The insurance sector has been substantially re formed since 1996.  The main developments 
have been:  the establishment of a new regulator;  th e privatization in 2003 of the Sri Lanka Insurance 
Company (SLIC);  and the removal of foreign invest ment limits in April 2002 (Gazette Notification 
No. 1232/14 of the Controller of Exchange, Centra l Bank).  The Insurance Board of Sri Lanka 
(IBSL), staffed by the Secretariat of the Securities and Exchange Commission, has regulated the 
insurance sector since 1 March 2001 (Regulati on of Insurance Industry Act No. 43 of 2000).126  It 
must register all insurers, but has limited capacity in insurance regulation, especially reinsurance and 
on-site inspection.  
91. The state no longer has any commercial role in in surance.  Its SLIC inte rests were sold in 
2003.127  The Government’s remaining 39% equity in  National Insurance Company (NIC) was also 
sold in 2002.  State agencies were no longer requi red to insure with SLIC after privatization.  
                                                      
125 Central Bank of Sri Lanka (2002a), p. 239. 
126 IBSL replaced the Controller of Insurance of the Ministry of Finance (Control of Insurance Act of 
1962) 
127 Ninety per cent was divested to a domestic consortium (with a Dutch technical partner) for 
Rs 6.05 billion and the rest given to SLIC employees.  The owners must continue to employ all staff, estimated at 3,000, on no worse terms and conditions.  Sri Lanka WT/TPR/S/128 
 Page 99 
 
 
Although declining, SLIC still dominated life and gene ral insurance in 2002 with  32% and 42% of the 
respective markets.   Crop insurance was also liberalized to a llow provision by private insurers.  In 
addition, foreign investment restrictions were removed and limits on overseas re-insurance were 
eased.128  Entry of insurance companies is unrestri cted.  Foreign branches must be locally 
incorporated firms under the Companies Act of 1982. 
(c) Capital market  
92. The performance of the Colombo Stock Excha nge rebounded in 2002 after hostilities ceased.  
Market capitalization rose to Rs 163 billion in 2002 (Rs 124 billion in 2001), assisted by the return of 
net inward portfolio foreign investment of Rs  2,443 million (US$25 million), improved corporate 
profitability, and the listing of several new companies, including Sri Lanka Telecom.  The Securities 
and Exchange Commission (SEC), which regulates th e stock exchange and the securities industry, is 
formulating a code of best practice for market intermediaries.   
93. In November 2000, new stock exchange listi ng rules replaced merit-based with disclosure-
based requirements.129  These are intended to facilitate company listings and to promote greater 
disclosure to protect investors.  The bond market has expanded and debt instruments diversified, 
including with longer maturity dates.  Dealers of government securities are regulated by the Central 
Bank; licensed commercial banks have been eligib le since February 2002.  A secondary securities 
market exists.  Foreign investment requirements were relaxed in the 2000 Budget, and full foreign 
ownership of licensed stockbroking firms was allowed in March 2000.  Unit trusts that invest no more 
than 20% of their total investment in gover nment securities may also be foreign owned. 
94. Regulation of superannuation funds is to be enhanced;  the Ministry of Finance has submitted 
a draft of the Superannuation Benefit Fund Regu latory Bill to the SEC for comments.  The 
Government also intends to establish a Pensions Reform Office to develop the pensions industry, 
which is dominated by government schemes.  A gove rnment task force representing all stakeholders 
has been established to examine possible reforms.  
(iii) Telecommunication services 
95. Sri Lanka's telecommunications market, especially for mobile services, has expanded 
(Table IV.4).  The number of fixed lines rose from 254,500 in 1996 to 768,620 in 2002, raising the telephone density (number of tele phones per 100 persons) from 1.4% to  4.7%.  However, the waiting 
list for a fixed telephone line increased, from 224,411 in 1998 to 306,268 in 2002.
130  Mobile services 
have grown much faster, from 71,028 subscribers in  1996 to 907,422 in 2002.  The number of internet 
users has also risen greatly (from 4,110 in 1996 to 70, 082 in 2002) and there are currently 29 internet 
service providers.  Telecommunications growth h as been hampered by regulatory constraints 
restricting competition, especially the state monopoly on fixed wire services, and resulting high charges and inadequate services that penalize consumers, including businesses.    
                                                     
 
128 World Bank (2002b). 
129 Central Bank of Sri Lanka (2002a). 
130 Actual waiting lists are likely to be much higher.  These figures are based on registered applications 
with SLT, and do not therefore includ e the high number of potential customers who do not bother to apply. WT/TPR/S/128 Trade Policy Review 
Page 100 
 
