2005 National Trade Estimate report for Sri

UNCLAS SECTION 01 OF 09 COLOMBO 001978

SIPDIS

DEPT PASS USTR FOR G. BLUE AND JROSENBAUM

STATE FOR EB/MTA/MST

GENEVA PASS USTR

E.O 12958: N/A
TAGS: ECON ETRD CE ECONOMICS
SUBJECT: 2005 National Trade Estimate report for Sri
Lanka

REF: A) STATE 240980

TRADE SUMMARY


1. The U.S. trade deficit with Sri Lanka was $1.7
billion in 2003, an increase of $14 million from 2002.
U.S. goods exports in 2003 were $155 million, down 10
percent from the previous year. Corresponding U.S.
imports from Sri Lanka were $1.8 billion, down 0.2
percent. Sri Lanka is currently the 104th largest export
market for U.S. goods.


2. The United States is Sri Lanka's largest export
market and the destination for $1.8 billion (or 38
percent) of exports, predominantly garments. Sri
Lanka's garment industry is heavily dependent on the
United States, with 63 percent of all garment exports
bound for the United States. Sri Lanka's exports face
many challenges. The largest export, garments, will
face increased competition in a quota-free era when the
WTO Agreement on Textiles and Clothing expires in 2005.
Competing products from cheaper sources also threaten
most other sectors. In order to meet these challenges,
there are new efforts to protect local industries and
agriculture, diversify exports, expand tourism, improve
competitiveness and increase foreign employment
opportunities. The Government also hopes to take
advantage of Sri Lanka's strategic location on shipping
routes, make use of the Indo-Lanka free trade agreement,
sign free trade agreements with other countries, and
establish Sri Lanka as a regional hub for manufacturing,
commerce and transport.


3. Sri Lanka witnessed a change of government in April
2004, following parliamentary elections. The current
government has espoused a shift to a mixed economy from
the largely free market economic policies of the
previous government. The Government's Economic Policy
Framework has backtracked on the previous government's
trade liberalization strategy. It specifically calls
for protection of small and medium enterprises and
agriculture.


4. The inability to meet established targets under the
PRSP led the IMF to put its financing programs on hold,
and they remain stalled pending discussions between the
IMF and the Government and, presumably, greater clarity
of the Government's economic policies. In the absence
of program funding and due to rising oil prices, Sri
Lanka suffered a large BOP deficit in 2004. Citing the
accompanying decline in reserves, and need for
protection, the government has taken several steps to
control imports and consumption.


5. The Government has created the National Council of
Economic Development (NCED). NCED consists of around 18
clusters representing both private and public sector
officials looking at various sectors of the economy.
The Trade and Tariff cluster is charged with designing
trade policy.

IMPORT POLICIES


6. Sri Lanka's main trade policy instrument has been
the import tariff. The tariff structure is subject to
frequent changes. The budget for 2005 brought down the
number of tariff bands to 5 from 6. Departing from its
liberalization path, the Government recently imposed a
new import tax on selected items by way of a levy
(referred to as a "cess" in Sri Lanka) in light of a
decline in foreign reserves. The Government also hopes
this new tax will protect domestic agriculture and
industry.


7. Import tariffs and other import charges: Currently,
there are 5 tariff bands of 0 percent, 2.5 percent, 6
percent, 15 percent, and 28 percent. The highest tariff
band was increased from 25 percent in 2002 to 27.5
percent in January 2004 and to 28 percent in November

2004. The next highest band has been removed and duties
increased from 20 percent to 28 percent. Textiles,
pharmaceuticals and medical equipment are free of duty.
Basic raw materials are generally assessed a 3 percent
duty. Semi-processed raw materials are at 6 percent.
Intermediate products are at 15 percent and most
finished products are at 28 percent. There are also a
number of deviations from the 5-band tariff policy.
Tobacco and cigarettes carry duties ranging from 75
percent to 250 percent. In addition, there are specific
duties on certain items, including footwear, ceramic
products, and agricultural products. These specific
duties are aimed at protecting domestic producers. Some
items carry an ad-valorem or a specific duty (whichever
is higher). There is intermittent use of exemptions and
waivers. Imports for export industries enter duty free.


