Bilateral Free Trade Agreements: Are we on the Right Track? 0 511

The process of Sri Lankan policy reforms of liberalisation since 1977 has been predominantly unilateral. These reforms were undertaken in a global context of multilateral trade and tariff reforms under the guidance of international organizations like GATT and WTO. In addition, Sri Lanka joined in the efforts of liberalisation at regional level, e.g. the South Asia Free Trade Agreement (SAFTA) under SAARC initiatives. Multilateral and even regional trade negotiations however, have proved very slow and cumbersome. Bilateral and preferential trade agreements have become attractive globally, as well as in Sri Lanka.

The first experience of post-independence Sri Lanka in bilateral trade agreements was the well-known Rubber-Rice Pact of 1951 between Sri Lanka (then Ceylon) and the People’s Republic of China. It was a simple bilateral bartering agreement which provided a win-win solution to the two participating countries. The recent Sri Lankan interest in pursuing bilateral and preferential trade agreements can be traced to the 1990s. Three FTAs have been signed and implemented since then. The India-Sri Lanka Free Trade Agreement (ISFTA) was signed in 1998 and entered into force in March 2000. The Pakistan-Sri Lanka Free Trade Agreement (PSLFTA) came into force in June 2005. The Sri Lanka Singapore Free Trade Agreement (SLSFTA) was signed and made effective in 2018.

The ISFTA and PSLFTA are simple agreements covering the trade of goods between the respective partner countries. The SLSFTA in contrast, is a comprehensive agreement covering trade in goods, sanitary and phy-to-sanitary measures, and technical barriers to trade, customs procedures and trade facilitation, trade in services, telecommunications, E-commerce, government procurement, foreign investment, competition, intellectual property rights, transparency rules and matters of economic and technical cooperation. Sri Lanka may choose to negotiate its future FTAs in the same format as that of the SLSFTA. The new FTAs would then be comprehensive/deep agreements. Such ‘deep’ FTAs influence border-related policies as well as beyond-the-border policies. Liberalization through bilateral FTAs is being given priority with multiple objectives.

Several issues must be raised on this declared approach of expanding the policy scope of FTAs. A fundamental issue is that FTAs, particularly comprehensive FTAs, restrict the policy autonomy of the government to a significant extent. In today’s global institutional and organizational structure the policy autonomy of a small country is no doubt extremely limited. It may be for good reasons that the policy makers in Sri Lanka opt to get their policy autonomy further constrained by a series of FTAs. Here the opinion makers in the country seem to demand the following. The reasons for signing an FTA ought to be transparently shared with the public. Adequate research ought to be conducted to establish that any envisaged FTA would generate net positive benefits to Sri Lanka. Further the feasibility of the envisaged FTA should be carefully examined without rushing into signing. The planned FTAs are to be signed with countries with greater experience and equipped with better institutions. If adequate care is not taken, the signing of an FTA could produce extensive adverse effects on the country’s development efforts.

”From an overall point of view, Sri Lanka, as it stands today, is in an extremely weak competitive position in the global economic set up”

There are many needed domestic economic reforms. Some of these could lead to further liberalization. At the same time, there could also be critical intervention by the state in some fields. Before envisaging any more FTAs, priority must be accorded to domestic policy reforms based on a coherent national development framework and a widely-accepted national foreign trade policy.

There is another danger in the current declared policy of moving toward two more FTAs and a comprehensive agreement with India, in addition to the three FTAs currently in force. FTAs are not the best way to improve Sri Lanka’s competitiveness or productivity which is constrained by various structural and institutional factors. None of these factors can be resolved by entering into FTAs. In addition, operating a number of FTAs with different countries, involving multiple Rules of Origin, can make the foreign trade system extremely complicated, distorted and cumbersome.

Sri Lanka does not yet have a firmly established institutionalised procedure within which international trade agreements, particularly those so-called comprehensive agreements, can be negotiated and implemented. Strong legal, regulatory and institutional frameworks are needed if the national interest is to be safeguarded in the process of negotiation and implementation of bilateral preferential FTAs. Entered into without due care, bilateral trade agreements could turn out to be, in the long run, contractual traps with obligations, without worthwhile advantages to gain.

