RESTRICTED  WORLD  TRADE  
ORGANIZATION  WT/TPR/S/237 
29 September 2010  
 
(10-4797) 
Trade Policy Review Body  
   
 
  
 
TRADE POLICY REVIEW 
 
Report by the Secretariat 
 
SRI LANKA 
 
  
 
This report, prepared for the third Trade Policy Review of Sri Lanka, has been 
drawn up by the WTO Secretariat on its own responsibility.  The Secretariat has, 
as required by the Agreement establishing the Trade Policy Review Mechanism 
(Annex 3 of the Marrakesh Agreement Establishing the World Trade 
Organization), sought clarification fro m Sri Lanka on its trade policies and 
practices. 
 
Any technical questions arising from this report may be addressed to 
Mr. Angelo Silvy (tel:  022 739 5249) and Mrs. Martha Lara de Sterlini 
(tel:  022 739 6033). 
 
Document WT/TPR/G/237 contains the policy statement submitted by 
Sri Lanka. 
 
 
 
Note: This report is subject to restricted ci rculation and press embargo until the end of the 
first session of the meeting of the Tr ade Policy Review Body on Sri Lanka. Sri Lanka WT/TPR/S/237 
 Page iii 
 
 
CONTENTS 
  Page 
SUMMARY   vii 
 (1) E CONOMIC AND INSTITUTIONAL ENVIRONMENT  vii 
 (2) T RADE AND INVESTMENT REGIME  viii 
 (3) T RADE POLICY BY MEASURE  ix 
 (4) T RADE POLICIES BY SECTOR  xi 
I. ECONOMIC ENVIRONMENT 1 
 (1) I NTRODUCTION  1 
 (2) R ECENT ECONOMIC DEVELOPMENTS  2 
 (3) O UTPUT AND EMPLOYMENT  3 
 (4) F ISCAL POLICY  7 
 (5) M ONETARY AND EXCHANGE RATE POLICY  8 
 (6) B ALANCE OF PAYMENTS  10 
 (7) T RENDS AND DEVELOPMENTS IN TRADE AND FOREIGN DIRECT INVESTMENT  11 
 (i) Composition of merchandise trade 11  (ii) Direction of merchandise trade 12 
 (iii) Composition of trade in services 12 
 (iv) Foreign direct investment (FDI) 12 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES   16 
 (1) O
VERVIEW  16 
 (2) T RADE POLICY FORMULATION AND IMPLEMENTATION  17 
 (i) Institutional and legal framework 17 
 (ii) Trade policy formulation, implementation, and objectives 18 
 (3) T RADE REGIME  19 
 (i) World Trade Organization 19 
 (ii) Regional trade agreements 21 
 (4) F OREIGN INVESTMENT REGIME  24 
 (5) A ID FOR TRADE  27 
 (i) Mainstreaming trade into national development strategies 27  (ii) Aid-for- trade support to Sri Lanka 28 
III. TRADE POLICIES AND PRACTICES BY MEASURE 32 
 (1) I
NTRODUCTION  32 
 (2) M EASURES DIRECTLY AFFECTING IMPORTS  35 
 (i) Procedures 35 
 (ii) Customs valuation and rules of origin 36  (iii) Tariffs 38 
 (iv) Other charges affecting imports 44 
 (v) Import restrictions, and licensing 52 
 (vi) Contingency measures 53 
 (vii) Technical regulations and standards 53  (viii) Sanitary and phytosanitary measures 57 WT/TPR/S/237 Trade Policy Review 
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  Page 
 (3) M EASURES DIRECTLY AFFECTING EXPORTS  59 
 (i) Procedures 59 
 (ii) Export taxes and other charges 59  (iii) Export restrictions and licensing 60 
 (iv) Export support 61 
 (v) Export finance, insurance, and guarantees 65  (vi) Export promotion and marketing assistance 66 
 (4) M
EASURES AFFECTING PRODUCTION AND TRADE  67 
 (i) Business environment and taxation 67  (ii) Competition policy and price regulation 68 
 (iii) Incentives 72 
 (iv) State-trading, state-owne d enterprises and privatization 75 
 (v) Government procurement 77 
 (vi) Intellectual property rights 84 
IV. TRADE POLICIES BY SECTOR 91 
 (1) I
NTRODUCTION  91 
 (2) A GRICULTURE  93 
 (i) Overview 93 
 (ii) Main crops 94  
 (iii) Border measures 97 
 (iv) Domestic support measures 98 
 (3) E NERGY   100 
 (i) Overview 100 
 (ii) Electricity 101  (iii) Petroleum 103 
 (4) M
ANUFACTURING  104 
 (i) Overview 104  (ii) Policy instruments 107 
 (iii) Textiles and clothing 108 
 (5) S
ERVICES  111 
 (i) Main features and multilateral commitments 111 
 (ii) Financial services 112  (iii) Telecommunications and IT services 118 
 (iv) Transport services 121 
 (v) Tourism 125 
REFERENCES   129 
APPENDIX TABLES  133 
  
