WT/TPR/S/128 Trade Policy Review 
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 II. TRADE POLICY REGIME: FRAMEWORK AND OBJECTIVES 
(1) TRADE AND TRADE -RELATED POLICY OBJECTIVES  
(i) Objectives 
1. The general trade policy objectives of Sri La nka include moving towards a more outward-
oriented trade regime, strengthening and incr easing overseas market access for Sri Lankan products, 
and further integrating Sri Lanka into the worl d economy.  These objectives have been pursued 
through multilateral, regional, and bilateral trade negotiations, in particular within the South-East 
Asian region.  There has also been an attempt to shift the Government's role, away from control and 
regulation to facilitation of private-sector development. 
2. Policies have been aimed at enhancing pr oduction and productivity through a continuous 
process of economic reform, with a view to promoti ng a more efficient allocation of resources, while 
improving the environment for private domestic a nd foreign investment.  Numerous tax incentives 
remain in place.  Specific emphasis has been placed on strengthening the agriculture sector, and promoting value-added activities through processing of agricultural goods.  The authorities aim to continue streamlining trade policies to support the export sector. 
3. Sri Lankan trade policy is also geared towards fo stering regional trade, with the emergence of 
the South Asian Preferential Trade Arrangement (SAPTA), a pre-cursor to the creation of a South Asian Free Trade Area (SAFTA), and the impl ementation of the India–Sri Lanka Free Trade 
Agreement.  In addition, Sri Lanka has recently si gned new framework agreements, with Pakistan and 
the United States, and is negotiating with other trad ing partners (e.g. Egypt).  Sri Lanka considers 
these arrangements as a springboard for broader trade liberalization.
1  Despite its commitment to the 
promotion of regional trade and ec onomic cooperation, Sri Lanka recognizes that it is best served by a 
stable and increasingly liberalized multilateral trad ing system, which takes into consideration the 
needs of developing nations.2  Thus, Sri Lanka takes an active role in the WTO, where the authorities 
have emphasized that "negotiations need to provide  adequate flexibility to developing countries in 
order to enable them to address their specific and characteristic problems." 3 
(ii) Institutional and legal framework 
4. Sri Lanka’s institutional and legal framework regarding economic and trade policies has 
remained mainly unchanged since 1995.  In accord ance with the constitution, the governing power in 
Sri Lanka is divided amongst the executive, the legislature, and the judiciary. 
5. The President, who is directly elected by the people for a term of six years and is eligible for 
re-election, is Head of State and exercises all executive powers.  The President's powers include the 
right to:  choose who holds any portfolio in the Cabi net;  appoint or dismiss the Prime Minister or any 
other minister;  dismiss Parliament;  and subm it to a national referendum any Bill or matter of 
“national importance”, which has been rejected by Parliament.4  According to the authorities, the 
                                                      
1 WTO document WT/MIN(98)/WS/M/1, 19 June 1998. 
2 Udagedara (2000). 
3 WTO document G/AG/NG/W/159, 12 April 2001. 
4 Information available Online at:  http://www.priu.gov.lk/execpres/Indexep.html [17 February 2003]. Sri Lanka WT/TPR/S/128 
 Page 17 
 
 
 President has never submitted any matter to referendu m.  Presidential decisions cannot be challenged 
at the judicial level;  hence, the Pr esident has considerable executive power.5 
6. Parliament is the legislative power.  The Par liament comprises 225 members, elected by the 
people for a period of six years, unless it is premat urely dissolved.  Parliament has control over public 
finances, including the power to modify the duties levied upon imports.6  Amendments to the 
Constitution require endorsement by a two-thirds majority in Parliament.7  
7. The judicial system consists of the Supreme Court, the Court of Appeal, the High Court, 
district courts, magistrates’ courts , and primary courts.  The last two are courts of first instance;  
appeals are handled by the Court of Appeals and, if  necessary, questions of law are dealt with by the 
Supreme Court.  The High Court deals with criminal cases and the district courts with civil cases.  
There are labour tribunals to decide on labour disputes.8 
8. Legislation is normally drafted within the Cabinet9;  once approved, it is submitted to 
Parliament for assent.  Members of Parliament may also initiate new legislation.10  Legislation is 
amended after consultations with ministers and the private sector (e .g. with the trade chambers).  In  
certain cases, when the law relat es to commercial matters, there is a process of consultation with the 
private sector during the drafting of new legislation. 
9. It has been reported that the Sri Lankan judiciar y branch has little power to review legislation 
since any challenge to a prospective Bill in th e Supreme Court on constitutional grounds must be 
within seven days from the date it is presented to Parliament.  After this point, the courts have no 
authority to review an Act, and it can be amende d only by Parliament.  In addition, the Sri Lankan 
Supreme Court rarely reviews legislation on its ow n initiative;  other parties generally bring such 
cases to the Court’s attention.11 
(iii) Trade policy formulation and implementation 
10. Sri Lanka's Government is, in per capita terms, one of the biggest in the world, with around 
57 ministries, some 37 cabinet rank12, employing around one million public servants.13  T h e  l a r g e  
number of ministries contributes to overlapping jurisd ictions in trade and trade-related policies and a 
lack of coherence in their formulation and im plementation.  This undermines cost-effective 
implementation of policy measures and delivery of government programmes.14 
11. The agencies in charge of trade policy form ulation and implementa tion have not changed 
substantially since the previous Review of Sri Lank a.  Although there have been some institutional 
                                                      
