Sri Lanka-Singapore FTA: Can the FTA see light under AKD?
Posted on January 25th, 2025
By Imesh Ranasinghe Courtesy The Morning
Sri Lanka imported about $ 950 million worth of goods on average from Singapore prior to the import restriction in 2020 as it is Sri Lanka’s fourth largest import destination.
According to the Central Bank of Sri Lanka (CBSL), exports to Singapore amounted to $ 123 million in 2023, which is about 1% of the total export revenue in that year while imports amounted to $ 866 million, which is 5.2% of the total import share.
The Sri Lanka-Singapore Free Trade Agreement (SLSFTA) was initially signed on 18 January 2018 and came into effect on 1 May 2018.
However, due to various decisions that had to be taken due to issues that arose after enforcing the FTA, it was suspended until 2023 when former President Ranil Wickremesinghe was able to get the go-ahead from the Singapore Government.
The main areas covered by the FTA include goods, services, investment, intellectual properties, telecommunication, e-commerce, trade facilitation, government procurement, competition, and economic and technical cooperation.
NPP Govt. has second thoughts about SLSFTA
Speaking to The Sunday Morning, Committee on Public Finance (COPF) Chairman Dr. Harsha de Silva said that the phasing out of the para-tariff of the SLSFTA had been discussed at the COPF as part of the undertaking that Sri Lanka had made in relation to the implementation of the agreement.
However, Government MPs in the COPF wanted to revisit the FTA before providing approval, citing it was not in their policy to sign the FTA with Singapore.
However, Dr. de Silva added that phasing out the para-tariffs over five years was also part of what Sri Lanka had agreed to with the World Bank and the International Monetary Fund (IMF).
In the staff report released after the completion of its second review in June 2024, the IMF said that the Sri Lankan authorities had committed to reducing the para-tariffs under the World Bank’s Development Policy Operation, while more trade reform initiatives were underway including updating the National Export Strategy, expediting trade agreements, and participating in global value chains.
Dr. de Silva said that there would be many implications if Sri Lanka were to stop the implementation of the SLSFTA now as it was a Government-to-Government agreement and legally binding.
He noted that although the Government said that it would go ahead with the SLSFTA, there would be a case-by-case study on other FTAs as well.
However, he added that revisiting every single FTA was not viable as entering the global supply chain was part of the IMF agreement.
Removal of para-tariffs under SLSFTA
Speaking before the COPF on Tuesday (21), Department of Fiscal Policy Director General Dr. Kapila Senanayake said that the SLSFTA had come into effect from December 2023 after a delay of five years.
He said that as part of the removal of para-tariffs, such as Customs duties, CESS, and Ports and Airport Development Levy (PAL), certain goods under these taxes had been categorised under zero-rated and 10th-rated phases.
According to the agreement, zero-rated tariffs have already been removed, while the 10th-rated ones will be phased out in 5-6 years.
Senanayake said that a gazette was issued to remove the zero-rated one and one-fifth of the PAL rate, where the PAL rate which was at 7.5% in 2018 would be adjusted to 6%, with the one-fifth or 1.5% being removed.
Basic Customs Duties (BCDs) on imports of all products except motor vehicles, liquor, and tobacco are free into Singapore. From the market access point of view of Sri Lanka, only four products at Harmonised System (HS) 8 digits, namely medicated or other samsu-alcoholic products, are included in the Negative List of Singapore.
The SLSFTA eliminates tariffs for 80% of all tariff lines through staging periods of up to 15 years, allows for third-party invoicing arrangements, safeguards market access, and ensures a more predictable operating environment for service suppliers.
Other key benefits of the SLSFTA include:
- A Certificate of Origin that shall be valid for 12 months from the date of issue of the exporting party
- Protection of Singaporean investors and investments in Sri Lanka
Speaking before the COPF, Dr. de Silva said that the Government’s position was that Sri Lanka should continue with the SLSFTA without any adjustment because it had been agreed upon after a suspension under the Maithripala Sirisena Government in 2018 and restarted in 2023 although FTA implementation was five years behind schedule.
He said that the Government of Singapore made a special provision to confirm that they could continue with the FTA despite the delay.
Goods under SLSFTA
The goods schedule of the SLSFTA from Sri Lanka covers 7,438 tariff lines at HS 8-digit level on the tariff schedule, where 80% of tariff lines with Customs duties (i.e. 5,950 tariff lines) are to be phased out over 15 years while 20% of tariff Lines (1,488) are in the Negative List.
Singapore has already liberalised 99.9% of tariffs, while only six products are in the Negative List; it has 9,575 tariff lines at HS 8-digit level on the tariff schedule.