8. Export Development Board (EDB) Levy: In November
2004, the Government introduced a new additional tax on
a range of imports, identified as non-essential. The
EDB levy is applied on C.I.F value, and ranges from 10
percent to 20 percent. Some of the items can have
either an ad valorem or a specific duty. (the higher
duty applies). Together with import tariff, the EDB
levy will effectively take import duties on most
finished goods to over 48 percent of import value. The
incidence of duty on items with specific duties will be
higher. These taxes, together with other charges
applicable on imports (mentioned below) will move Sri
Lanka's tariff structure steeply upwards.


9. There are other charges on imports:
a) 10 percent import duty surcharge;
b) 1.5 percent ports and airports development levy (PAL)
on imports;
c) Value Added Tax (VAT) of 0, 5, 15 and 18 percent;
d) excise fee on some products such as aerated water,
liquor, beer, motor vehicles and cigarettes. Excise fee
on motor vehicles was increased sharply in 2004;
e) Export Development Board surcharge on all imports
where the customs duty is more than 45 percent; and
f) port handling charges.
g) surcharge of 0.25 percent on import duty (to fund the
National Action Plan for Children, to be finalized and
implemented in 2005)


10. VAT and excise taxes are charged on both imports
and domestic producers. Import prices are increased by
5 percent (by adding a deemed profit margin) when
calculating the VAT and excise duty.


11. According to US trade data, total value of imports
affected by the EDB cess will be about $5 million out of
a total of about $143 million annual US exports to Sri
Lanka. Total effect on US exports could be much higher
as US sourced products sent via other trading hubs, or
manufactured by US entities abroad, are not captured in
the US export data used to compile this analyses. Many
US companies export products to Sri Lanka from ports and
plants outside the US. The Embassy has received
complaints from affected US exporters regarding the new
"prohibitive" tariff regime.

Import Licensing


12. Over 300 items at the 6-digit level of the
Harmonized Tariff Schedule (HST) code remain under
license control, mostly for health, environment and
national security reasons. There is a 0.1 percent fee on
import licenses.

Customs Barriers


13. The Government of Sri Lanka implemented the WTO
Customs Valuation Agreement in January 2003 and follows
the transaction value method to determine the c.i.f.
value. The scheme has operated quite successfully.
Major companies have not faced problems. Sri Lanka
Customs complains of companies undervaluing goods
brought in from Dubai and China. Customs is also in the
process of installing an Electronic Data Interchange
(EDI) system to support an automated cargo clearing
facility. When implemented, this system should improve
customs administration and facilitate trade.

STANDARDS TESTING, LABELING AND CERTIFICATION

14. At present there are 85 items that come under the
Sri Lanka Standards Institution (SLSI) mandatory import
inspection scheme. These importers have to obtain a
clearance certificate from the SLSI to sell their goods.
SLSI accepts letters of conformity from foreign
laboratories, but retains the discretion to take samples
and perform tests.


15. There is discussion within some sections of health
and environment sectors to introduce a labeling
requirement for imports of bio-engineered food, but no
requirements are in place currently.


16. A new labeling and advertising regulation was
published in January 2004. This relates to the
information that should appear on a label of any
prepackaged food product offered for sale, transported
or advertised for sale in Sri Lanka, including imported
food. The regulation is currently scheduled to come
into effect on January 1, 2005. Implementation,
however, could be delayed further.


17. Poultry and meat: The ban on US poultry has been
lifted subsequent to the USDA notification to the World
Animal Health Organization (OIE) that the US is free of
Highly Pathogenic Avian Influenza (HPAI). An unofficial
ban on the import of chicken to protect the local
industry was revoked in November 2004 following a
Government decision to allow poultry imports into the
country. The primary beneficiary of the foreign chicken
ban was a Singaporean-owned poultry company in Sri
Lanka, which dominates the domestic market with an
approximately 80 percent market share. Imports of beef
from the United States are banned due to fears of bovine
spongiform encephalopathy.

GOVERNMENT PROCUREMENT


18. Sri Lanka is not a member of the WTO Government
Procurement Agreement. Government procurement of goods
and services is mostly done through a public tender
process. Some tenders are open only to registered
providers. The Government publicly subscribes to
principles of international competitive bidding, but
charges of corruption and unfair awards continue. There
are no professional evaluation experts in Sri Lanka.
Tender board members are routinely pulled from other
jobs.


19. The Government recently created a National
Procurement Agency (NPA) to introduce an improved system
of procurement.

EXPORT SUBSIDIES


20. Exporting companies approved by the BOI, are
generally entitled to corporate tax holidays and
concessions. Exporters receive institutional support
from the Export Development Board in marketing. Sri
Lanka Export Credit Insurance Corporation (SLECIC)
issues insurance policies and guarantees to exporters.
Imports for exporting industries and BOI approved
projects usually are exempted from VAT. For some others,
the VAT is refunded. There are no major complaints
regarding VAT refunds. The airports and ports levy on
imports for export processing is 0.25 percent of CIF
value.

INTELLECTUAL PROPERTY (IPR) PROTECTION


21. Local agents of U.S. and other international
companies representing recording, software, movie, and
consumer product industries continue to complain that
lack of IPR protection is damaging their business.
Piracy levels are very high for sound recordings and
software, making it difficult for the legitimate
industries to protect their market and realize their
potential in Sri Lanka. Sri Lanka is a party to major
intellectual property agreements, including the Berne
Convention for the protection of literary and artistic
works, the Paris Convention for the protection of
industrial property, the Madrid Agreement for the
elimination of false or deceptive indication of source
on goods, the Nairobi Treaty, the Patent Co-operation
Treaty, the Universal Copyright Convention and the
Convention establishing the World Intellectual Property
Organization (WIPO). Sri Lanka's intellectual property
law is based on the WIPO model law for developing
countries. Sri Lanka and the United States signed a
Bilateral Agreement for the Protection of Intellectual
Property Rights in 1991, and Sri Lanka is a party to the
WTO Trade-Related Intellectual Property Rights (TRIPS)
Agreement. In November 2003, a new intellectual
property law came into force.


22. This law meets both U.S.-Sri Lanka Bilateral IPR
Agreement and TRIPS obligations to a great extent. The
law now governs copyrights and related rights,
industrial designs, patents for inventions, trademarks
and service marks, trade names, layout designs of
integrated circuits, geographical indications, unfair
competition and undisclosed information. All
trademarks, designs, industrial designs and patents must
be registered with the Director General of Intellectual
Property. Infringement of IPR is a punishable offense
under the new law, and IPR violations are subject to
both criminal and civil jurisdiction. Relief available
to owners under the new law includes injunctive relief,
seizure and destruction of infringing goods and plates
or implements used for the making of infringing copies,
and prohibition of imports and exports. Penalties for
the first offense include a prison sentence of 6 months
or a fine of up to $5,000. The penalties could double
for the second offense. Enforcement, however, is a
serious problem, as is public awareness of IPR. The
domestic implementing legislation under the old law was
very weak and the Government did not act as an enforcer
of IPR laws. Aggrieved parties must seek redress of any
IPR violation through the courts, a frustrating and time-
consuming process.


23. The Sri Lankan police uncovered a Malaysian-owned
CD/VCD production facility in a Colombo suburb, in
October 2004. It is alleged to have produced pirated
copies of music, movie and software violating rights of
several US companies. The police investigation is still
on going. The police have also conducted a few other
raids of stores selling pirated movie and music CDs.


24. The Director of Intellectual Property and
international experts have begun IPR legal and
enforcement training for customs and police officials.
In September 2004, a group of five lawyers and a judge
attended an IPR program in the US under the
International Visitor program of the U.S. State
Department. An active US Embassy-led IPR working group
comprising affected industries is also working closely
with the Sri Lanka Government to pursue more aggressive
enforcement and enhance public awareness. It will take
time before new procedures and court precedents are
established under the new law.


25. In addition, Sri Lanka needs to ratify and conform
to the WIPO Performances and Phonograms Treaty (WPPT)
and the WIPO Copyright Treaty (WCT). Sri Lanka is
completing its accession to the WTO Information
Technology Agreement.

SERVICES BARRIERS


26. Sri Lanka has opened the services sector to foreign
investment. Foreign investment of 100 percent is allowed
in a range of service sectors such as banking,
insurance, telecommunications, tourism, stock brokerage,
construction of residential buildings and roads, supply
of water, mass transportation, telecommunications,
production and distribution of energy, professional
services and the establishment of liaison offices or
local branches of foreign companies. These services are
regulated and subject to approval by various government
agencies. The screening mechanism is non-discriminatory
and, for the most part, routine. Some other services
have restrictions on foreign investment.

27. Banking: Foreign commercial banks are allowed to
open branch offices in Sri Lanka, subject to an economic
needs test and approval by the Central Bank. Foreign
investors are allowed to hold 100 percent equity in
local banks. Bank ownership, however, is subject to
limits on individual ownership. Individual/company
share ownership of a bank is limited to 15 percent of
equity; group of companies 20 percent and promoters 25
percent. Currently, there are twelve foreign commercial
banks operating in Sri Lanka, including one US bank.


28. Listed below are the main constraints faced by the
commercial banking sector:
a) restriction of banking business by government
ministries and departments to state-owned banks;
b) restriction on speculative foreign exchange trading
by commercial banks; Banks are allowed to buy or sell
foreign exchange for commercial transactions only;
c) a VAT on profit before tax and salaries;
d) inadmissibility of electronic documents in courts;
and
e) the absence of laws to protect and facilitate
electronic commerce. Several laws are being drafted to
permit electronic transactions; They include an
electronics transactions law, a computer crimes law, a
data protection law, and a code for administration of
ATMs and Credit Card Operations.
f) absence of Anti Money Laundering legislation. Draft
legislation is under preparation.

Insurance


29. One hundred percent foreign investment is allowed
in insurance. Foreign insurance companies are required
to incorporate in Sri Lanka to undertake insurance
business. The Government has recently privatized the
state-owned insurance companies. Sri Lankans with
access to foreign currency can obtain foreign insurance
policies. Resident Sri Lankans are otherwise prohibited
from obtaining foreign insurance policies except for
health and travel. A major insurance company has
reported difficulty in penetrating government business
due to corruption. Sri Lanka's insurance regulatory
body retains powers to introduce minimum and maximum
tariffs for various insurance products.

Telecommunications


30. The telecommunications sector is the most dynamic
service industry in Sri Lanka. There is one fixed wire
line operator, Sri Lanka Telecom (SLT),two wireless
local loop operators and four mobile phone operators.
Several private operators also provide radio paging,
data communication, internet service and satellite link-
ups. The Government of Sri Lanka sold a 35 percent
stake in SLT to NTT of Japan in 1997. The Government
sold a further 12.5 percent stake of SLT in 2003 to the
public. SLT has recently acquired a mobile phone
operator. Due to the past monopoly status under
Government control, SLT continues to own most of the
national telephone infrastructure (including main
switches) and the only two international cable landing
stations, controls access to the international fiber
optic cables and continues to dominate the sector
affecting the competitiveness of other operators. All
other operators are privately owned.


31. In early 2003, the Government liberalized
international telecommunications and issued 33 (non-
facilities based) gateway licenses, ending the SLT
monopoly over international telephony. Since then,
international outgoing call rates have dropped sharply.
However, since new licensees are not allowed to
establish terrestrial facilities, they are forced to use
infrastructure of existing domestic operator networks
(including SLT and Lanka Internet, which has U.S.
equity) to terminate or originate international calls.


32. A key problem facing the telecommunications sector
is restricted interconnection. The Regulatory Authority
has failed to enforce regulations provided under the
Telecommunications Act to establish an efficient and
transparent interconnection regime. SLT, the wireless
operators and some of the mobile operators have formed
an unofficial cartel to control local gateways and
restrict interconnection to other operators. This has
adversely affected the operations of most of the other
operators and new international gateway licensees who
are unable to make use of their licenses due to lack of
interconnection by the local exchange operators. This
situation has resulted in illegal bypass by some
operators. Spectrum management is also weak and
frequencies are not properly allocated which affect
telecommunication operators. The Regulatory Agency,
under a new management, has plans to improve the
regulatory regime.

Quotas on foreign films


33. The state-owned National Film Corporation's (NFC)
approval is required to import films. There is a quota
restriction on imports of English language films, which
is currently set at 100 per year. The quota does not
amount to a barrier due to low annual imports. There
are controls on screening of films: except for 6 top
cinemas, all other theaters in Sri Lanka are required to
screen at least 60 percent local films. The theaters
exempted from the rule are free to screen foreign films
without any restrictions. The NFC also charges a tax of
$0.31 per ticket from screenings. Part of the fee on
tickets for local films is paid by the NFC to local film
producers. NFC, which is instituted by an Act of
Parliament, has wide powers that can be used to
effectively restrict foreign film imports.

Professional Services


34. There is no formal national policy on professional
services. In practice, many foreign doctors, nurses,
engineers, architects, and accountants work in Sri
Lanka. Most of them are attached to foreign companies.
Sri Lanka has not made any WTO commitments on the
presence of natural persons, and national treatment is
not accorded to foreign nationals working in Sri Lanka.
Most foreign nationals do not have statutory recognition
in Sri Lanka and cannot sign documents presented to
government institutions or regulatory bodies.


35. The Immigration Department grants resident visas
for expatriates and professionals whose services are
required for projects or by companies approved by the
Board of Investment. The Department also grants visas
for expatriates required for projects approved by the
government. Non-BOI companies such as banks can also
recruit expatriate staff. Sri Lanka also operates a
resident guest visa scheme for foreign investors and
professionals who are recommended by the relevant
Ministry.

Legal Services


36. A person can provide legal consultancy services
without being licensed to practice law in Sri Lanka.
Foreigners are not allowed to practice law (appear in
courts) and do not have statutory recognition in Sri
Lanka. Sri Lankan citizens with foreign qualifications
need to sit for exams conducted by the Sri Lanka law
college in order to practice and register in the Supreme
Court.

Education


37. Movement of people for education is not restricted.
Foreign students are allowed to study in private schools
in Sri Lanka, or follow other professional study
courses. Foreign teachers also work in private schools
in Sri Lanka.

Doctors


38. The Sri Lanka Medical Council allows qualified
foreign doctors and medical specialists to work in Sri
Lanka. They have to be sponsored by a medical
institution or a non-government organization, and are
required to obtain temporary registration from the Sri
Lanka Medical Council (SLMC). Many Indian doctors have
been issued resident work visas recently to work in an
Indian-owned hospital in Sri Lanka.

Accountants


39. All big four international accounting firms are
represented, together with most of the second tier
international firms. The Institute of Chartered
Accountants of Sri Lanka (ICASL) membership is required
to conduct audits and discharge other statutory duties
in Sri Lanka.

Engineers and architectural services


40. Over the years, most foreign funded projects have
used foreign consultants and contractors.

INVESTMENT BARRIERS


41. Sri Lanka welcomes foreign investment. One hundred
percent foreign investment is allowed in most
manufacturing and services sectors.


42. Foreign investment is not permitted in the
following businesses: non-bank money lending; pawn
brokering; retail trade with a capital investment of
less than $1 million (with one notable exception: the
BOI permits retail and wholesale trading by reputed
international brand names and franchises with an initial
investment of not less than $150,000); providing
personal services other than for the export and tourism
sectors; coastal fishing; education of students under 14
years for local examinations; and the awarding of local
university degrees. Investment in additional sectors is
restricted and subject to screening and approval on a
case-by-case basis, when foreign equity exceeds 40
percent: shipping and travel agencies; freight
forwarding; higher education; mass communications;
fishing; timber-based industries using local timber;
mining and primary processing of non-renewable national
resources; growing and primary processing of tea,
rubber, coconut, rice, cocoa, sugar and spices; and,
finally, the production for export of goods subject to
international quota. Foreign investment restrictions
and government regulations also apply to air
transportation, coastal shipping, lotteries, large-scale
mechanized gem mining, and "sensitive" industries such
as military hardware, dangerous drugs and currency.


43. The BOI offers a range of incentives to both local
and foreign investors. To qualify for BOI incentives,
investors need to meet minimum investment and minimum
export requirements. In general, the treatment given to
foreign investors is non-discriminatory. Even with
incentives and BOI facilitation, however, foreign
investors can face difficulties operating here.
Problems range from difficulties in clearing equipment
and supplies through customs to getting land for
factories. The BOI encourages investors to locate their
factories in BOI-managed industrial processing zones to
avoid land allocation problems. Investors locating in
industrial zones also get access to relatively better
infrastructure facilities such as improved power
reliability, telecommunication and water supplies.


