Third Review of the Pakistan-Sri Lanka Free Trade Agreement

Sri Lanka is a lower-middle income economy located in South Asia which shares maritime borders with the Maldives and India. The country has an area of 65,610 square kilometers with Colombo both as the capital and the largest city by population.

Pakistan, like Sri Lanka, is also a lower-middle income country located in South Asia. Pakistan is the 33rd largest country in the world with an area of 881,913 square kilometers and Islamabad is the capital.

Pakistan’s population is 10 times that of Sri Lanka. The GDP of Pakistan is three times the GDP of Sri Lanka however, its GDP per capita is a third of the GDP per capita of Sri Lanka implying a lower standard of living in Pakistan as compared to Sri Lanka.

Pakistan and Sri Lanka have always been reliable allies of each other with historical relations. Since gaining independence from the British, the two countries have enjoyed a conflict-free and comparatively stable relationship.

The Pakistan Sri Lanka Free Trade Agreement (PLSFTA) between Pakistan and Sri Lanka is effective since June 12, 2005. As part of the FTA, the two countries agreed to offer preferential market access to each other’s exports by granting tariff concessions. Pakistan completed its final phasing out commitments in March 2009 while Sri Lanka completed its phasing out commitments in November 2010.

The table below shows concessions currently offered by Pakistan to Sri Lanka under the FTA at HS-08 level.

Concession List Concession under PSLFTA Number of Tariff Lines at HS-08 Offered by Pakistan
MOP List 50% MOP 19
20% MOP 28
TRQ List 100% 6
  35% MOP 24
Exclusion List Not Subject to the Terms and Conditions of the FTA 1011

All tariff lines other than the above have duty-free access for Pakistani imports from Sri Lanka. Pakistan currently offers a margin of preference ranging from 20.0 percent to 50.0 percent on 47 tariff lines to Sri Lanka under PSLFTA. Pakistan also offers a margin of preference ranging from 35.0 percent to 100.0 percent on 30 tariff lines for the respective in-quota values per each financial year to Sri Lanka under the PSLFTA. Pakistan’s exclusion list has 1011 tariff lines in it.

Pakistan has duty-free access for exporting ‘Long Grain Rice (Basmati)’ (HS-10063010) and ‘Potatoes …’ (HS-07011000) to Sri Lanka for the respective in-quota values per year under PSLFTA. Pakistan enjoys a preferential treatment for exporting rest of the tariff lines to Sri Lanka under PSLFTA except for the ones included in the exclusion list of Sri Lanka.

Pakistan is among the top 10 import partners of Sri Lanka while the country is the 26th largest export partner of Sri Lanka.

Pakistan’s exports to Sri Lanka increased from US$ 153.7 Million to US$ 253.7 Million and its imports from Sri Lanka increased from US$ 59.2 Million to US$ 71.2 Million in the 2005-2020 period. This has led to an increase in Pakistan’s trade surplus with Sri Lanka from US$ 94.5 Million to US$ 182.5 Million for the said period.

The figure below shows Pakistan’s bilateral trade with Sri Lanka since implementation of the FTA.

Pakistan-Sri Lanka Bilateral Trade

Pakistan mostly exports ‘Cement …’ (HS-2523), ‘Onions …’ (HS-070310), textiles, ‘Potatoes …’ (HS-070190), ‘Pharmaceutical products’ (HS-30) and ‘Milled rice …’ (HS-100630) etc. to Sri Lanka. Pakistan’s exports of Textiles, ‘Medicaments …’ (HS-300439), ‘Disodium carbonate’ (HS-283620) and ‘Float glass …’ (HS-700529) to Sri Lanka have experienced the highest growth rates since the implementation of PSLFTA.

Pakistan mostly imports ‘Vegetable products n.e.s’ (HS-140490), ‘Vessels …’ (HS-890800), ‘Rubber …’ (HS-40), ‘Medium Density Fiberboards …’ (HS-441114) and ‘Coconut’ (HS-080111 and HS-080112) etc. from Sri Lanka. Pakistan’s imports of ‘Beauty or make-up preparations …’ (HS-330499), ‘Rubber …’ (HS-40), ‘Plugs and sockets …’ (HS-853669) and ‘Textured filament yarn …’ (HS-540233) from Sri Lanka have experienced the highest growth rates since the implementation of the PSLFTA.