The tariff schedule of the SLSFTA specifies staging categories 0, 6, 10, 12, and 15, which specifies the period in which the Customs duty will be eliminated for products that are not in the Negative List.
CESS and PAL applicable on imports as specified by the staging category 10 in the tariff schedule will be eliminated in five equal instalments from 31 December 2023 to 31 December 2027.
The elimination of CESS and PAL will not be applicable for products in Sri Lanka’s Negative List.
Speaking before the COPF last week, Treasury Deputy Secretary A.K. Seneviratne said that under the SLSFTA, Customs duties were removed one-sixth annually for six years, CESS removed one-fifth annually over five years, and PAL removed one-fifth annually over five years for all para-tariffs to be zero-rated.
He added that two-sixth of Customs duties had already been removed while one-fifth of CESS had also been removed, but the first one-fifth removal of PAL was yet to be approved.
Seneviratne noted that through the SLSFTA, both countries would create a free trade zone for goods and services, adding that services had already been demarcated in the FTA while more services would be added later.
Commenting on the goods under the SLSFTA at the COPF, Ministry of Trade, Commerce, Food Security, and Co-operative Development Secretary K.A. Vimalenthirarajah said that the Singapore FTA and Thailand FTA were comprehensive agreements. He therefore noted that taking trading goods on a stand-alone basis was not the proper evaluating basis and that it should be taken on a comprehensive basis.
He said that under the SLSFTA, rules of origin applied to goods produced wholly on Sri Lankan soil such as tea, while goods such as apparel were considered value-added products from Sri Lanka.
Vimalenthirarajah further noted that under the SLSFTA, any product which had more than 35% of value addition was only eligible to be imported or exported under the agreement.
He added that in the FTA, tea was on the Offensive List of goods as it needed to get market access in Singapore, while petroleum products were on the Defensive List as most petroleum products were imported from Singapore and were a revenue-sensitive matter.
The items in the Defensive List are not included in the FTA but are subjected to taxes as usual.
According to him, petroleum products, tobacco, and alcohol are on the Defensive List of the SLSFTA and are subject to all para-tariffs for importation.
Services under SLSFTA
The services classification is based on the 12 main categories of the World Trade Organization (WTO) services sectoral classification. The coverage of services in the SLSFTA schedules includes business services (including professional services and computer services); communication services; construction and related engineering services; distribution services; educational services; environmental services; financial services (including insurance and banking); health-related and social services; tourism and travel-related services; recreational, cultural, and sporting services; transport services; and other services.
Singapore’s schedule of services commitments has 100% coverage of 12 broad services sectors of the WTO classification compared to the 75% coverage in Sri Lanka’s schedule.
The SLSFTA liberalises several industries to facilitate trade in services. It provides commitment, transparency, and certainty for Singaporean service suppliers operating in Sri Lanka.
Trade in services was negotiated on a Positive List basis, requiring each State to specify sectors for liberalisation and the corresponding degree of openness.
Some of Sri Lanka’s commitments include liberalising telecommunications services, including internet, mobile cellular, and satellite services; computer-related hardware and software services; financial services covering insurance and banking; maritime services such as seaborne transport, repairs of seagoing vessels, and cargo handling services; general construction services; and hotel, travel, and tourism services.
The SLSFTA covers consultancy and advisory services in sectors such as legal advisory for international and third-country law, but not for Sri Lankan law, advisory of architectural and engineering services, or management consultancy.
Singapore’s commitments are more extensive and liberalise several sectors, including professional services, construction and engineering services, and goods distribution services.
No risk of Singaporean professionals coming to SL
Addressing the COPF, Dr. de Silva said that although architects, doctors, and accountants were concerned that under the mode 4 movement of natural persons in the SLSFTA, professionals from Singapore would come and establish their businesses here, there was no such clause in the agreement.
In international trade, services can take place through four distinct categories referred to as modes 1, 2, 3, and 4, where mode 4 refers to the movement of people.
In the SLSFTA, mode 4 has been opened to only two of the four sub-categories, namely to business visitors and Intra-Corporate Transferees (ICTs), with the latter requiring Singaporean nationals working as ICTs to work in a company that has made an investment in Sri Lanka and is incorporated (as specified in horizontal commitments under mode 3 linked to commercial presence through investment).
The SLSFTA does not permit entry for Singaporean nationals to work in Sri Lanka under the other two sub-categories of mode 4, which are contractual suppliers and independent professionals.
Furthermore, Sri Lanka has put in place guidelines for the two sub-categories of mode 4 that are open (i.e. ICTs and business visitors). The entry of business visitors is restricted to 30 days.
In terms of ICTs, they have to be a national of Singapore (not a permanent resident), be employed in a Singaporean company for no less than 12 months, and have a minimum of five years of relevant industry or professional experience before the date of application.
In addition to the above guidelines, ICTs are further restricted to the positions of managers, executives, and specialists which are clearly defined in the agreement.
Sri Lanka has listed only three professional services for Singapore. For these services, modes 3 and 4 are closed for Singaporean nationals. The resultant position is that Singaporean firms cannot incorporate companies to provide these professional services in Sri Lanka and bring down any Singaporean nationals to work as ICTs.
Govt. going ahead with SLSFTA on the basis of continuity
Also speaking at the COPF, Deputy Minister of Finance and Planning Dr. Harshana Suriyyaperuma said that the Government had decided to support and move forward with the Singapore FTA as it had been started some time back and since both parties had engaged and met part of the commitments under the agreement.
Deputy Minister of Industry and Entrepreneurship Development Chathuranga Abeysinghe said that the Ministry of Trade was not involved in the creation of the SLSFTA, although the ministry had been consulted when creating the Sri Lanka-Thailand FTA.
He said that in the SLSFTA, Sri Lanka was in a trade deficit as mostly oil-related commodities were imported to the country.
SL’s losses through SLSFTA suspension
Speaking before the COPF, Vimalenthirarajah said that Sri Lanka had lost significant avenues due to the delay in implementation of the SLSFTA over the last five years.
Unfortunately, when it was signed in 2018, there were big avenues for Sri Lanka to capitalise on, but due to decisions taken by the previous governments, the Easter Sunday attacks, the Covid-19 pandemic, and the subsequent economic crisis, Sri Lanka could not take certain economic benefits from the Singapore FTA,” he said.
He also added that even certain Singaporean investors had vacated their investments in Sri Lanka during the 2018-2022 period.
SLSFTA opens up ASEAN economies to SL
Speaking to The Sunday Morning, Frontier Research Head of Macroeconomic Advisory Chayu Damsinghe said that the main purpose of the SLSFTA was to open up Sri Lanka’s exports to Association of Southeast Asian Nations (ASEAN) economies.
We don’t have a strong entrance for exports into the ASEAN market and the SLSFTA primarily opens up the export market for South East Asia,” he said.
He noted that although Sri Lanka imported from the ASEAN region, the exports to that region had been weak.
However, Damsinghe said that an FTA alone would not solve the issue of a lack of exports to the ASEAN, as it also depended on what ASEAN economies wanted to buy and what Sri Lanka could produce.
He added that the industries in Sri Lanka were significantly different to industries in the ASEAN regions and therefore, there was not much competition between Sri Lanka and ASEAN countries.
SL missed out on importing quality products at lower prices
Speaking to The Sunday Morning, Sri Lanka-Singapore Business Council (SLSBC) President Shiluka Goonewardene said that Sri Lanka had missed out on two things due to the delayed implementation of the SLSFTA.
He said that businesses had missed out on the opportunity to import quality products at lower prices in the past when compared to current global economic conditions.
Further, Goonewardene said that due to businesses losing out on importing quality products, consumers also missed out on having the benefit of using quality products.
As a trade chamber, our job is to promote trade and investment between the two countries and some of our members import goods under the FTA,” he said.
He added that the business council was creating awareness on the use of the FTA as most businesses did not use the FTA to import as they were unaware about the benefits available under these agreements.
Sri Lanka-China FTA
According to a media briefing held on Wednesday (22), Minister of Foreign Affairs Vijitha Herath said that during President Anura Kumara Dissanayake’s visit to China last week, both countries had agreed to form a working group to discuss the China-Sri Lanka FTA.
Sri Lanka had to temporarily stop Free Trade Agreement (FTA) talks with China under the previous Government because Beijing disagreed with Colombo’s three requests.
This was due to Sri Lanka wanting a list of products, about 500 tariff lines, to go to zero on the day the agreement comes into force, which then has no element of reciprocity. However, China later indicated its wish to reciprocate.
China wanted Sri Lanka to liberalise 90% of the tariff lines and the value of the trade. Sri Lanka’s position was that the country could go for an 85% tariff line, but not the value.
The other issue was that Sri Lanka proposed that if the tariff liberalisation programme is 20 years, a review should take place in the 10th year due to the uncertainties of how the economy will look by the 10th year. However, China opposed the review mechanism.
China is the second largest import destination of Sri Lanka after India with over $ 3 billion worth of goods imported annually.