44. Government treatment of foreign investors in the
privatization process has been largely nondiscriminatory
with foreigners buying controlling interest in some
companies. The privatization process has not always
been transparent, however. For instance, in 2003, the
government sold part of the retail operations of state-
owned Ceylon Petroleum Corporation (CPC) to a foreign
entity without a formal tender process. A major U.S.
supplier that had earlier acquired a government-owned
lubricant plant has complained that the government had
reneged on the terms of an exclusivity agreement
extending up to mid-2004.


45. Access to local credit markets by foreign-owned
companies incorporated in Sri Lanka was liberalized in
2003 and such firms can now borrow rupee funds without
the approval of the Central Bank. Foreign-owned
companies, BOI-approved firms and exporters can access
dollar denominated loans. Applications for dollar
denominated loans from local firms are considered on a
case-by-case basis and not encouraged.

Capital Repatriation


46. Sri Lanka has accepted Article VIII status of the
IMF and has liberalized exchange controls on current
account transactions. There are no surrender
requirements on export receipts, but exporters need to
repatriate export proceeds within 120 days to settle
export credit facilities. Other export proceeds can be
retained abroad. Currently, contracts for forward
bookings of foreign exchange are permitted for a maximum
period of 360 days for the purposes of payments in trade
and 720 days for the repayment of loans. There are also
no barriers, legal or otherwise, to the expeditious
remitting of corporate profits and dividends for foreign
enterprises doing business in Sri Lanka. Remittance of
business fees (management fees, royalties and licensing
fees) is also freely permitted. Funds for debt service
and capital gains of BOI approved companies exempted
from exchange control regulations are freely permitted.
Other foreign companies remitting funds for debt service
and capital gains require Central Bank approval. Prior
to Central Bank approval they also need a tax clearance
certificate. All stock market investments can be
remitted without prior approval of the Central Bank.
Investment returns can be remitted in any convertible
currency at the legal market rate.


47. Controls on capital account (investment)
transactions usually prohibit foreigners from investing
in debt and fixed income securities. One exception has
been the Central Bank's local market dollar denominated
bond issues in 2001, 2002 and 2004, which were opened to
foreign investors. The government has proposed allowing
foreign investment in corporate debentures and
government bonds. Local companies require Central Bank
approval to invest abroad. The process of granting
approval for such investments was streamlined in 2002,
resulting in an increase in approvals.

ELECTRONIC COMMERCE


48. See above section under Services Barriers on
Banking.

OTHER BARRIERS


49. Delays in litigation are a problem. For example, a
US investor with a substantial investment in an export
manufacturing company has faced lengthy delays in a
court case over a large insurance claim. The company
instituted legal action in June 1999 and court
proceedings are still on-going with the company
suffering financial losses as a result. In many
disputes, defendants resort to obtaining injunctions,
stay orders or postponements to drag cases on for years.
The Government has established a commercial court to
hear business litigation, but delays are still common.


50. In order to support the domestic software industry,
private sector companies using locally produced software
will be allowed to depreciate 100 percent of the cost in
the first year, according to 2005 budget proposals. The
depreciation allowance on foreign software is only 25
percent. The public sector is required to give
preference to locally produced software and ensure at
least 50 percent local value addition when using foreign
software.


51. Transfer tax on property: The Government has
recently re-introduced a 100 percent transfer tax on
property purchased by foreign nationals and companies.
For this purpose, a company is defined as an entity with
at least 25 percent foreign equity. Apartments above
the third floor of condominium buildings, land for the
development of large housing schemes, hospitals and
large infrastructure are exempted from the tax.
Foreigners maintaining US$ 150,000 in a bank account in
Sri Lanka will be given concessionary treatment. In
addition to the tax, the Government will announce
prohibited geographical areas for purchase by non-
citizens. Property transfers to foreigners were
exempted from tax in 2002.


52. Ranking of significant barriers:
1) Imports: High duties on imports of finished
products and food items.
2) IPR: Lack of IPR protection.
3) Investment: 100% land tax on foreigners.
4) Banking: Restriction of government banking business
to state owned banks.
5) Government Procurement: Lack of transparency and
corruption.
6) Telecommunications: Dominance of telecommunications
infrastructure by partly state-owned Sri Lanka Telecom
(SLT) and lack of interconnection to other telecom and
internet operators.
LUNSTEAD