 Sri Lanka WT/TPR/S/237 
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  Page 
CHARTS 
 
I. ECONOMIC ENVIRONMENT  
I.1 Product composition of merchandise trade, 2004 and 2008 13 
I.2 Direction of merchandise trade, 2004 and 2008 14  
IV. TRADE POLICIES BY SECTOR 
 IV.1 Structuring of output in manufacturing, 2009 105 
IV.2 Interest rate spreads of commercial banks, January 2004-February 2010  115 
  
TABLES 
 
I. ECONOMIC ENVIRONMENT 
 
I.1 Selected macroeconomi c indicators, 2004-09 3 
I.2 Basic economic indicators, 2004-09 5 
I.3 Balance of payments, 2004-09 10 I.4 Realized foreign investment stocks of Board of Investment enterprises, 2004-09 15 
 
II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES  
II.1 Aid-for-trade flows to Sri Lanka, 2004-08 29 
 III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
III.1 Rules of origin  38 
III.2 Sri Lanka's tariff structure, 2003, 2009, and 2010 39 
III.3 Summary analysis of Sri Lanka's MFN tariff, 2003 and 2010 40 
III.4 Import duties collected, 2004-09 41 III.5 Loss of revenue due to granting of duty waivers on essential commodities,  
 petroleum products and motor vehicles, 2008 43 
III.6 Sri Lanka's preferential rates, 2010 43 III.7 Estimated revenue losses due to tariff concessions under Sri Lanka's main trade agreements, 
 2008 and 2009  44 
III.8 Summary analysis of Sri Lanka's charges on imports (excluding VAT), 2009 46 
III.9 Excise tax performance, 2006-09 48 
III.10 Nation Building Tax exceptions 48 III.11 Special Commodity Levy, May 2010 50 
III.12 Revenue loss due to the imposition of SCL, 2008 and 2009 50 
III.13 Collection of value-added tax, 2006-09 51 III.14 Export Cess and other export levies, 2010 60 
III.15 Products subject to price regulation, May 2010 71 
III.16 Government procurement:  methods for the selection of bids, 2010 80 III.17 Industrial property statistics, 2003-09 87 
 
IV. TRADE POLICIES BY SECTOR  
IV.1 Agriculture, livestock, and fishing in Sri Lanka, 2004-09 95 
IV.2 Sri Lanka's banking system, 2009 113 IV.3 Shipping services, 2004-09 124 
IV.4 Tourism statistics, 2003-09 126 
 WT/TPR/S/237 Trade Policy Review 
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  Page 
APPENDIX TABLES 
 
I. ECONOMIC ENVIRONMENT  
AI.1 Merchandise exports by product group, 2004-08 135 
AI.2 Merchandise imports by product group, 2004-08 136 AI.3 Merchandise exports by destination, 2004-08 137 
AI.4 Merchandise imports by origin, 2004-08 138 
 II. TRADE POLICY REGIME:  FRAMEWORK AND OBJECTIVES 
 
AII.1 Principal notifications under WTO Agreements, 1 January 2004 to 1 March 2010 139  
III. TRADE POLICIES AND PRACTICES BY MEASURE 
 
AIII.1 MFN specific rates, 2010 141 
AIII.2 Lines where applied rates exceed bound rates, 2010 143 
AIII.3 Duty rates greater than 100%, based on tariff rates including other charges 
 on imports (no VAT), 2009 146 
AIII.4 Excise duties, 2010 148 
AIII.5 Imports subject to technical regulations under the Imports (Standardization and 
 Quality Control) Regulations 2006 151 
AIII.6 Investment incentives under the Board of Investment (BOI) regime, February 2010 153 AIII.7 Investment incentives under the Inland Revenue Act 156 
 
IV. TRADE POLICIES BY SECTOR  
AIV.1  Agricultural products (WTO definition) subject to import licensing, 2009 159 Sri Lanka WT/TPR/S/237 
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SUMMARY  
 
1. Sri Lanka has a fairly open and 
transparent trade regime, characterized by 
reliance on price-based measures and scant use 
of non-tariff measures and, in general, relatively low tariffs.  Trade reforms since the last Review have proceeded at a mixed pace:  transparency has been enhanced, but average 
tariff protection has increased.  Also, 
Sri Lanka has made substantial use of import surcharges and other charges falling solely or mainly on imports.  These measures have been taken mostly for revenue purposes and, in this sense, high economic growth and the end of 
the armed conflict in May 2009 provide the 
opportunity to lower the burden on imports as well as to step up economic, trade and institutional reform.   In June 2010, the Government announced an overall reduction in 
tariffs, lowering many rates to zero, and 
eliminated a 15% import surcharge applied on most imports.   
2. The incentives programmes have been 
streamlined somewhat but continue to be complex;  the authorities consider that they 
have been necessary to offset the disincentives 
created by the internal strife.  Further rationalization of the incentives regime could help improve resource  allocation and overall 
economic efficiency, hence increasing 
Sri Lanka's international competitiveness.  It 
could also help to eliminate distortions and diversify production and trade, which remain concentrated in a few products and markets.  In this respect, and in tandem with measures to 
liberalize trade, the Government intends to 
deepen the process of reform and modernize the business environment by unifying and further reforming its incentives regime and introducing comprehensive competition policy legislation.  The authorities consider that 
Sri Lanka has the potential to expand its 
industrial base by focusing on industries with higher value added.  This will, however, require investment in new technologies and in human capital. (1) E
CONOMIC AND INSTITUTIONAL 
ENVIRONMENT  
3. The performance of Sri Lanka's 
economy during the period under review 
(2004-09) was strong, despite the internal 
conflict, the effect of a tsunami, and external shocks such as higher oil and food prices and the global financial cris is.  GDP expanded by a 
solid 6% per year in real terms during the 
period, supported mainly by strong domestic 
demand, allowing GDP per capita to double between 2004 and 2009 to  reach US$2,053.  
However, although the global financial crisis has had a limited impact on economic growth, it has had a strong impact on Sri Lanka's 
external trade, particularly owing to a drop in 
demand from its major trading partners, the European Union and the United States.  Foreign direct investment inflows, on the other hand, were not severely affected by the 
internal conflict or the crisis.   
4. Sri Lanka's response to the global 
economic crisis included adopting a number of fiscal measures to increa se taxes falling mostly 
on imports, as well as measures to support export-oriented industries.  The Central Bank 
made active use of monetary policy from 2008 
to ensure an adequate level of liquidity, through measures including the reduction of the statutory reserve ratio and lower policy interest rates, while the exchange rate was 
allowed to float more freely.  Inflation, which 
had peaked in June 2008, fell to below 5% by end 2009, aided by tighter monetary policy and the easing of international commodity prices.  However, fed by strong domestic 
demand inflation picked up some strength in 
the first half of 2010, albeit staying at single-digit levels. 
5. Sri Lanka's balance of payments is 
characterized by a structural current account deficit, which increased substantially between 
2005 and 2008, to 9.5% of GDP.  Together 
with a sharp outflow of capital resulting from the global financial crisis, this led to a substantial loss in foreign exchange reserves.  This loss prompted the authorities to adopt 
measures to bolster liquidity, increase foreign WT/TPR/S/237 Trade Policy Review 
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exchange inflows and strengthen the 
balance-of-payments position, and to seek IMF financing, resulting in a Stand-by Arrangement signed in mid 2009 for a total of 
US$2.6 billion.  Under the arrangement, 
Sri Lanka committed to trim the budget deficit and eliminate losses in two major state utilities, among other targets.  A dramatic (27.6%) decline in merchandise imports, partly 
due to lower GDP growth and partly to 
price-based measures taken to contain imports, such as new and higher import charges, as well as temporary deposits in the Central Bank for import operations, contributed to a substantial reduction of the current account deficit in 
2009, to an estimated US$214 million, or 0.5% 
of GDP.   
6. The end of the internal armed conflict 
in May 2009 offers new growth opportunities, 
particularly in the short- and medium-term, 
because economic expansion may be boosted 
by the reconstruction effort.  However, to ensure sustained growth, the authorities would need to maintain and reinforce macroeconomic stability and complete the pending structural reforms, including tax reform, the 
restructuring of state-owned enterprises, 
investing in education and research and development, and reforming the labour market to make it more flexible.  
(2) T
RADE AND INVESTMENT REGIME  
7. Sri Lanka has been an active 
participant in the Doha  Development Agenda, 
having tabled, together with other countries, proposals on areas such as:  technical barriers to trade;  geographical indications;  labelling 
of textiles, clothing, footwear, and travel 
goods;  preferences erosion;  and trade facilitation.  During the period under review, Sri Lanka has not been involved in any dispute under WTO rules.   
8. Sri Lanka's main trade-policy thrust 
continues to be aimed at achieving greater 
integration into the world economy.  In particular, Sri Lanka is seeking to foster foreign direct investment into the country to expand output and employment, and to enhance foreign market access for its products.  
These objectives have been pursued through multilateral, regional, and bilateral trade negotiations, through an incentives regime 
geared at encouraging exports and investment, 
and through a number of development programmes to enhance productivity and improve infrastructure.   
9. Sri Lanka participates in two regional 
trade agreements:  the South Asian Free Trade 
Area (SAFTA) Agreement, and the Asia-Pacific Trade Agreement (APTA);  as well as in two bilateral agreements:  the Indo-Sri Lanka Free Trade Agreement (ISFTA), and the Pakistan-Sri Lanka Free 
Trade Agreement (PSFTA).  Among those 
preferential partners, only trade with India and China is significant. 
10. Sri Lanka's foreign investment regime 
is relatively open, with a few exceptions where 
investment is either subject to non-automatic 
approval or is reserved for Sri Lankan nationals.  In areas where foreign investment is permitted, foreign investors receive national treatment and may benefit from the wide range of incentives provided by the Board of 
Investment of Sri Lanka (BOI) or from the 
Treasury.  Full foreign ownership is allowed in most industries and in a number of services activities (including banking, insurance, finance, construction, mass transportation, 
telecommunications and information 
technology, and petroleum distribution). 
11. Sri Lanka received total of 
US$1.77 billion in assistance in aid-for-trade between 2004 and 2008.  Japan and 
multilateral donors have been the major 
providers.  Sri Lanka's Ten-Year Horizon Development Framework 2006-2016  
(TYHDF) aims to accelerate economic growth with special consideration given to pro-poor growth strategies.  Trade is included as a 
macroeconomic strategy to achieve 
development. Sri Lanka WT/TPR/S/237 
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(3) TRADE POLICY BY MEASURE  
12. Sri Lanka's trade reform efforts since 
its last Review have proceeded at a somewhat mixed pace;  they have included steps to 
enhance transparency, but have also resulted in 
the introduction of new border charges, which have, on average, increased protection.  Sri Lanka's trade policy has relied mostly on price-based measures rather than on non-tariff 
measures, of which it has made relatively scant 
use.  Trade policy has been guided to a large extent by revenue considerations.  In 2010, with the end of the armed conflict and high GDP growth rates expected, Sri Lanka started to undertake steps to reduce tariffs and other 
charges on imports. 
13. Sri Lanka introduced major changes to 
its tariff schedule in 2007 and in 2010.  The simple average applied MFN tariff was 11.5% in 2010, up from 9.8% reported in Sri Lanka's 
Review for 2003, but lower than the 12% 
posted in 2009.  Tariff rates for most products range from 0 to 30%, with a few peaks, mainly for tobacco products.  Despite the increase in the average rate, the proportion of duty-free lines rose from 10% of the total in 2003 to 
44.4% in 2010, mainly through the elimination 
of the 2.5% tariff rate and its replacement with duty-free access.  Bound tariff lines account for only 36.4% of the total, at rates ranging from 0% to 75%.  In general, bound rates 
greatly exceed applied rates, with an average 
bound tariff of 32.7%.  However, in June 2010, some 103 HS applied tariff lines exceeded their bound rates, affecting mostly tobacco products, textiles, carpets, ploughs, 
and switches.  As part of their strategy to 
liberalize trade and tariffs and other charges on imports, the authorities may wish to consider enhancing the scope and level of their bindings;  this would add predictability to the trade regime and would help to improve the 
business environment, which is one of the 
Government's goals. 
14. Imports into Sri Lanka are subject to a 
number of other charges:  excise duty, Export Development Board Levy (cess), value-added 
tax (VAT), Social Responsibility levy, the Ports and Airports Development Levy (PAL), 
the Nation Building tax, and port handling charges.  These charges increase considerably the cost of importing into Sri Lanka, which in 
some cases may exceed 100%.  Tobacco 
products and motor vehicles face the highest overall import charges.  Most imports, with the exception of some basic goods, were subject to a 15% surcharge until June 2010, when it was 
eliminated.  An Export Development Board 
(EDB) Levy (cess), ranging from 1% to 35%, is charged on imports under some 3,500 tariff lines covering a relatively large range of products.  Excise duties are levied on tobacco products, oil products, ae rated water, liquor, 
beer, motor vehicles, and certain household 
electrical items;  they can be ad valorem , 
specific, or alternate.  The highest rates are applied on automobiles and some machinery.  Imports are also subject to the PAL at a rate of 
5% and, since early 2009, to a Nation Building 
Tax, currently at 3%.  The VAT is applied at a general rate of 12%, with some exceptions. 
15. A Special Commodity Levy was 
introduced in 2007 on 11 essential food commodities, including milk powder, dhal, 
sugar, potatoes, and onions.  This single 
composite levy replaced the various duties and taxes applicable in respect of essential food commodities with a view to controlling the price escalation of these products.  Rates are 
adjusted periodically to reflect price and 
demand and supply developments;  adjustments may be general or limited to specific products.  The introduction of the levy has resulted in lower import duties for the 
products concerned. 
16. Despite having raised tariffs and other 
charges on imports, Sri Lanka made substantial efforts during the period under review to enhance transparency.  Information regarding applied tariff levels and all other 
import charges is easily available online.  
However, although orders modifying tariff and other import tax rates are published and available online, the fre quent resort to this 
kind of practice adds discretion and creates 
confusion among importers;  limiting the 
number of changes and converting specific WT/TPR/S/237 Trade Policy Review 
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duties into ad valorem  charges would help to 
further foster transparen cy.  On the other hand, 
Sri Lanka must be commended for keeping and publishing figures with respect to revenue 
forgone due to tariff and other tax exemptions.   
17. An important policy development 
since the last Review has been the implementation of the WTO Customs Valuation Agreement (CVA).  However, 
Sri Lankan legislation grants the authorities 
the flexibility to depart from CVA rules when deemed necessary, in the interest of the national economy or for any other reason, allowing for the use of minimum values.  During the period under review, minimum 
import prices were applied on imports of used 
cars. 
18. Sri Lanka's use of non-tariff barriers is 
relatively limited, with the exception of non-automatic import licensing requirements, 
which are applied on some 500 tariff lines, 
covering goods including grains, chemicals, some textiles, petroleum, and motor vehicles.  Sri Lanka does not have any provision in place to use contingency measures.  Two bills containing provisions on anti-dumping, 
countervailing duties, and safeguard measures 
were gazetted  in October and November 2005, 
but as at June 2010, still awaited the approval of Parliament.  Sri Lanka's national standards and technical regulations generally follow 
international guidelines.  Sri Lanka has 
103 trade-related technical regulations;  these have been notified to th e WTO.  The technical 
regulations cover a range  of products included 
in the Imports (Standardization and Quality 
Control) Regulations 2006, which must 
conform to a Sri Lanka Standard (SLS), to be allowed for import.  Sri Lanka has made 18 SPS notifications to the WTO.    
19. Sri Lanka continues to apply policies 
to encourage exports of goods and services.  
Several incentive programmes, some of which 
have export requirements, are available to support exports.  Three schemes are operated by Customs:  duty rebate (drawback) scheme, the temporary importation for export 
processing scheme (TIEP), and the manufacture-in-bond scheme.  Sri Lanka also 
has an Export Processing Zones (EPZs) scheme;  there are 11 such zones, comprising some 220 enterprises, and employing over 
75,000 persons.  Locating an enterprise in an 
EPZ entitles a company to tax holidays, duty-free imports, and concessionary land prices.  Exporters of non-traditional goods exporting at least 80% of their production also 
enjoy a number of tax concessions, including a 
preferential income tax rate on profits from these exports, and a full tax holiday for between three and seven years for new investments.  These concessions are also extended to service providers that export at 
least 70% of turnover.   
20. Sri Lanka imposes border charges on 
certain exports.  Export duties are levied on value-added vein quartz and raw vein quartz, while an export cess is levied on cashew nuts, 
raw hides, metal scrap, natural rubber, coconut 
products, and tea.     
21. Although the Consumer's Affairs 
Authority may investigate the effects on consumers of anti-competitive practices, Sri Lanka's legislation does not confer it the 
power to conduct investigations on the 
existence of monopolies per se  or to examine 
mergers or acquisitions that have already taken place.  There are no provisions that make pre-merger notification mandatory.  As a 
result, investigations on the effects of mergers 
may only be undertaken for utilities, which fall under the purview of the Public Utilities Commission, or for companies listed in the Colombo Stock Exchange, which may be 
reviewed by the Securities and Exchange 
Commission of Sri Lanka.  The Government is in the process of drafting new competition policy legislation to address most of these issues, including the mandatory examination of mergers across the board. 
22. Sri Lanka has not made any 
notifications to the WTO with respect to state-trading enterprises under Article XVII of the GATT 1994.  Sri Lanka launched a programme of public enterprise reform and 
privatization in 1990, reinforced with the Sri Lanka WT/TPR/S/237 
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establishment, in 1996, of the Public 
Enterprises Reform Commission (PERC), which completed some 50 privatization operations before it was closed in 2007 and the 
legal basis to privatize was repealed.  The 
Government's current policy on public enterprises is not to privatize, but to restructure and improve performance and invite private-sector minority participation.  
State-owned enterprises are required to enter 
into performance agreements with the Treasury and to aim at being profitable. 
23. Sri Lanka offers a wide range of tax 
incentives, notably tax holidays, primarily for 
investment purposes.  The two main investment incentive regimes are under the 
Board of Investment (BOI) Act, and under the Inland Revenue Act.  Investment under the 
BOI Act scheme is subject to a number of 
requirements, including export requirements.  The duration of the tax holiday depends on the amount invested.  Under the Inland Revenue Department (IRD) incentives regime, income tax exemptions are provided usually for 
five years or in some cases for three years.  
Effective tax rates can vary substantially by firm and sector and there have been discussions about merging the two systems.  Sri Lanka's current system of tax incentives 
may result in duplication and overlapping of 
beneficiaries if not of benefits, and may cause distortion in the allocation of resources by artificially placing some firms and sectors in a more advantageous positio n than others.  The 
authorities consider that these incentives are 
necessary to offset the disincentives created by 
the internal strife, and by domestic bottlenecks.  In this respect, the end of the conflict and the high economic growth rates achieved in recent years offer the opportunity 
to step up economic, trade, and institutional 
reform.   
24. During the period under review, 
efforts were made to streamline and clarify procurement guidelines and to make the 
process more efficient and transparent.  
However, government procurement continues to be used to promote domestic suppliers and products.  Sri Lanka grants price preferences for locally manufactured goods to promote 
value added to local raw materials and domestic bidders.  The margins of preference for domestic bidders for works and contracts 
are 7.5% for contracts funded by international 
donors and 10% for contracts funded by the Government;  the margins for domestically manufactured goods are 15% and 20%, respectively.  Sri Lanka does not participate in 
the WTO Plurilateral Agreement on 
Government Procurement (GPA), nor is it envisaging participating in the near future.   
25. Sri Lanka introduced new, 
comprehensive intellectual property legislation in 2003, aimed at ensuring compliance with 
the TRIPS Agreement.  The new Act covers 
copyright and related rights, industrial designs, patents, marks and trade names, layout designs of integrated circuits, unfair competition and undisclosed information, and geographical 
indications.  The new Act has also extended 
the term of copyright protection, from life plus 50 years, to life plus 70 years.  Although enforcement of IPRs was reinforced during the review period, counterfeiting and piracy remain a problem.  Stricter legal provisions to 
fight piracy have been introduced in recent 
years, but their enforcement appears to remain somewhat weak.  The Sri Lankan authorities are intent on making every effort to enforce intellectual property rights by strengthening 
enforcement agencies, training officers, and 
building public awareness. 
(4) T
RADE POLICIES BY SECTOR  
26. Despite its relatively modest share of 
GDP (12.6% in 2009), agriculture has an 
important role in Sri Lanka's economy:  it 
employs and provides the livelihood of a high percentage of the population, and is an important foreign exchange earner.  Government intervention in agriculture, including border protection and domestic 
support, remains significant.  Support is 
provided in the form of subsidized inputs, price support, and concessionary credit, among others.  Nevertheless, productivity in domestic food crops remains low, and Sri Lanka 
continues to be a net food importer.  Tariff WT/TPR/S/237 Trade Policy Review 
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protection for agricultural products increased 
during the review period, and the use of ad hoc duty waivers and tariff changes may have resulted in distortions in agricultural 
commodity markets and domestic production.  
Development in the sector has been hampered by low levels of investment and credit, lack of quality inputs, inadequate transportation and marketing systems, lack of storage facilities, 
insufficient technological development, and 
land use restrictions.  Reducing import protection, rationalizing domestic support, and 
implementing a more consistent trade policy would allow a more efficient allocation of resources, thus increasing productivity and 
farmers' incomes.  In addition, a more 
functional land market would help attract higher investment levels and promote the introduction of modern agricultural technologies.  
27. Sri Lanka produces about half of its 
energy needs, but imports all its oil and oil product requirements.  The petroleum sector was reformed in 2003, most notably by putting an end to the state-run Ceylon Petroleum Corporation's (CPC) monopoly to import and 
distribute oil and petroleum products, and by 
some adjustments to the pricing system.  Nevertheless, the CPC remains a dominant player, and a leading retailer with influence over local market prices.  An amendment to 
the CPC Bill aimed at improving the sector's 
regulation is under consideration.   
28. The electricity sector is dominated by 
another state-owned enterprise, the Ceylon Electricity Board (CEB), which has run at a 
loss for many years as electricity tariffs have 
been kept below generation costs.  At the same time, cross-subsidization in favour of certain consumers has led to high electricity costs for industrial users, potentially weakening their competitiveness.  Under the recent Sri Lanka 
Electricity Act (2009), the CEB retained its 
monopoly in transmission, but it must now purchase electricity through competitive tenders.  The new Act also provides for some degree of tariff reform, but falls short of more 
ambitious and long-discussed initiatives to 
fully re-structure the electricity industry. 29. Sri Lanka's industrial policy aims at 
diversifying its manufacturing base and promoting regional industrialization.  In order to encourage investment in the manufacturing 
sector, the Government has offered a wide 
range of tax incentives, concessionary tax rates and other types of assistance.  The sector remains an important contributor to economic growth, accounting for 18.1% of GDP and 
17.7% of total employment.  However, it is 
highly concentrated in a few products and export markets, and relies heavily on imported inputs, making it vulnerable to external economic cycles and price fluctuations.    
30. The apparel industry, the main foreign 
exchange earner, has faced significant 
challenges over the past few years, affected by increased competition from other exporting countries and weak demand in the United States and the European Union, which 
receive about 90% of its exports.  The industry 
has responded by adopting new technologies, improving quality, and encouraging product differentiation.  Growth in the manufacturing sector as a whole would be enhanced by upgrading infrastructure (e.g. electricity and 
transport) so as to reduce production costs, 
improving productivity, diversifying export markets and products, and addressing labour 
market rigidities.  In addition, rationalizing the incentives regime could help enhance resource 
allocation and efficiency. 
31. The services sector, which accounts 
for 58% of GDP and 42% of employment, remains the main driver of economic growth, expanding by an average 6% annually in real 
terms between 2004 and 2009.  Following 
privatization and liberalization measures in the early 2000s, Sri Lanka's service sector is relatively open.  Full foreign ownership is permitted in banking, insurance, and telecommunications.  Nevertheless, state 
intervention remains strong in key areas.  For 
example, in the banking sector, the two largest commercial banks are state-owned and hold about a third of total banking assets.  Moreover, the Government's position as the 
largest borrower has limited the ability of state 
banks to provide much-needed funds to the Sri Lanka WT/TPR/S/237 
 Page xiii 
 
 
private sector, although there are signs that this 
situation is changing.  In telecommunications, the partially state-owned incumbent operator retains considerable influence in the market, 
while the sector's regulator faces capacity 
constraints to enforce pro-competitive reforms.   
32. In transport services and 
infrastructure, although domestic and foreign investment has been encouraged, the State 
keeps a strong presence:  the majority 
government-owned national carrier dominates the air services industry, another state-run company retains the monopoly to develop and 
manage airports and airport services, and a government agency is in charge of all cargo handling and port services, with the exception 
of a terminal at the Colombo Port.  Further 
efforts to advance regulatory reform so as to strengthen competition, increase private-sector participation, and establish a level playing field for new entrants would contribute 
towards modernizing Sri Lanka's services 
sector, hence improving the country's productivity and external competitiveness.