Commercial Diplomacy in Sri Lanka: Exploring Some Issues Ganeshan Wignaraja Chair-elect, Global Economy Programme, LKI gwignaraja@gmail.com 29 June 2017 Colombo

Key Messages 40 years after the 1977 reforms, Sri Lanka envisages more coherent and pro-active commercial diplomacy An evidence-based exploration on trade, FDI and policies reveals some issues for commercial diplomacy and economic policy in Sri Lanka Undue export pessimism seems unwarranted in the post-crisis world and Sri Lanka can more tap into opportunities in dynamic Asia Implementing reforms, FTAs with dynamic Asia and capacity building in commercial diplomacy can help ensure success in Sri Lanka

#1: Shift in the Ratios of Export Growth to GDP growth F = Forecast, estimated using three-year annual average weights of exports of goods and services in constant 2005 US$ and the volume growth of goods and services from IMF October 2016. Note: Developing Asia refers to the developing member countries of the Asian Development Bank. Developing Asia's volume of exports are estimated using annual weights of exports of goods and services in constant 2005 US$. Source: ADB estimates based on data from the International Monetary Fund. 2016. World Economic Outlook (April and October) and World Bank. World Development Indicators online database (accessed 4 November 2016).

#2: Low & Concentrated Base of Sri Lanka’s Goods and Services Exports $ 9.4 billion 2007 $ 16.7 billion 2016 Note: Other primary is defined as sea food, spices, coconut and rubber, gems and jewellry and other commodities. Other manufactures are defined as food, beverages and tobacco, rubber products, mach. and mechanical appliances, petroleum, transport, other industrial exports.  Source: Central Bank of Sri Lanka and World Bank ,World Integrated Trade Solution (WITS). Accessed 13 May 2017.

#3: Traditional Markets Dominate Sri Lanka's Goods Exports $ 19.0 billion 2004-06 $ 30.9 billion 2014-16 2014-16 2004-06 EU = European Union; ROW = Rest of the World Note: Dynamic Asia includes ASEAN economies, Japan, Korea, Hong Kong, and Taiwan.  Source: Direction of Trade Statistics, International Monetary Fund online database (accessed 5 May 2017).

#4: FDI Inflows Lag Exports in Sri Lanka 2000-10 350.9 2011-15 880.9 2000-10 5.1 2011-15 4.7 Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).

#5: Gradual Shift in Inward FDI To Dynamic Asia 2013-15 2004-06 EU = European Union; ROW = Rest of the World Note: Dynamic Asia includes ASEAN economies, Japan, Korea, Hong Kong, and Taiwan.  Source: UNCTAD, FDI/MNE database (www.unctad.org/fdistatistics).

Opportunities in a Post–Crisis World Undue export pessimism seems unwarranted Weak import demand in advanced countries seems temporary China’s rebalancing opens new opportunities for China and others Examples of emerging trading opportunities in Asia: China’s transition to higher domestic value added and innovation means the development of more technologically sophisticated GVCs in East Asia Some of China’s labour-intensive GVC stages are migrating to others in the region (e.g. ASEAN and India) A greater role for SMEs (as direct or indirect exporters) in Asia’s GVCs Expansion of services exports across Asia including digital trade, finance and professional services Sri Lanka could tap more into opportunities in dynamic Asia

#6: Need for Structural Reforms in Sri Lanka Philippines Thailand Singapore Simple Average MFN Tariff, 2015 9.3 6.3 11.0 0.2 Ease of Doing Business Rank, 2016 110 99 46 2 Overall Infrastructure Quality Rank, 2015 (out of 140 economies) 64 90 44 Individuals using the Internet, % of population, 2015 30.0 40.7 39.3 82.1 Researchers in R&D (per million people)* 111 189 974 6,658 Average credit value gap per SME, US $, 2011 16,801 9,182 21,474 166,551 Source: World Trade Organization, World Bank, World Economic Forum, and IFC Enterprise Finance Gap Database.

#7: Lagging FTA Activity Esp. With Dynamic Asia Source: Asian Regional Integration Center, Asian Development Bank. Accessed June 2017. https://aric.adb.org/fta