Reimagining Sri LankaEuropean Union Relations
By Navindu Deeptha Kalansuriya
The United Kingdom officially left the European Union on 31 January 2021 and after going through a transition period of almost one year on 24 December 2020. The EU and UK concluded their trade and cooperation agreement. Then on 31 December 2020 UK went onto EU single market and the customs union. Hence, goods moving between EU and UK are now subject to different rules and licensing and compliance regimes. Both EU and UK are important economic and diplomatic partners to Sri Lanka.
After 5 years from the Brexit referendum the future connectivity between EU and UK remains unclear. Hence, there is an over-arching importance for Sri Lanka to tap in to the opportunities presented through re-alignment of diplomatic and economic relationships in Europe and to develop solid relationships with remaining EU countries who are prominent players in the region.
Impact of Brexit on Sri Lanka
Since 2016 which marked the beginning of Brexit, the Sterling Pound depreciated against many currencies. However, as far as its behaviour against the Sri Lankan Rupee is concerned Sterling pound has only gone from strength to strength after the small initial dip in 2016. UK happens to be the largest contributor to the tourism sector in Sri Lanka in terms of guest nights. Hence, the appreciation of Sterling Pound against the Sri Lankan Rupee is beneficial for Sri Lanka. Due to this appreciation of the sterling pound against the LKR, the purchasing power of UK people in buying Sri Lankan goods increases substantially. This will help Sri Lanka with increasing its export volume to UK.
The UK will no longer be part of the EU single market and the no trade concession, such as GSP Plus, will be offered as part of the EU policy. Most of the Sri Lankan exports to the European Union enters through UK. Therefore, Sri Lanka may not be able to receive GSP Plus for the goods that they export to both UK and EU through UK. Hence, Sri Lanka will have to find alternative trade gateways to EU because using UK gateway to EU will not enable them to access the GSP Plus tax concession. However, the indirect impact of the Brexit is difficult to assess. The world economy is integrated through a complex web of interrelated economic variables.
The impact of Brexit may vary depending on the circumstances and the interaction of those economic variables. However, the immediate impact will be risk aversion. This will result in flight to quality, increasing safe haven assets like gold, USD and US treasuries while pressuring oil and commodities. The likelihood of US rate hikes are lower given the heightened risk of global economy. Brexit happened during a time when US was trying to raise its benchmark rates while the rest of the world was economically struggling. However, it must be noted that direct impact of Brexit on Sri Lanka will be negative. Because, both EU and UK are large trading partners of Sri Lanka.
Overview of current relations between SL & EU
During the last few years diplomatic relations between Sri Lanka and EU has grown stronger, with several high level dialogues between Colombo and Brussels. In the month of March, a delegation from European Union visited Sri Lanka to discuss early revival of investor dialogue between the two entities to ensure improved facilitation and promotion. Moreover, the EU-Sri Lanka joint commission seeks to build a partnership between the two entities by discussing bilateral and multilateral matters such as economic development and trade cooperation. Currently, countries like Germany, Netherlands, Denmark and Poland are sharing military ties with Sri Lanka.
As per International news sources, like CNN and Reuters most of the European countries have already announced their interest to strengthen military and economic ties with Sri Lanka in the view of securing their spot in Indian Ocean and to benefit from the strategic position of Sri Lanka. The EU and Sri Lanka are closely linked economically. Many developing countries along with Sri Lanka has benefited from European Union’s Generalised scheme of preferences (GSP +) since its inception in 1970s. This scheme reduces import duties from products entering EU market in exchange for Sri Lanka abiding by international values and principles, including human rights and labour. However, in 2010, Sri Lanka lost the access to the GSP plus tax concession due to the poor implementation of the UN human rights convention but regained access in 2017.