 
Table IV.4 
Telecommunication services, 1996-02  
Service 1996 1997 1998 1999 2000 2001 2002a 
Fixed access services (number)        
SLT telephone lines  254,500 315,241 455,598 580,199 653,144 708,200 768,620 
New telephone connections  50,170 72,457 143,075 133,709 90,647 77,535 69,258 
Applicants on waiting list  270,800 284,876 224,411 236,225 248,486 257,707 306,268 
WLL subscribers  527 26,381 67,931 86,914 114,267 121,082 114,488 
Telephone density (per 100 persons) 1.39 1.93 2.93 3.70 4.17 4.44 4.65 
Other services (number)        
Cellular phones 71,028 114,888 174,202 256,655 430,202 667,662 907,422 
Public pay phones 3,002 3,682 4,761 5,799 8,222 7,281 6,681 
Radio paging services  10,721 10,829 10,511 10,300 7,009 6,535 5,516 
Internet and e-mail 4,110 10,195 18,984 25,535 40,497 61,532 70,082 
a Provisional. 
Source:   Central Bank of Sri Lanka (2002d), Sri Lanka Socio-Economic Data 2002 ;  and Central Bank of Sri Lanka (1997) 
and (2002a), Annual Report .  
96. The Government took steps to end the monopoly of Sri Lanka Telecom (SLT), until recently 
majority state owned, over international voice servi ces and wire line operati ons in August 2002.  As 
part of this liberalization pr ogramme, Sri Lanka adopted a new National Communications Policy in 
2003, including new interconnection rules (effect ive 7 March 2003) to provide for mandatory 
interconnection on an "efficient, non-discriminator y and cost oriented basis".  The policy’s 
cornerstone was to provide "effective and fair co mpetition based on non-discriminatory allocation and 
administration of scarce resources, open licensing, interconnection, equal access, dispute resolution 
and access to information".131  The regulatory regime was to be strengthened by granting more 
independence to the national regulator, the Te lecommunications Regulatory Commission (TRC), 
which was formed in 1996 (Box IV.3).  A liberal licensing regime was to be implemented to allow 
unrestricted competition from new, including foreign,  entrants.  Pre-determined limits on the number 
of licences or the types of services offered were to  be removed when exclusivity clauses in existing 
licences expired.  Other licence restrictions,  such as the limit of  four mobile licences and on the 
number of data communication opera tors, were also to be lifted .  However, very few of these 
measures had been implemented when the Govern ment indefinitely suspended the policy in 
August 2003.  The current status of the policy is unclear. 
97. SLT continues to operate the wire network and is the sole provider of fixed phone services.132  
Despite initial intentions, no new licences have be en granted to supply domestic services.  SLT's 
fixed-line competition remains limited to restricted wireless local loop (WLL) services provided by a 
licensed duopoly.133  Four licensed operators provide comp eting mobile services.  However, SLT no 
longer has a monopoly on international call services.  Th ere is now no restriction on issuing External 
Gateway Operator licences;  some 30 licen ces have been issued since August 2002.   Licences for 
fixed and mobile phone services are usually for 20 years, and 10 years for internet providers.  The 
                                                      
131 Ministry of Mass Communication (2002). 
132 Central Bank of Sri Lanka (2002a), p. 126. 
133 The duopoly on wireless local loop (WLL) services (held by Suntel and Lanka Bell) is intended to 
be discontinued in 2005 when their exclusivity licences, extended for five years in 2000, expire.  They were initially licensed in 1996 to provide basic telephony and other services in competition with SLT. Sri Lanka WT/TPR/S/128 
 Page 101 
 