5 Knight-John (2002). 
6 The Minister of Finance may, however, issue a Revenue Protection Order to modify customs duties.  
This Order has immediate legal effect pending the Bill becoming an Act of Parliament.  Orders are valid for four 
months (Weeserasekera and Kananathalingam, 2002). 
7 Europa (2002). 
8 Europa (2002). 
9 There are 34 Cabinet ministries and 20 non-Cabinet ministries (Information available Online at: 
http://www.gov.lk/Ministry/min istry.htm [10 June 2003]). 
10 WTO (1996). 
11 Knight-John (2002). 
12 Government of Sri Lanka (2003b). 
13 This figure excludes the number empl oyed by state-owned enterprises.  
14 For example, two thirds of the funds allocated to the Export Development Board (EDB) are soaked 
up by the costs of administering the EDB (see Chapter III(3)(vi)).  WT/TPR/S/128 Trade Policy Review 
Page 18 
 
 
 changes, as some ministries have merged (changing  their names) and new ones have been created;  
trade policy continues to be formulated and implem ented mainly by the Ministry of Commerce and 
Consumer Affairs15, along with other concerned ministries (T able II.1).  In particular, the Prime 
Minister created the Ministry of Policy Developm ent and Implementation as a focal point to develop 
economic policies, and coordinate and harmonize  national, sectoral, and sub-national policies.16  
Other ministries heavily involved in the formulation and implementation of trade policy include:  Finance and Planning;  Enterprise Development, Industrial Policy and Investment Promotion;  
Agriculture, Livestock, and Samurdhi;  and Economic Reforms, Scie nce and Technology. 
Table II.1 
Main institutions involved in trade po licy formulation and implementation, 2003  
Department/organization Trade-related functions 
Ministry of Commerce and Consumer Affairs 
Department of Commerce Trade representation abroad, trade information and export promotion;  
conduct of Sri Lanka's  trade relations at  bilateral, regional and multilateral 
level 
Department of Import/Export Control Admi nistration of import and export controls 
Consumer Affairs Authority Compe tition policy, consumer protection, and regulation of internal trade 
Co-operative Wholesale Establishment Gove rnment owned import and export company 
Sri Lanka Export Credit Insurance Corporation Export credit and insurance 
National Intellectual Property Office of Sri Lanka Registrar of patents and trade marks, copyrights and other marks 
Ministry of Finance and Planning  
Department of Fiscal Policy and Economic Affairs Formul ation and implementation of fiscal and economic policies 
General Treasury Tariff policies (including ta riff concessions, surcharges, and refunds) 
Sri Lanka Customs Collection of import/export duties 
Central Bank of Sri Lanka Monetary and excha nge rate policy (including exchange controls) 
Ministry of Enterprise Development, I ndustrial Policy and Investment Promotion 
Board of Investment of Sri Lanka  Investment policies 
Industrial Development Board  Develo pment and promotion of industries 
Sri Lanka Export Development Board Export promotion 
Textile Quota Board Administration of export quotas  
Ministry of Agriculture, Livestock and Samurdhi  
Department of Agricultu re Agricultural policies 
Department of Plant Protection Administ ration of the Plant Protection Ordinance 
Department of Animal Protection Administrati on of animal quarantine & inspection services 
Department of Export Agriculture Promotion of export crops 
National Fertilizer Secretariat Monitoring of fertili zer supply and administration of fertilizer subsidy 
Ministry of Economic Refo rms, Science and Technology 
Public Enterprises Reform Commi ssion Formulation and implementation of the privatization programme 
Sri Lanka Standards Institution Development of standards and technical regulations 
Ministry of Plantation Industries   
Sri Lanka Tea Board Promotion and development of the te a industry, including export promotion 
and regulation. 
Source: WTO Secretariat, based on various Ministries' online information. 
                                                      
15 Ministry of Commerce and Consumer Affairs is in charge of implementing policies and programmes 
related to domestic and international trade, and consumer affa irs.  At the domestic level the Ministry is in charge 
of, inter alia , inland trade, competition policy, and the national price policy.  Regarding international trade the 
Ministry is in charge of administering imports and exports controls;  promoting Sri Lankan exports through trade exhibitions, export research programmes, an d training.  (Information available online at:  
http://www.gov.lk/Ministry/trade&comm.htm [9 June 2003]). 
16 Government of Sri Lanka (2003c). Sri Lanka WT/TPR/S/128 
 Page 19 
 
 
 12. To coordinate the tasks of the different agencies and ministries with a role in trade policy, the 
Economic Policy Sub-Committee of Cabinet has been created under the Ministry of Policy 
Development and Implementation, which sets out the broad policies.17  In addition, the Macro/Trade 
Framework Steering Committee, convened by the Central Bank and the Tariff Advisory Council 
(TAC) monitors policy implementation by the line mini stries.  Its task is also to ensure that the 
different agencies and ministries work in a coordinated manner.  The TAC is appointed by the Minister of Finance and advises the Minister on re quests from industry for tariff changes, and on an 
appropriate tariff structure in line with revenue needs.
18 
13. The formulation of policies in Sri Lanka is the joint responsibility of the executive and the 
legislative branches of government;  the broad principl es of policy are specified in the constitution.  In 
practice however, these broad principles of good gove rnance are rarely adhered to and the checks and 
balances built into the executive-legi slative structures are undermined by short-term partisan politics.  
Political influences, which give rise to ad hoc po licy development and bad governance practices, have 
had a negative impact on the economic reform  process.  It seems that bad governance is 
omnipresent.19  This is a result of a gradual weakening in  public-sector institutions, characterized by a 
bloated bureaucracy, insufficient decentralization,  weak financial controls and public accountability.20 
14. Transparency of the regulatory system also seems to be a problem.  Sri Lanka's legal system 
seems to be well developed and laws pertaining to, inter alia , taxes, exchange controls, customs, 
standards, and intellectual property rights are in  place.  However, foreign and domestic investors 
complain that the regulatory system allows far t oo much leeway for bureaucratic discretion.  For 
instance, laws and regulations seem to often in clude caveats such as:  "under such terms and 
conditions as approved by a Secretary, a Director General, or a Minister" and "subject to certain 
conditions";  such conditions are not clearly stipulated  and sometimes it is stated that they "are at the 
discretion of the Minister or other authorities".  Moreover, effective enforcement mechanisms are 
sometimes lacking and coordination problems betw een the relevant agencies frequently emerge. 21 
(2) TRADE AGREEMENTS AND ARRANGEMENTS  
(i) World Trade Organization 
15. Sri Lanka is a founding Member of the WTO and grants at least MFN treatment to all its 
trading partners.  As a developing country, Sri La nka benefited from a transition period to implement 
a number of commitments under various WTO Agreem ents, for instance, in relation to customs 
valuation, import licensing procedures, and the TRIPS Agreement.22 
16. Sri Lanka participated in the extended WTO ne gotiations on basic telecommunications and on 
financial services.  Sri Lanka’s commitments on basic telecommunications and its list of Article II on exemptions were attached to the Fourth Protocol on 15 February 1997.
23  Sri Lanka accepted and 
                                                      
17 This sub-committee includes, inter alia , the Minister of Policy Development and Implementation,  
the Minister of Finance, the Minister of Economic Reform, the Minister of Commerce, and the Minster of 
Enterprise Development.  
18 UNESCAP (2003a). 
19 Knight-John (2002). 
20 World Bank (2000). 
21 Government of the United States (2002). 
22 WTO document WLI/303, 2 March 1995.  
23 WTO document S/GBT/4, 15 February 1997. WT/TPR/S/128 Trade Policy Review 
Page 20 
 
 
 ratified the Fourth Protocol on 27 November 1997 and the Fifth Protocol on 20 January, 1999 
(Chapter IV(4)).  Sri Lanka has observer status  in the Agreement on Trade in Civil Aircraft.24 
17. Table AII.1 shows Sri Lanka's status in rela tion to notification requirements under the WTO 
Agreements as at June 2003. 
18. The Government of Sri Lanka has attached great  importance to the full implementation of the 
Uruguay Round Agreements.  However, the authoriti es consider that the implementation of the 
Uruguay Round commitments and the use of the di spute settlement mechanism was not possible 
without technical assistance.25  Sri Lanka's concerns with the implementation of the Uruguay Round 
included:  the lack of liberalization in the agricu ltural and textiles sectors;  the increasing resort to 
contingency measures by developed countries agains t imports from developing countries;  the non-
implementation of provisions related to special a nd differential treatment;  and the growing trend on 
the part of developed countries towards legalism.26  In preparation for the 1999 Ministerial 
Conference, Sri Lanka with other developing countries submitted proposals for the negotiations regarding implementation issues on agricultu re, anti-dumping and subsidies, sanitary and 
phytosanitary measures, technical barriers to trade,  TRIMs, TRIPS, customs valuations, notification 
obligations, and dispute settlement.
27 
19. In preparation for the 2001 Ministerial Confer ence, Sri Lanka with other developing countries 
put forward a proposal for a Framework Agreement on Special and Differential Treatment.28  At the 
Doha Ministerial Conference, Sri Lanka stated it s disappointment with the results of the Uruguay 
Round regarding market access and emphasized that the Ministerial Conference should address 
implementation issues.  In regard to agriculture, Sri Lanka considered that special and differential 
(S&D) treatment should be an integral part of the negotiations.  Food security concerns should be 
recognized as well as the needs of net food impor ting developing countries (NFIDCs).  Sri Lanka was 
interested in extending the enhanced protection granted under geographical indications to products 
other than wine and spirits.  Regarding the issue of TRIPS and public health, Sri Lanka considered 
that its access to drugs should not be limited a nd that Members should be able to implement the 
necessary policies to protect public health, incl uding the granting of compulsory licensing and 
allowing parallel imports.  Liberalizat ion of trade in textiles had been  limited;  thus, a meaningful 
integration of the textiles and clothing sector was necessary.  Market access negotiations on non-
agricultural products should assure the reduction of ta riff peaks and escalation in developed countries.  
Technical cooperation had to become the core agenda of WTO.29   
20. In the Fifth WTO Ministerial Conference in Canc un, Sri Lanka stated that enhanced market 
access for agricultural goods was th e single most important development issue in the DDA, but like 
many other developing countries, Sri Lanka would requi re the flexibility to designate special products 
and the establishment of a special safeguard mechan ism (SSM) for developing countries.  An increase 
in market access opportunities for non-agricultura l goods was also essential to accomplish the Doha 
Mandate.  On services, Sri Lanka expected that  developed countries would undertake significant 
market access commitments in temporary movement of natural persons.  Sri Lanka considered that 
trade facilitation and transparency in government pr ocurement were developmen t-related issues.  As 
                                                      
24 WTO document WT/L/247, 26 November 1997. 
25 WTO document WT/MIN(98)/WS/M/1, 19 June 1998. 
26 WTO document JOB(99)/3169, 3 June 1999. 
27 WTO documents JOB(99)/3169, 3 June 1999;  WT/GC/W/355, 11 October 1999;  WT/GC/W/374, 
15 October 1999;  and WT/GC/W/375, 18 October 1999. 
28 WTO document WT/GC/W/442, 19 September 2001. 
29 WTO document  WT/MIN(01)/ST/71, 11 November 2001. Sri Lanka WT/TPR/S/128 
 Page 21 
 
 
 regards trade and investment, Sri Lanka considered  that a GATS - type positive - list approach would 
provide the necessary basis for flexibility to ad dress the needs of developing countries.  The 
interaction between trade and competition was a difficult and complex issue.30 
21. Sri Lanka (together with other WTO Member s) has submitted proposals for the ongoing 
negotiations in the WTO on services and agricultu re.  Regarding GATS, Sri Lanka is mainly 
interested in the movement of natural persons.  Sri Lanka's proposals for the ongoing negotiations in 
agriculture include issues such as green box subsidies31;  special and differential treatment and the 
development box32;  market access33;  the implementation of  the Marrakesh Ministerial Decision in 
favour of LDCs and NFIDCs34;  a special safeguard mechanism (SSM) for developing countries35;  
and domestic support and export competition.36 
22. During the period under review, Sri Lanka has not been involved in any disputes as 
complainant or defendant under the WTO Dispute Se ttlement mechanism.  It has, however, reserved 
its right as a third party to three disputes.  These  concerned:  the impositi on of countervailing duties 
on imports of desiccated coconut and coconut milk powder by Brazil37;  a ban on imports of shrimp 
and shrimp products by the United States38;  and the conditions under which the EU accords tariff 
preferences under its GSP scheme.39  In 2003, Sri Lanka joined consultations requested by the United 
States under Article 64 of the TRIPS Agreement regarding the protection of trade marks and geographical indications for agricultural products an d foodstuffs in the European Union.  Sri Lanka 
has joined these consultations because of its inter est in exporting Ceylon Tea and Ceylon Cinnamon 
to the EU market.
40 
(ii) Other arrangements 
23. Sri Lanka continues to be a member of the South Asian Association for Regional Cooperation 
(SAARC) and a party to the Bangkok Agreement.  Th e members of the SAARC (Bangladesh, Bhutan, 
India, the Maldives, Nepal, Pakistan, and Sri La nka) concluded the South Asian Preferential Trade 
Arrangement (SAPTA) in 1995.  In 1997, SAA RC members reiterated th eir commitment to the 
creation of the South Asian Free-Trade Area (SAFTA) by the year 2001, or failing that, not later than 
2005.  However, thus far this has not been impl emented and the negotiating process is continuing.  
Three rounds of trade liberalization have been comp leted within SAPTA.  Sri Lanka's concessions in 
these three rounds covered some 204 tariff lines (most of  them at the six digit level), with special 
concessions for the least developed countries (Bangladesh, Bhutan, Maldives, and Nepal).41  
                                                      
30 WTO document WT/MIN(03)/ST/89, 12 September 2003. 
31 WTO documents WT/GC/W/374, 7 October 1999,  and G/AG/NG/W/14, 23 June 2000. 
32 WTO documents G/AG/NG/W/13, 23 June 2000, and G/AG/NG/W/83,  12 December 2000.  
33 WTO document G/AG/NG/W/37, 28 September 2000, and JOB(02)/103, 3 September 2002. 
34 Sri Lanka is considered a net food-importing developing country for the purposes of the Marrakesh 
Ministerial Decision on measures concerning the possibl e negative effects of the reform programme on LDCs 
and NFIDCs (WTO document G/AG/5/Rev.6,  10 April 2003);  and WTO document G/AG/W/49/Add.1,  
23 May 2001. 
35 WTO documents JOB(02)/177,  18 November 2002;  and JOB(02)/177/Rev.1,  17 December 2002.  
36 WTO document JOB(02)/174, 18 November 2002. 
37 WTO documents WT/DS30/1, 5 March 1996;  and WT/DS22/6, 18 April 1996.  
38 WTO document WT/DS58/9, 17 April 1997. 
39 WTO document WT/DS246/5, 6 March 2003. 
40 WTO document WT/DS174/7, 24 April 2003. 
41 For a complete list of products subject to prefer ences, see SAPTA schedules [Online].  Available at:  
http://www.saarc-sec.org [10 June 2003]. WT/TPR/S/128 Trade Policy Review 
Page 22 
 
 
 24. The Bangkok Agreement, signed in 197542, provides for liberalization of both tariff and non-
tariff barriers;  at present, the agreement is li mited to tariff concessions.  Two rounds of trade 
negotiations have taken place and a schedule to initi ate a third round is being drawn up.  Sri Lanka 
provides concessional entry to 288 items (174 tariff li nes at the eight-digit level and 114 lines at the 
six-digit level), with most concessions at 50% of the MFN tariff rates.43  Additional concessions were 
granted to Bangladesh on 30 tariff lines (25 at the six-di git level, and five at the eight-digit level), and 
to the Lao PDR on seed lac and stick lac (HS 1301.10.01) and cotton linters (HS 1404.20);  these concessions were at 50% of the general tariff duty rates.
44  
25. India and Sri Lanka signed a Free Trade Agreement (ILFTA) on 28 December 1998, which 
entered into force on 1 March 2000.45  Sri Lanka retained some 1,659 items (27.47% of total tariff 
lines at the eight-digit level)  in the negative list (Annex D), whic h includes agricultural goods as well 
as some items of "significant production".46  Tariffs are to be eliminated over eight years.  Upon entry 
into force of the agreement, Sri Lanka woul d grant duty-free access to all goods included in 
Annex F-1 (335 tariff lines at the eight-digit level, 5.55% of total tariff lines), and 50% preference margin for items in Annex F-II (981 tariff lines at th e eight-digit level, 16.24% of total tariff lines).  
The margins of preference on the items included in Annex F-II will be increased to 70%, 90%, and 
100%, respectively at the end of the first, second, and third years of the agreement.  For the remaining 
items (3,065 lines at the eight-digit level, 50.75% of  total tariff lines), except those in the negative list 
(Annex D), the tariff will be reduced by no less than 35% within the first three years, 70% before the 
sixth year, and 100% before the eighth year.
47  Exports of tea and garments to India are subject to 
quotas.  The agreement allows for the use of safegua rd and anti-dumping measures.  In addition, in 
case of balance-of-payments difficulties, either pa rty may provisionally suspend the preferential 
treatment and notify the other partner.48  In 2000, the performance of  tea and garments exports to 
India was not encouraging.49  Exports of these items under ILFTA increased only marginally in 2001 
but declined in 2002 (Table II.2).  Export of ite ms under quotas remained low, mainly because entry 
                                                      
42 The members of the Agreement are:  Bangladesh,  China (accession in 200 1), India, Republic of 
Korea, Lao People's Democratic Repu blic and Sri Lanka (UNESCAP, 2003b). 
43 For a complete list of products subject to  preferences, see [Online].  Available at:  
http://www.unescap.org/itid/mtg/sl_c oncession.pdf [10 June 2003]. 
44 For a complete list of the additional co ncessions, see [Online].  Available at: 
http://www.unescap.org/itid/mtg/sl_c onces_bang.pdf; and http://www.unescap.org/itid/mtg/sl_conces_lao.pdf 
[10 June  2003]. 
45 This agreement was notified to the WTO on 27 June 2002 (WTO document WT/COMTD/N/16,  
27 June 2002). 
46 The negative list contains items under HS Chapters:  25;  27 (e.g. mineral fuels, mineral oils);  30;  
32 (e.g. paints and varnishes);  33 (e.g. preparation for oral or dental hygiene);  34 (e.g. soap and organic surface-active products and preparations);   35;  36 (e.g. matches other than py rotechnic articles);  38;  39 and 40 
(items of plastics and rubber section);  41 (raw hides and skins);  46;  48 (paper and paperboard and articles 
thereof);  49 (e.g. printed or illustrated postcards);  53;  56;  58;  59 (some textiles articles);  64 (footwear);  
66 (umbrellas);  68 (articles of stone and cement);  69 (cer amic products);  70;  71;  72;  73;  74;  76 (items of 
iron and steel; copper;  aluminium and their articles);  82 (t ools e.g. spades, shovels, fork s, axes, razors, knives);  
83 (misc. articles of base metals);  84 (e.g. filtering or pu rifying machinery;  fire extinguishers;  lawn mowers);  
85 (e.g. storage heating radiators, radi o broadcast receivers, reception apparatu s for television);  87 (vehicles);  
89;  90 (e.g. spectacle lenses);  94;  95 (e.g. dolls representing human beings);  96 (e.g. ball point pens). 
47 WTO document WT/COMTD/N/16, 27 June 2002. 
48 For more information on this agreement,  see online information, available at:  
http://www.indolankafta.org/. 
49 Dheerasinghe (2000). Sri Lanka WT/TPR/S/128 
 Page 23 
 
 
 of these products to India is restricted to two po rts, and, according to the authorities these Sri Lankan 
goods are not competitive in the Indian market.50 
Table II.2 
Quota utilization of ready made  garments and tea under ILFTA 
Tea Garments 
Year Exports  
volume (tonnes) Quota  
allocation (tonnes) Exports  
volume (pieces) Quota 
allocation (pieces) 
2000 461 11,250 599 600,000 
2001 484 15,000 382,190 800,000 
2002 448 15,000 21,221 800,000 
Source:  Government of Sri Lanka. 
26. In 2002 Sri Lanka signed two additional free-tr ade framework agreements.  On 25 July 2002 
it signed a Trade and Investment Framework Agre ement with the United States, and negotiations 
continue with a view to concluding a free trade agreement.51  On 1 August 2002, Sri Lanka signed a 
Free Trade Framework Agreement with Pakistan;  th e agreement covers both goods and services.  It 
appears that negotiations on the annexes to the agre ement with Pakistan have been finalized, but the 
agreement has not yet entered into force.52 
27. In 2001, Sri Lankan products received preferential treatment under the Generalized System of 
Preferences (GSP) schemes of Australia, Bulgar ia, Canada, Hungary, Japan, Korea, the Slovak 
Republic, Switzerland, and the United States;  Sri Lanka was removed from New Zealand's GSP 
scheme at the end of 1999.53  Sri Lanka  participates in the Global System of Trade Preferences 
(GSTP) among developing countries.  Sri Lanka offe rs tariff concessions with margins of preference 
ranging from 50% to 3.85% on 23 tariff lines at the HS four-digit level.  Sri Lanka’s list of 
concessions under the GSTP includes fruit, prepared fish, rum, prepared explosives, film in rolls, wall 
paper, sewing machines, and four-wheel-drive vehicles.54  The rules of origin for the GSTP have not 
changed since the previous Review of Sri Lanka. 
28. Sri Lanka is also a party to the Bangladesh, India, Myanmar, Sri Lanka, Thailand - Economic 
Cooperation (BIMST-EC) Agreement, which came in to force in 1997 as a foru m to facilitate and 
promote trade, investment, and technical  cooperation among par ticipating countries.55  BIMST-EC 
has created a working group to draft a framework ag reement for a free-trade agreement.  Sri Lanka is 
also a member of the Indian Ocean Rim A ssociation for Regional Cooperation (IOR-ARC) 
established in 1997. 
29. Sri Lanka has finalized negotiations of a draf t framework agreement of a proposed FTA with 
Egypt.  The authorities expect to sign the agreemen t before the end of 2003.  Talks on the proposed 
comprehensive economic partnership agreement (C EPA) with Singapore and the proposed FTA with 
Bangladesh have started.  
                                                      
50 Central Bank of Sri Lanka (2001). 
51 Information supplied by the Sri Lankan authorities. 
52 Board of Investment (2003). 
53 IDB database as at March 2003 (WTO Secretariat, Statistics Division). 
54 Information provided by the authorities. 
55 Thenuwara (1999). WT/TPR/S/128 Trade Policy Review 
Page 24 
 
 
 (3) FOREIGN INVESTMENT REGIME  
30. There have been no major changes in Sri Lanka ’s investment regime since 1996.  However, 
restrictions on foreign participation have been re laxed in certain sectors, for example, banking and 
insurance (Chapter IV).  There is no discriminati on against foreign investors, who may benefit from a 
wide range of incentives provided by the Bo ard of Investment of Sri Lanka (BOI).56  Despite these 
incentives and BOI’s facilitation, foreign investor s still have problems in Sri Lanka.  Difficulties 
include obstacles to clearing products through customs,  lack of access to land to build factories, and 
inadequate infrastructure (e.g. poor transpor tation facilities, and unreliable power and water 
supplies).57   
31. The main laws regulating foreign investment in Sri Lanka are the Board of Investment of Sri 
Lanka Law No.4 of 1978 as  amended (in 1980, 1983, 1992, a nd 2002) and its implementing 
regulation, and the Exchange Control Act, which, inter alia,  stipulates foreign equity limitations in 
various sectors.58  The Board of Investment (BOI), an autonomous statutory agency operating directly 
under the President, is the primary government authority responsible for foreign investment.  It is a "one-stop" window for foreign investors.
59  Its services include approving projects, granting licences, 
establishing eligibility for tax incentives, and assisti ng in procurement.  The BOI also administers 
export-processing zones and industrial parks.60   
32. All FDI is subject to government approval in Sri Lanka.  Approval is in general handled by 
the BOI and is, with some exceptions, automatic.  In  certain sectors FDI may not be approved by the 
BOI;  approval in these cases is granted only after th e foreign investment proposal has been evaluated 
by other government agencies.  Proposals might have to be evaluated by several ministries/agencies, 
which need to grant a "special approval";  the per centage of equity participation is decided on a case 
by case basis.61  In other sectors, the BOI may approve FDI up to a certain limit.  Above the stipulated 
limit, approval will be granted on a case-by-case basi s in consultation with the relevant ministry 
(Table II.3).62  Foreign companies must also apply for regi stration with the Registrar of Companies to 
establish a presence in Sri Lanka. 
33. The BOI offers a wide range of incentives to elig ible local and foreign investors.  Eligibility 
criteria are determined by the BOI.  Minimum investment, export, and labour requirements, which vary according to sector, are established by BOI as a condition for both local and foreign investors to 
qualify for incentives (Table AIII.3 and Chapter III(3 )).  In addition, under Section 17 of the Act 
investors may sign an agreement with the BOI to obtain an exemption from specific laws, or to 
modify or vary the application of such laws.
63 
                                                      