BY: ECONSULT

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Banking In a Spot of Bother 0 588

By : Kenneth De Zilwa

The Sri Lankan Banking system credit growth is strongly correlated with the economic activity of the country. The Correlation Coefficient between GDP growth rates and Banking Sector Annual Average Loan Growth is 0.76.

The Banking sector profits have witnessed a 25pct growth from 2016 to 2017. The growth comes on the back of highly volatilize exchange rates and interest environment in the economy. NII of the banking sector to showed a growth 12pct for the corresponding period, thus remaining flat from 2015.  Other income have accounted for 73pct while NII contributes circa 27pct of the total income of the Banking sector.

Banking In a Spot of Bothe

The Sri Lankan economy has recorded an average growth of 4.5 pct over the past 66 years. While only recording above average growth rates of 8pct post war in 2010, 2011 and 7pct growth rates in 2013 and 2014.  In 2015, 2016 and 2017 the economic activity declined and continued to grow marginally above the trend line growing   by 4.8pct in 2015, 4.4pct in 2016 and 4.0pct in 2017. Credit growth has decelerated from 32pt in 2016 to 18.1pct in 2017. Recording a  57pct year on year decline.

Banking sector credit growth has predominantly focused on the Industrial sector which accounts for circa 42pct of which housing and construction accounted for 75pct of the total, while services accounted for 30pct, within which tourism based credit creation was circa 29.3pct while consumption based credit lending stood at  21pct and agriculture 9pct.

Banking In a Spot of Bothe

Therefore Econsult anticipates that the slowing of credit growth would translate to an overall slowing of the real sector and lower GDP growth for 2018 to 3.0pct and 2019 to 3.5pct. On the back of tighter credit controls, declining agricultural supplies,  incremental VAT and taxation ushered in by the New Inland Revenue Act 2017, and the currency depreciations

The rating agency too have indicated that Banks would have to consider supplementing risk capital by cutting down dividend payout and consider further capital raising based on Basel III rules since CAR have come under pressure due to rising NPL’s to equity & reserves. This could mean that Banks would be forced to tighten credit while adopting more secure means of lending. Such outcomes could pose more issues to the already choked real economy. The recent deceleration of the economy is bound to hit the banking sector in Q4 2018 and Q1 2019.

Source : CBSL Annual Report & Thmosonreuters

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US – China Trade Talks

After months of trade war, the US and China agreed to a 90-day truce to work out their differences. It was scheduled to end on Friday, but President Trump lifted the ultimatum to increase tariffs after he was satisfied by progress made in several rounds of talks in Beijing and Washington.US China Talks

A White House economic official, Larry Kudlow, said on Thursday the two countries were on the brink of a ‘historic’ trade agreement. A meeting between Trump and his Chinese counterpart Xi Jinping, was also expected soon. After the latest round of talks in February, US Agriculture Secretary Sonny Perdue tweeted that China had committed to buying ‘an additional’ 10m tonnes of soybeans as a ‘show of good faith’.

US farmers rely greatly on such trade with China: in 2017 around a third of US soybean production – worth $14bn -– was exported there, where it is used for animal feed.

Chinese tariffs had already hit America’s farming regions hard.  Exports plummeted last summer when China imposed tariffs on US soybeans and other agricultural products.

Donald Trump has requested China to abolish tariffs on US farm produce arguing that it is very important for US farmers.

In the meantime, South China Morning Post on 19th April reported that China regrets WTO ruling that China’s Tariff Freight Quota System for rice, wheat and corn violates international trade rules. The verdict was given in a case filed by the administration of former President Barak Obama in December 2016.

The US government is also seeking a total reforms of the WTO including re-visiting China’s role in the international trading system as the US believes China should no longer designated as a developing country, enjoying favourable trade treatment as China has emerged the world’s second largest economy.  