 
Minister of Mass Communication, based on TRC's recommendations, must license all 
telecommunication operators.134 
Box  IV.3:  National Communications Policy 2003 
The centrepiece of the new policy was to establish "a liberal licensing regime designed to promote an open 
market, which would allow the private sector maximum flexibility to develop the sector in response to 
consumer demand and public needs".  Licensing was to be "open, non-discriminatory, transparent and light 
handed".   The number of licences would have been unres tricted, except where scarce resources were 
involved, such as radio frequencies.  According to the policy, traditional licensing and other barriers to 
market entry were to be "reduced or eliminated to allow market forces and technology to determine the 
most efficient means of providing services".  Public fixed-wire network services were to be encouraged, 
and new mobile and wireless local loop (WLL) licences issued using available spectrum frequencies.  
Entry barriers for establishing transmission networks to service wholesale and retail customers were to be 
removed, and "regulatory burdens" minimized.  Licences were to be issued in a competitively neutral 
manner across licensees in each market segment and "not  at unreasonably high f ees that may deter market 
entry or limit operators' ability to invest".  
The TRC was to develop and enforce universal service obligations to ensure that all rural consumers had 
"reasonable and affordable" access to  the full range of telecommuni cation services, including voice 
telephony, internet, e-mail, and text messaging.  A Telecommunications Development Fund (TDF) was to 
be established to finance universal services.  Licensed  operators were required to contribute an agreed 
percentage of the licence fees to the TDF.  The TDF was intended to support mainly non-commercial (non-profitable) services, such as extending services in isolated areas.  Multi-purpose community telecentres 
(MCTs) in rural areas were to be used to help meet  universal access;  the TRC was to ensure that MCTs 
received access to essential networks at reasonable and a ffordable charges.  Under the suspended policy, all 
operators were to participate in establishing a Natio nal Disaster and Emergency Service telephone system.    
TRC's independence and authority was to be enhanced under the new policy, with more transparent 
operations and procedures, to ensure full autonomy from operators, the Ministry and Government.  The 
Ministry of Mass Communications is currently its Ch airman.  The TRC was also to be re-named the 
Communications Regulatory Commission (CRC). 
Source:  Ministry of Mass Communication, Proposed National Communications Policy,  September 2002. 
98. The suspended policy would require operators to negotiate access conditions subject to TRC 
approval to ensure that the agreed terms were in th e interests of fair market competition.  Under these 
provisions, the TRC is to set interconnection terms, e ither by mediation or specific rulings, if parties 
do not agree.  Interconnection charges are to be co st oriented.  Additional interconnection rules apply 
to dominant operators declared by the TRC (such as SLT)).  They must publish an approved reference 
interconnection offer within three months of being declared, stating all charges, and technical and 
other conditions for allowing interconnection.135 
99. The TRC must approve all tariffs, except for WLL and external gateway services, to protect 
consumers.  Tariffs are generally approved on a cost -plus basis.  Tariff re-balancing is aimed at 
reducing cross-subsidies, such as lowering the relativ ely high cost to large users and international 
                                                      
134 The Minister may reject the TRC's recommendation and grant a licence on his own discretion 
(section 17(2) of the Telecommunications Act).  
135 Any operator may re-negotiate the reference interconnection offer by SLT provided it is TRC 
approved.  Any new offer must conform to the Interconnection Rules and the dominant operators' connection offer;  be non-discriminatory against other connectable operators;  and not curtail competition (Interconnection 
Rules of 2003, paragraph 15).  A reference interconnec tion offer must conform to the WTO's Fourth Protocol on 
Basic Telecommunications, including the Reference Paper (paragraph 14(3)).  SLT's offer was submitted to the TRC for approval before the policy was suspended. WT/TPR/S/128 Trade Policy Review 
Page 102 
 
 
callers.136  The TRC  has subsidized the construction and opera tion of new public payphones in rural 
areas since February 2002, to help supply universal services;  the per unit subsidy was raised recently 
from Rs 50,000 to Rs 75,000.137 
100. The Government partially divested ownership in SLT in 1996 by selling 35.2% equity to 
Japan's Nippon Telephone and Telegr aph Corporation (NTT).  In N ovember 2002, SLT was listed on 
the Colombo Stock Exchange and a further 15.3% of the Government’s stake divested;  this reduced 
state equity to 49.5%.138  The initial target was to divest more locally and to sell remaining equity to 
foreign interests, but these plans were revised due to the relatively low level of domestic and 
international interest.139  The Government is currently considering the divestment of a further 8% 
equity in SLT.   
(iv) Transport 
101. There is a long-standing need for major reforms in public transport.140  The Ministry of 
Transport, Highways and Aviation, and the Mini stry of Port Development and Shipping are 
responsible for transport policy and the developmen t of a national integrated transport system.  
Investment in transport infrastructure has been  inadequate.  The Government's Bureau of 
Infrastructure Investment has tried to promote fo reign infrastructure invest ment through build-own-
operate (BOO) or build-own-transfer (BOT) arrangeme nts, but with limited success.  Tax incentives 
have also been used to promote foreign investment (Chapter III(3)).   
(a) Air services 
102. The major change in air transport services since the previous Review of Sri Lanka in 1995 has 
been the Civil Aviation Authority Act No. 34 of 20 02, which established the Civil Aviation Authority 
of Sri Lanka (CAASL) to replace the Department of Civil Aviation  as the principal regulatory agency.  
It commenced operations in December 2002.   The CAASL  is responsible for preparing a national 
aviation policy, developing an aviation plan, issu ing licences, monitoring commercial air services, and 
ensuring safety. 
103. Sri Lanka has one international airport, Bandara naike International Airport (BIA), which is 
being expanded.  Airport and Aviation Services (Sri Lanka) Limited (AASL), a fully state-owned 
monopoly, continues to provide airport and navigation services.141  It also allocates cargo space, 
carries out refuelling, and sublets restaurants and sh ops.  There are plans to  allow new entrants to 
provide these services and to privatize AASL.  Sr i Lanka Airlines (SLA) continues to operate all 
ground handling services.142   
104. Approximately 32 airlines (three domestic ca rriers) were operating in 2002 (27 carriers 
provided international services in 2001).   Following the terrorist attack at  BIA in July 2001, several 
                                                      
136 Central Bank of Sri Lanka (2002a), p. 127.  Do mestic call charges, for example, increased on 
average by 15% in May 2002, while international rates were reduced by 8%. 
137 The subsidy is capped at Rs 125 million or 2,500 new payphones (100 payphones per district).  The 
maximum number of subsidized payphones for any single operator is 25 per district.  
138 The Government's share allocation gave preference to domestic retail investors, domestic non-state 
institutional investors, and foreign inve stors;  state-controlled investment funds and institutions received lowest 
priority.  The allocation of the 12% shareholding was:   domestic retail 34%, domestic non-state institutions 
23%, state institutions 27%, and foreign investors 16%. 
139 Central Bank of Sri Lanka (2002a), p. 193. 
140 Central Bank of Sri Lanka (2002a), p. 193. 
141 See online information.  Available at:  http://www.airport.lk/services.htm [24 July 2003]. 
142 WTO (1996). Sri Lanka WT/TPR/S/128 
 Page 103 
 
 
major foreign carriers downgraded services and mo ved their bases from Colombo;  some resumed 
operation in 2002 after the peace imitative.143  Air passengers at BIA rose by 6% to 2.9 million in 
2002 and cargo by 6%.  The majority state-owned na tional carrier, SLA, retained a substantial market 
share in 2002 (60% of p assengers and 44% of cargo).144  SLA is the only designated Sri Lankan 
international carrier.  SLA's divestment agreement made it the sole Sri Lankan international carrier 
until March 2008.145  
105. International carriers operate from Sri Lanka under bilateral air service agreements.  New 
agreements have been signed since 1996 with Cypr us, the Czech Republic, Greece, Iran, Israel, the 
United States, Yemen and Macau, China;  several  existing agreements were also renegotiated.   
Cabotage rights are not allowed, but are not an is sue since Sri Lanka has only one international 
airport.   The Sri Lanka/United States Open Skies Air Transport Agreement has, since November 
2002, provided for unrestricted capacity and frequencies by respective airlines, including liberalized code sharing and charter arrangements, both for passenger and cargo services.
146 
106. The CAASL has recently removed restrictions preventing domestic operators from providing 
international charter flights between neighbouring countries.147  All three domestic operators 
(Serendib, LionAir and ExpoAviati on) have reportedly expressed interest in operating these services.  
According to the authorities, the only restriction on foreign register ed operators providing domestic 
air services is that 60% of their directors must be Sri Lankan. 
(b) Maritime services 
107. Port services recovered strongly in 2002, buoyed by the removal of the war risk surcharge in 
March. This surcharge, imposed by insurance comp anies in July 2001, along with security fears, led 
to several major shipping lines divert ing operations to neighbouring ports.148  Ships arriving at 
Colombo Port rose by 6% in 2002 to 3,787, and co ntainer handling increased by 2% (Table IV.5).  
Total cargo at the three main ports (Colombo, Galle,  and Trincomalee) rose by 5% to some 28 million 
tonnes in 2002.  Most cargo passes through the Port of Colombo, which also conducts trans-shipment 
business.  The state entity, Sri Lanka Ports Author ity (SLPA), manages these ports (and the port at 
Kankasanthurai) and is responsible for all cargo handling and harbour development (SLPA Act of 
1979).  It handles all port services (apart from the Qu een Elizabeth Quay at Colombo) and also has a 
monopoly on providing certain services, such as navi gation and pilotage.  SLPA is under the Ministry 
of Port Development and Shipping, which is respons ible for maritime policies and regulation.  There 
are no plans to privatize SLPA.  The Government pl ans to establish an independent Port Regulatory 
Authority by 2005 to safeguard competition and  prevent anti-competitive practices, including cross-
subsidization and price fixing. 
                                                      
143 Three private domestic flight services, suspended in  1998 due to security fears, resumed operations 
in 2002, and several new licences were issued (Central Bank of Sri Lanka, 2002a). 
144 Central Bank of Sri Lanka (2002a). 
145 SLA was partially divested in 1999 and 2001, and is currently 51.05% state-owned.  According to 
the authorities, Emirates Airline owns 43.63% and SLA employees 5.32%.  This information is inconsistent 
with data in Table AIII.5, whic h is based on the PERC website. 
146 See online information.  Available at:  h ttp://www.slaito.com/aboutus.h tm [24 July 2003]. 
147 Daily News , "Local airlines allowed charter flights", 15 October 2003, p.1. 
148 The rate was 0.75% of one quarter of the value of the ship and cargo. WT/TPR/S/128 Trade Policy Review 
Page 104 
 
 
Table IV.5 
Shipping services, 1997-02  
Service 1997 1998 1999 2000 2001 2002a 
Vessels arrived (number) 4,087 4,233 4,339 4,232 4,014 4,062 
Colombo 3,627 3,879 3,968 3,832 3,570 3,787 
SLPA - - - 3,090 2,824 2,942 
SAGTb - - - 742 746 845 
Galle 56 104 97 97 117 76 
Trincomalee 404 250 274 303 327 199 
Total cargo ('000 tonnes) 26,832 26,847 26,995 27,535 27,062 28,313 
Colombo 25,117 24,793 24,825 25,222 24,741 26,273 
SLPA - - - 21,986 21,207 20,298 
SAGTb - - - 3,236 3,534 5,975 
Galle 182 402 439 597 662 526 
Trincomalee 1,533 1,652 1,731 1,718 1,659 1,514 
Container traffic ('000 TEUs) 1,687 1,714 1,704 1,733 1,727 1,765 
SLPA - - 1,636 1,432 1,397 1,207 
SAGTb - - 68 301 330 558 
Trans-shipment containers ('000 TEUs)       
SLPA - - 1,108 959 959 848 
SAGTb - - 45 222 236 370 
Employment (SLPA)(number) 19,033 18,777 18,930 19,344 18,561 17,910 
Colombo 17,101 16,964 17,075 17,411 16,744 16,157 
Galle 831 769 777 758 737 752 
Trincomalee 1,101 1,044 1,078 1,175 1,080 1,001 
a Provisional. 
b South Asia Gateway Terminal Ltd (SAGT) commenced cargo handling on 5 September 1999. 
Note: TEUs = twenty-foot equivalent container units. 
Source:  Central Bank of Sri Lanka (2002a), Annual Report 2002,  Table 35.  
108. Productivity at the Port of Colombo increased s ubstantially in 2002;  net gantry moves per 
hour rose by 44%.  This largely reflected improved performance by SAGT (Private) Ltd, a private 
company, which was granted a 30-year BOT conce ssion in 1998 to operate Queen Elizabeth Quay 
and the South Asian Gateway Terminal (SAGT).149  In 2002, container throughput rose by 69% and 
trans-shipments by 57%.  SAGT's share of car go also increased in 2002 from 14% to 23%.  
Reorganization of the terminals managed by SL PA has also added to productivity.  The Jaye 
Container Terminal (JCT) was corporatized in 20 02 and many shipping lines have signed Terminal 
Service Agreements to use it.  However, SLPA's gr oss profitability declined and operating expenses 
rose by 6% in 2002.150 
109. Government policy, as outlined in the 1997 Na tional Policy Statement on Ports and Shipping, 
is being revised and will be  re-issued shortly.  There have been  no major policy or legislative changes 
in shipping since 1996.  Long-standing government  policy is to liberalize port operations and 
encourage private participation by implementing a landlord port concept to complement BOO/BOT 
operations.  SLPA would provide the port structure (fairways, sites, roads, and quays) while super-
                                                      