Pakistan’s export potential for the top 25 potential export products to Sri Lanka at HS-06 level was US$ 862.8 Million while the actual exports for these 25 high potential products was only US$ 116.7 Million in 2020. Nine of the top 25 potential export products of Pakistan to Sri Lanka at HS-06 level belonged to the commodity group ‘TEXTILES AND TEXTILE ARTICLES’ in 2020. Pakistan’s cumulative exports of this Group to Sri Lanka were worth US$ 17.1 Million while the cumulative export potential for these same products was US$ 204.1 Million in 2020.

Sri Lanka’s export potential for the top 25 potential export products to Pakistan at HS-06 level was US$ 1.1 Billion while the actual exports for these 25 high potential products was only US$ 6.1 Million in 2020. Sri Lanka had an export potential of US$ 572.1 Million for exporting ‘Black fermented tea …’ (HS-090240) to Pakistan while the actual exports were only US$ 544,000/- in 2020.

Pakistan’s exports complement 27.9 percent of Sri Lanka’s imports while Sri Lanka’s exports complement 24.2 percent of Pakistan’s imports.

There are various issues hindering trade between Pakistan and Sri Lanka. The primary issue these days is that Sri Lanka currently faces a foreign exchange crunch which is responsible for delays in payments. Sri Lanka’s imports from Pakistan face NTB hurdles including those relating to regulatory clearances and the time taken in product registrations, some of which can take up to a year.

Trade disputes are a major and frequent issue because most traders in both countries prefer not to use banking channels and therefore, informal trade also exists between the two countries.

After the FTA was signed, no additional taxes should have been applied or removed on any product without mutual agreement of both parties. However, this is happening on both sides. Furthermore, non-tariff barriers are also hindering the trade between Pakistan and Sri Lanka, including since 2020 the import-substitution policy being implemented by the government in Sri Lanka.

Issues faced by Pakistani companies who export ‘Pharmaceutical products’ (HS-30) to Sri Lanka include limited registrations of dossiers and a lack of international certifications.

Pakistani authorities do not issue import permits for importing agricultural products from Sri Lanka. On the Pakistani side, exports of agricultural products at times lack proper globally acceptable certifications.

Trade in textiles between the two countries is difficult to increase primarily due to a difference in design preferences at the consumer level.

There is also a limited availability of shipping containers which has increased the cost of transportation.

The chambers of commerce of both countries need to work in close coordination for resolving trade disputes in a timely and efficient manner. Awareness needs to be created among traders from both countries on the need to use formal banking channels.

There is a need for Pakistan to establish dedicated desks in the Ministry of Commerce (MOC) and the Trade Development Authority of Pakistan (TDAP) among other relevant stakeholders to help resolve issues related to frequent changes in tariff structure and CESS in Sri Lanka.

There needs to be more coordination among authorities of both countries when unilateral changes to tariffs are involved so that the friendly relations between the two countries are strengthened.

MOC , TDAP & Pakistani manufacturers are advised to work on promoting Pakistani brands in Sri Lanka.

Pakistan’s Board of Investment (BOI) needs to match make between Pakistani and Sri Lankan investors.

MOC and TDAP are specially advised to facilitate Pakistani companies to start functioning on Free on Board (FOB) rather than Cost and Freight (CNF) and Carriage and Insurance Paid (CIP) to improve logistics and shipping. It is also recommended that Pakistan International Airlines (PIA) start operating direct flights between Karachi/Lahore and Colombo.

As a goodwill gesture to increase Pakistan’s imports from Sri Lanka, all levies and regulatory duties except customs duties, sales tax and withholding tax may be removed. Furthermore,  the Sri Lankan government needs to make sure that Pakistan’s imports from Sri Lanka are of Sri Lankan origin according to the certificate of origin.

In order to increase Pakistan’s exports to Sri Lanka, MOC and TDAP are advised to facilitate Pakistani exporters to establish a distribution network in Sri Lanka and establish offices like pharmaceutical companies have done in order to improve export competitiveness.

Pakistani exporters should look to have local partners in Sri Lanka in order to export to Sri Lanka in an efficient manner as Sri Lankan government and their legal system supports domestic traders.

Pakistani government should incentivize Pakistani entrepreneurs to establish factories in Sri Lanka in order to carry out trade activities directly. It will also help match consumer preferences on both sides more closely.

Finally, it is recommended that the FTA between Pakistan and Sri Lanka should be further strengthened by including services and investment in Phase II of the PSLFTA in order for the two countries to have a deeper economic relationship.

The PBC is a private sector not-for-profit advocacy platform set-up in 2005 by 14 (now 87) of Pakistan’s largest businesses. PBC’s research-based advocacy supports measures which improve Pakistani industry’s regional and global competitiveness. More information about PBC, its members, objectives and activities can be found on its website: