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international spikes, were on the rise. After falling between 1998 and 2001, they increased from 21 percent in 2001 to 22 percent in 2003, 23.8 percent in 2009, and 23.9 percent in 2010.

Additional evidence that import competition is being stifled is that more than one hundred eight-digit HS items were subject to MFN rates exceeding the WTO bounds in 2010. The products affected were among others tobacco products, textiles, carpets, ploughs, and switches (WTO 2011, p. 123). Considering that the average WTO bound rate of 33 percent was almost three times as high as a simple average MFN rate, this suggests huge tariff rates and little respect for commitments made under the WTO agreements.

The negative impact of high tariff rates is often addressed by the government’s resort to grant tariff exemptions on an ad hoc basis. Although the scope and depth of the use of tariff exemptions by the government of Sri Lanka to offset tariff peaks is not entirely clear, it seems to be substantive. One way of assessing it is to use data on import duty collection as percentage of imports against a weighted average applied MFN tariff rate. An average rate of import duty collection of 4.8 percent in 2004-08 was well below an average weighted (by imports) applied tariff rate of around 6 percent (WTO 2010, p. 123). The increase in the difference indicates the increase in tariff exemptions, albeit not necessarily in a number of duty exemptions granted by the authorities. The WTO estimates the revenue forgone due to the waivers on import duties and other taxes on imports in 2008 at around 1.2 percent of GDP.<sup>19</sup> Sri Lanka’s average MFN applied tariff rate is similar to India’s and Bangladesh’s. It is, however, around twice as high as in Malaysia and five times as in Mauritius.<sup>20</sup> It is interesting to note that Sri Lanka’s average is close to that in Thailand (10.8 percent in 2009). This average does not take into account a 15 percent import surcharge that was in place until 1 June 2010; and, more importantly, para-tariffs that, as we shall see, increase dramatically the total levels of nominal protection in Sri Lanka raising them several times above their levels in its regional counterparts with the possible exception of Bangladesh, which also resorts to para-tariffs.

Although two measures of variability produce a different time profile of the change in dispersion in 1998-2010, they both indicate high variance in tariff rates and its increase in 2010. As measured by the values of the coefficient of variation, dispersion significantly declined from 1.39 in 2001 to 1.13 in 2009 and increased in 2010 to 1.28 (close to its level in 2003) thus reversing the falling trend. Standard deviation, another measure of variation of the tariff schedule, kept moving upward between 2003 and 2010 having had increased from 12.4 in 2003 to 14.7 percent in 2010 (Figure 5).

Dispersion in MFN tariff rates varies depending on the sector of the economy and the level of processing but it did not display any unusual patterns in 2010 (Figure 5). Dispersion of applied tariff rates, as measured by the coefficient of variation, is relatively low for agricultural goods. It is much higher for industrial products: within this group, it is particularly high for capital goods and intermediate products despite much lower MFN average tariff rates than for other groups of products.<sup>21</sup> On the other hand, it is much lower for two sectors subject to high tariff protection: raw materials and consumer goods.

Turning to another critical dimension of tariff schedule, i.e., variability in terms of processing, the cascading effect of increasing tariff rates with the level of protection—except for textiles and clothing— can be only detected between intermediate or semi-processed products and fully processed goods 19 Ibidem, p. 123.

20 Derived from data in the UNCTAD TRAINS database and WTO IDB database.

21 It is interesting to note that the increase in tariff protection was not limited to the agricultural sector. According to the WTO 2011, an average MFN tariff for manufactured products increased from 8 percent in 2003 to 9.2 percent in mid-2010 resulting from an increase of rates applied on all main industrial categories.