56 The incentives provided by the BOI ar e also available to domestic investors. 
57 Government of the United States (2002). 
58 The Central Bank is in charge of ensuring  compliance with the Exchange Control Act. 
59 However, investment in certain sectors require the approval of several agencies. 
60 Information about the BOI is availabl e online at:  http://www.boisrilanka.org. 
61 Notice under the Exchange Control Act, 19 April 2002. 
62 Board of Investment of Sri Lanka (undated). 
63 These laws include:  the Inland Revenue Act, the Customs Ordinance, the Exchange Control Act, the 
Companies Ordinance, the Merchant Shipping Act, The Finance Act, The Air Navigation Act (Section 17) and 
Schedule B of the Board of Investment Act of Sri Lanka Law, No. 4 of 1978. Sri Lanka WT/TPR/S/128 
 Page 25 
 
 
 Table II.3 
Reserved and regulated sectors for FDI 
Sectors for which BOI cannot provide direct approval  Body in charge of approving investment 
Percentage of foreign equity determined on a case-by-case 
basisa  
International air transportation Ministry of Transport, Highways and Civil Aviation 
Coastal shipping  No information provided  
Military hardware Approval depe nds upon the product manufactured 
Dangerous drugs, poisons, alcohol, and hazardous or 
carcinogenic materials Approval depends upon the product manufactured 
Currency, coins and security documents  Approval depends upon the product manufactured 
Large-scale mechanized mining of gems Ministry  of Economic Reform, Sc ience and Technology, and 
Ministry of Environment and Natural Resources 
Lotteries Ministry of Finance 
Foreign investment allowed up to 100% of equityb  
Non-deposit-taking finance companies 
Insurance Ministry of Finance 
Ministry of Finance 
Foreign investment allowed up to 100% of equityc  
Banking Ministry of Finance 
Sectors for which BOI can provide limited direct approvald Body in charge of approving in vestment above the stipulated 
limit  
BOI may approve up to 40% of equity for projects  
Export production of goods subject to intern ational quotas Approval depends on the product 
Growing and primary processing of  tea, rubber, coconut, rice, 
cocoa, sugar, and spices Ministry of Agriculture and Livestock 
Timber-based industries using local timber Mi nistry of Environment and Natural Resources 
Mining and primary processing of non-renewable natural 
resources Ministry of Environment and Natural Resources 
Fishing Ministry of Defence, and Ministry of Fisheries and Ocean 
Resources 
Supply of water  Ministry of Irrigation and Water Management 
Mass transportation Ministry of Transport, Highways and Civil Aviation 
Telecommunication Ministry of Mass Communication 
Professional services Ministry of Empl oyment and Labour, Ministry of Public 
Administration, Management and Reforms 
Freight forwarding Ministry of Port Development and Shipping 
Travel agencies Ministry of Tourism 
Shipping agency services Ministry of Port Development and Shipping 
a Special approval is required for investment in these sectors.  The percentage of equity holding allowed in each sector is dec ided 
on a case-by-case basis by the relevant ministry.  
b Information provided by the Ministry of Co mmerce and Consumer Affairs indicates that foreign investment is allowed up to 90% 
in insurance.  However, other information indicates that in April 2002 foreign investme nt limits in the in surance sector were 
removed (Gazette Notification No. 1232/14 of the Controller of Exchange, Central Bank). 
c Information provided by the Ministry of Co mmerce and Consumer Affairs indicates that foreign investment is allowed up to 60% 
in the banking sector.  However, other in formation provided by the Central Bank indi cates that foreign equity limits were 
increased from 49% to 60% in 2000, and subsequently eliminated in May 2002. 
d For investment above the stipulated lim it, approval is granted on a case-by-case basis,  in consultation with the relevant min istry. 
Source:  Notice under the Exchange Control Act, 19 April 2002;  and information provided by the Ministry of Commerce 
and Consumer Affairs. 
34. Sri Lanka notified to the WTO that its investment regime does not provide for local-content 
requirements, trade-balancing requirements, fore ign exchange balancing requirements, exchange WT/TPR/S/128 Trade Policy Review 
Page 26 
 
 
 restrictions resulting in import restrictions or dom estic sales requirements involving restrictions on 
exports.64 
35. Since 1996 the Government of Sri Lanka has si gned investment protection agreements with 
Australia, Egypt, Germany, India, Indonesia, Ira n, and Thailand.  Sri Lanka also signed double 
taxation agreements with Egypt, Iran, Jordan, Ku wait, Mauritius, Nepal, the Philippines, Russia, 
Saudi Arabia, and the United States.65 
                                                      
64 WTO document G/TRIMS/N/1/LKA/1, 31 March 2000. 
65 Information provided by the Sri Lankan authorities.