149 SAGT equity is 41.25% Sri Lankan owned, including 15% owned by SLPA. 
150 A productivity-based Target Bonus System replaced the "speed money" system and a new voluntary 
retirement scheme allowed shedding of almost 3,000 redundant staff in 2002.  However, SLPA's staff of 18,000 
at end 2002 was still double the optimal levels (Central Ba nk of Sri Lanka, 2002a, p. 136).  The target is to 
further lower current staff levels from  14,000 to 8,000 within two years.  Sri Lanka WT/TPR/S/128 
 Page 105 
 
 
structures (cranes, warehouses, etc.) and steve doring services would be owned and operated by 
private contractors.  However, few reform s have occurred since SAGT was contracted.151  T h e  
Government abolished plans to privatize the JCT in early 2001, due mainly to labour union resistance.  
110. The priority is to expand Colombo port to become a regional hub.  Existing capacity is 
expected to be insufficient by 2005 and  Hambantota is being considered as a possible long-term 
replacement.   Galle is to be developed as a multi-purpo se port to help meet regional, including 
coastal, shipping requirements.  Trincomalee is thought to have potential as a port for commercial 
shipping and cargo handling, ship repair/ building, and cruise and marina activities.  
111. Sri Lanka has a national fleet of two vessels operated by the state-owned national carrier, 
Ceylon Shipping Corporation (CSC).  CSC must ca rry all government import cargo provided it is the 
cheapest alternative.  This requirement is to be re moved at the end of 2003.  Government policy is to 
strengthen its operations, including involvement in fo reign joint ventures.  Several private companies 
own and operate small fleets unde r the Sri Lankan flag, including Mercantile Shipping (a joint-
venture company with German participation).  Coast al shipping is reserved for Sri Lankan flagged 
vessels;  offshore companies and BOI firms can register their vessels as Sri Lankan flagged vessels.  
International shipping lines handle virtually  all of Sri Lanka's overseas shipping.   According to 
authorities, no "exceptional" requirements are imposed on ships using Sri Lankan ports. 
112. The Government is liberalizing the provision of bunker oil to international ships. The state-
owned Lanka Marine Services was privatized in 200 1 (Section (3)(ii) above).  The Government is 
also developing private investment in ship chande lling and offshore supplies, which are open to the 
private sector.  The Colombo Dockyard Limited (CDL ), 51% foreign owned, co nducts ship repair and 
ship building activities.  There are no government subs idies to ship building or repair.  According to 
authorities, the only foreign investment restriction in  shipping is the foreign equity limit of 60% for 
shipping agencies. 
(c) Land services 
113. Road and rail transport are important modes of  transport both for cargo and passengers.  The 
state monopolist Sri Lanka Railways (SLR) operates about 1,500 kilometres of track;  it serviced 
some 4 billion passenger kilometres (106 million passe ngers) and 131 million freight tonne kilometres 
in 2002.  Rail accounts for about 6% of passenger a nd 4% of freight transportation in Sri Lanka.  
Freight operations expanded in 2002. 
Road 
114. The Road Development Authority develops and maintains national highways.  Road 
development continues to be hampered by financ ial constraints and land acquisition problems.  A 
Road Fund was established in 2002 to finance road ma intenance, funded by a special vehicle levy.  
The Government wishes to increase private-sector funding in road construction.152 
                                                      
151 The Government completed feasibility studies in 2002 on two major development projects;  the 
US$1 billion Colombo South Harbour Expansion Project, designed to  accommodate post-Panamax vessels 
involved in trans-shipment traffic, a nd the Hambantota Port Development Proj ect.  The private sector is to fund 
the South Harbour expansion, as a public-private partnership involving BOT concessions similar to SAGT.  
152 It is concurrently considering a private proposal to finance the Rs 11 billion construction of the 
Colombo-Katunayake Expressway that started in 2000.  It has also invited expressions of interest from the private sector to construct the Colombo-Kandy alternative highway on a BOO/BOT basis. WT/TPR/S/128 Trade Policy Review 
Page 106 
 
 
115. Passenger bus services are provided by private operators and state-owned regional transport 
companies (RTCs, also called cluster bus compan ies) under the Central Transport Board.  RTC 
services account for about one third of the comm uter bus market.  RTCs are poorly managed and 
over-staffed (over 40,000 staff fo r 5,000 operating buses).  Their operating losses rose by 55% in 
2001, but fell by 9% in 2002, to Rs 2.2 billion.  Government subsidies to RTCs totalled Rs 1.2 billion 
in 2002.153  Private bus operators are disadvantaged by small operations and low government-set 
fares.  A new bus-fare policy for private and public  operators, adopted in 2002, replaced the ad hoc 
fare revisions with annual reviews usin g an improved cost-based pricing formula.154  However, the 
Government directed RTCs not to adopt the 15% fare increase recommended by the National 
Transport Commission (NTC), the national transpor t regulator, from July 2002.  The regulatory 
regime for bus transport remains fragmented with  overlapping responsibilities vested in provincial 
Councils and the NTC (National Transp ort Commission Act No. 37 of 1991).  
116. The Government is establishing private-public pa rtnership arrangements (PPPA) in RTCs to 
improve efficiency.  In 2002, the Public Enterpri ses Reform Commission (PERC) invited investors to 
acquire 39% equity in and to manage RTCs.  They are expected to inject extra funds through 
government-guaranteed debt financing, mainta in existing employees on no worse terms and 
conditions, and provide public services under governme nt supervision, all in return for state 
subsidies.155  As a result of low interest in RTCs, divestment was postponed.  Six RTCs were to have 
been divested to a private consortium in 2003.  However, following court action, Cabinet withdrew 
this award and the PERC is calling for new tenders for all 13 RTCs. 
117. Independent truckers dominate road transport.  According to the authorities, there are no 
restrictions on road transportation, and freight rates are set by market forces. 
Rail  
118. Terrorist activities badly affected rail operations, and restoring these services is a high 
priority.  Major sections of track are being reconstr ucted, such as the Northern and Eastern railway 
lines, at an estimated cost of Rs 8 billion.   
119. Passenger rail services have deteriorated due mainly to financial constraints, aggravated by 
overstaffing, low charges, and operational as well as managerial deficiencies in Sri Lanka Railways 
(SLR).156  Its losses totalled Rs 2.8 billion in 2002 (one quarter of all state transfers to public entities).  
Passenger fares have not changed since 1996;  freight rates were raised by 50-250% from 
September 2001.  The Government wishes to improve  SLR's management and operational efficiency 
through private sector participation, but is yet to announce clear policies.  A broad-based restructuring 
programme is needed involving private-sector part nership and a self-financing mechanism to avoid 
excessive budgetary pressures.157 
                                                      
153 Rs 225 million was also paid to subsidize bus travel by school children and Rs 300 million to fund 
bus services on uneconomic rural routes. 
154 Cost components of the formula are fuel (27%), crew (22%), repairs (12%), service, lubricants, 
tyres, and tubes (11%), depreciation (10%), finance co sts and risk (10%) and overheads (8%).  Interim fare 
increases are possible when di esel prices rise rapidly. 
155 Government guarantees are limited to 30% of the investor's purchased equity. 
156 Central Bank of Sri Lanka (2002a), p. 133. 
157 Central Bank of Sri Lanka (2002a), p. 135. Sri Lanka WT/TPR/S/128 
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(v) Tourism 
120. Tourism was Sri Lanka's third largest foreign exchange earner in 2002, and directly accounted 
for some 3% of GDP (9% including indirect contribution).158  Following the peace initiatives, the 
sector is recovering.  After declining sharply by 15. 9% in 2001, tourist arriva ls rose by 16.7% in 2002 
to 393,171, with substantial growth (over 100% ) since mid-year (Table IV.6).  Gross earnings 
expanded by 24.6% in 2002 to Rs  23.7 billion (US$248 million).  R oom occupancy rates remained 
low, at 43.1%, but had increased from 2001.  Total tourism employment rose by 8.3% to 87,600.  Tourism has strong linkages with the economy, genera ting significant indirect employment (51,100 in 
2002) and growth, especially outside Colombo. 
Table IV.6 
Tourism statistics, 1996-02 
Percentage change 
Indicator 1996 1997 1998 1999 2000 2001a 2002b 
2001 2002 
Tourist arrival 302,265 366,165 381,063 436,440 400,414 336,794 393,171 -15.9 16.7 
Tourist guest nights ('000) 2,947 3,680 3,944 4,479 4,056 3,342 3,989 -17.6 19.4 
Room occupancy rate (%) 40.3 49.1 52.8 57.6 52.3 42.1 43.1 -19.5 2.4 
Gross tourist receipts (Rs million) 9, 195 12,316 14,873 19,288 19,095 19,034 23,724 -0.3 24.6 
Per capita tourist receipts (Rs) 30, 420 33,635 39,030 44,194 47,688 56,515 60,340 18.5 6.8 
Total employment  76,711 81,614 83,427 87,744 91,063 80,904  87,600 -11.2 8.3 
 Directc 31,963 34,006 34,780 36,560 37,943 33,710 36,500 -11.2 8.3 
 Indirectd 44,748 47,608 48,692 51,184 53,120 47,194 51,100 -11.2 8.3 
a Revised. 
b Provisional. c Direct employment is employment in hot els and restaurants, travel agencies, tour  operators, airlines, agencies providing 
recreational facilities, and tourist shops. 
d Indirect employment are domestic producers and suppliers of  inputs, and manufacturers and suppliers of handicraft.  
 
Source:  Central Bank of Sri Lanka, Annual Report, various issues.  
121. The composition of tourists has changed.  While  about half still originate in Western Europe, 
especially France, Germany, and the UK, Asian arriva ls have increased.  In 2002, most tourists came 
from India.  Tourism diversification covering ma rkets like China, Japan, and Singapore through joint 
public/private promotion is a ke y government objective.  The Chinese Government recently accepted 
Sri Lanka as an official tourist destination.  Sr i Lanka also promotes tourism through bilateral and 
regional cooperation.  "Visa on a rrival" was introduced for tourists  from South Asian Association for 
Regional Cooperation (SAARC) partners in January 2003. 
122. Factors constraining the sector's development incl ude:  insufficient international air services;  
lack of adequate internal transport, especially  roads, and other basic infrastructure, including 
telecommunications, water and electricity;  a shorta ge of skilled human resources;  and concentration 
of tourism in a few specific areas with associated environmental degradation, such as beach erosion 
and seawater pollution.159  Availability of international air services to Sri Lanka is a major 
                                                      
158 Direct contribution covers hotels and restaurants, travel agencies, tour oper ators, airlines, agencies 
providing recreational facilities and tourist shops.  Indi rect contribution is that of domestic producers and 
suppliers of inputs.   
159 The Department of Wildlife Conservation provides permits for the development of tourism projects 
to ensure environmental protection. WT/TPR/S/128 Trade Policy Review 
Page 108 
 
 
constraint.160  The terrorist attacks limited the country's air access by reducing the total capacity of Sri 
Lankan Airlines.  Insurance premiums for landin g at the BIA increased by over 100%, and made 
airline operation difficult.  The number of charter companies operating in 2002 fell from nine to four (Aeroflot, Edelweiss Air, CSA Czech Airlines, and Transavia Airlines).  However, seven new 
bilateral air service agreements in 2002 have impr oved flight access to Sri Lanka, and new scheduled 
airlines began services (section iv(a)).  The availability of qualified tourism labour is a high government priority;  it established the Sirimavo Bandaranaike Institute of Tourism and Hotel 
Management in August 2000 to  train tourism personnel. 
123. Tourism was declared a government priority, or  "thrust" industry for rapid development in 
1999;  this seems to have been the main policy ch ange in the sector since 1995.  The Ministry of 
Tourism sets tourism policy, as enunciated in the To urism Master Plan 2002-04.  The policy is for the 
private sector to develop tourism with the Govern ment playing a facilitating role.  The state-owned 
Sri Lanka (Ceylon) Tourist Board (CTB) works with the Ministry to regulate the industry, implement 
policy and promote tourism.
161  CTB also helps the private sector to promote tourism.162  In 2003, a 
tourism embarkation levy of US$5 per arriving ai r passenger was introduced and a 1% turnover levy 
applied to all CTB approved establishments , to fund overseas marketing and promotion.163  CTB 
approves hotel projects and tourist guides;  guides must pass accredited courses.  Foreigners may 
become guides subject to the same  testing and course requirements.  All hotel projects must undergo 
an environmental impact assessment study by the Central Environmental Authority.164   
124. The Ceylon Hotels Corporation (CHC),  established in 1966 to provide tourist 
accommodation, is 28.57% state ow ned and is being restructured. 
125. The BOI supports tourism with tax incentives (C hapter III(3)).  Tourism on the east coast, 
which was closed in 1987 for security reasons, re- opened in 2002.  The Gove rnment has established a 
concessional loan facility of up to Rs 50 million to help  hotels in the Trincomalee district to refurbish. 
                                                      
160 A serious bottleneck in available airline seats developed in 2002, especially from major European 
markets (Central Bank of Sri Lanka, 2002a, pp. 22 and 223). 
161 Ceylon Tourist Board Act No. 10 of 1966. 
162 The CTB launched a major tourism promotion and marketing campaign in 2000 aimed at raising 
tourist numbers to one million by 2010, based on developing niche markets such as eco-tourism, culture 
tourism, incentive travel, adventure tourism, conventions, and exhibitions. 
163 Tourism promotion is to be transferred from CTB to the Tourist Promotional Bureau, to be 
established in 2004.  The CTB would be restructured, and a Tourist Development Council formed for tourism 
planning and regulation. 
164 UNESCAP (2001). Sri Lanka WT/TPR/S/128 
 Page 109 
 
 
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