The European Union still stands out to be the biggest export market for Sri Lanka. In 2019, Sri Lanka exported goods worth USD 2.2 billion which amounts to 22% of total exports to the world and imported goods and imported goods worth 1.7 billion USD from the EU which accounts to 8% of total imports from the world. Among the EU member countries Sri Lanka boasts a trade surplus with 17 member countries. In terms of total trade, Sri Lanka’s largest EU trading partners are Germany (25%), Italy (23%), France (13%), Belgium (10%) and the Netherlands (07%).
Sri Lanka shares bilateral investment treaties (BITs) with several EU countries including Germany, Finland, France, Denmark, Sweden, Czech Republic, Romania, Netherlands and Italy. In 2018, Sri Lanka received USD 90 million Foreign Direct Investment (FDI) from EU which accounts for 5.6% of total FDI received.
In comparison, India and China together accounted for 65% of the total FDIs received by Sri Lanka. As far as tourist arrivals are concerned, Sri Lanka roughly received 712,600 tourist arrivals from Europe in 2018 which accounts for 50.8% of total number of tourist arrivals of that year. Germany happened to be the largest market with 6.7% of total tourist arrivals. Moreover, around 350 Sri Lankan workers have immigrated to Europe in 2019. Most of them are skilled workers.
EU also plays a vital role in Sri Lanka in terms of knowledge exchange and cooperation, the EU and Sri Lanka engage through a variety of science and education exchange programmes such as Horizon 2020, the Erasmus plus which is considered to be the largest science and research programme in the world. Apart from EU awarding Sri Lankan with different scholarship schemes, EU also went on to support Colombo Scope 2019, a platform for local artists. Furthermore, EU has provided Sri Lanka with vital development and humanitarian assistance on numerous occasions.
EU provided 40 million Euros to finance the capacity development of authorities, 30 million Euros were granted for strengthening rural communities. 30 million Euros were allocated for the modernisation of agriculture, whilst 15 million Euros were granted for building institutional capacities and reducing language barriers to promote reconciliation efforts during post Brexit period.
How could SL strengthen ties with EU
In order to strengthen ties with EU, it is vital to increase Sri Lanka’s presence in the region by adding to already established 11 permanent diplomatic missions. These missions should engage in the economic diplomacy programme of Sri Lanka and have access to personnel with good business knowledge, soft skills and fluency in prominent European Languages such as German, French, Italian and Spanish. Currently linguistic differences between Sri Lanka and EU countries impede bilateral commercial ties. Therefore, it is essential to develop language capacity and cultural awareness in Sri Lanka by providing specific training to the Diplomats and aspiring diplomats who are studying International relations and global politics.
To enter and remain competitive in the European market Sri Lanka needs to transform into a financial, technological and economic hub in the Indian Ocean. To do so Sri Lanka needs to improve the business environment for investments. Furthermore, Sri Lanka should encourage innovation, produce goods of high quality and move towards sustainable production concepts.
Improving infrastructure services and enhancing the efficiency of crossborder procedures of the country is paramount for attracting investments from EU. Sri Lanka could strengthen their economic links with EU by designing and implementing coherent trade strategy alongside promoting the national export strategy.
National export strategy must be revisited and strategised thoughtfully. It should be strategised in such a way that Sri Lankan products are able to compete in the European market. Moreover, the Sri Lankan government should focus on new range of export goods and services apart from the traditional export goods like Tea, Rubber, Coconut and Apparel. Furthermore, sustainable production concepts like green production, organic farming should be adopted by Sri Lankan companies since people in EU are highly concerned on quality and ethical practices. Small and Medium scale companies should be encouraged to work more efficiently. It has to be noted that Sri Lanka will lose access to GSP Plus in 2023, which shall result in increasing the relative prices of Sri Lankan exports to the EU. Therefore, Sri Lanka need to ensure preferential rates are provided post 2023.
Covid-19 and Brexit have triggered many countries to rethink their current relationships with their global partners. EU happens to be one of Sri Lanka’s major trading and development partners. Sri Lanka has the potential to leverage on its existing ties with EU countries for a stronger and deeper integration. This will also help the island nation to mitigate and control uncertainties caused due to Covid-19 pandemic and emerge stronger as a country after the pandemic.