 

Brexit Deadlock Continues

The British Prime Minister said she would step down if and when her Brexit deal was delivered. There was a desire for ‘a new approach, and new leadership’, she told a meeting of Conservative lawmakers. However, members of the House of Commons voted on a range of measures designed to break the impasse over Brexit — but failed to agree on any of them.

Brexit Deadlock ContinuesThe European Union has requested the UK to accept a six months delay with an option to leave earlier if the UK Parliament can agree to a deal, The European Union leaders agreed to another delay to the UK schedule withdrawal from the EU until October 31. In the meantime, the European parliament election is due in late May and if the UK does not take part in the election process it would be required of the UK to leave on June 01st without a deal as some observed. The Prime Minister of UK has suggested that she could still manage to get her withdrawal agreement passed through parliament, in time to avoid UK taking part in the European elections.

 

New Head at World Bank

Following President Trump’s announcement that Mr. Malpass would be the US candidate for election as the next President of the World Bank, Mr. Malpass won unanimous approval from the executive board of the bank, which has 25 members. The US holds a 16% share of board voting power and has traditionally chosen the World Bank’s leader. Traditionally, the US picks the World Bank President, Europeans choose the IMF Managing Director, and the Japanese do the same for the Asian Development Bank.

David Malpass has been selected as President of the World Bank Group for a five-year term from April 9, 2019. Mr. Malpass previously served as Under Secretary of the Treasury for International Affairs for the United States.  As Under Secretary, Mr. Malpass represented the United States in international settings, including the G-7 and G-20 Deputy Finance Ministerial, World Bank-IMF Spring and Annual Meetings, and meetings of the Financial Stability Board, the Organization for Economic Cooperation and Development, and the Overseas Private Investment Corporation.  

New Head at World BankIn 2018, Mr. Malpass advocated for a capital increase for the IBRD and IFC as part of a larger reform agenda featuring sustainable lending practices, more efficient use of capital, and a focus on improving living standards in poor countries. He was also instrumental in advancing the Debt Transparency Initiative, adopted by the World Bank and IMF, to increase public disclosure of debt and thereby reduce frequency and severity of debt crises. 

Prior to becoming Under Secretary, Mr. Malpass was an international economist and founder of a macro-economic research firm based in New York City. Mr. Malpass served as chief economist of Bear Stearns and conducted financial analyses of countries around the world. 

Earlier in his career, Mr. Malpass served as the U.S. Deputy Assistant Secretary of the Treasury for Developing Nations and Deputy Assistant Secretary of State for Latin American Economic Affairs. In these roles, he focused on an array of foreign policy and development issues, including the United States’ involvement in multilateral institutions; the World Bank’s 1988 capital increase, which supported the creation of the Bank’s environment division; the Enterprise for America’s Initiative; and Brady bonds to address the Latin American debt crisis. He also served as Senior Analyst for Taxes and Trade at the U.S. Senate Budget Committee, and as Staff Director of the Joint Economic Committee of the U.S. Congress.

Mr. Malpass has served on the boards of the Council of the Americas, Economic Club of New York, and the National Committee on US–China Relations. Mr. Malpass earned his bachelor’s degree from Colorado College and his MBA from the University of Denver.  He undertook advanced graduate work in international economics at the School of Foreign Service at Georgetown University.

The World Bank President is Chair of the Boards of Directors of the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The President is also ex officio Chair of the Boards of Directors of the International Finance Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), and the Administrative Council of the International Centre for Settlement of Investment Disputes (ICSID).

Some worry that Mr. Malpass, a critic of the bank, will seek to reduce its role. In the past, he has described the World Bank as too big. He has said he would like to lend less to middle income countries like China, which he argues are financially strong enough.

Speaking at an event at the Council on Foreign Relations back in 2017 he said: “Multilateralism has gone substantially too far – to the point where it is hurting US and global growth”. However, when his predecessor Jim Kim asked shareholders for more money, it was David Malpass who – in exchange for reforms at the bank – helped make it happen. Last year, he was part of negotiations over a package of World Bank lending reforms.

Ivanka TrumpThe US agreed to back a plan for shareholders to inject $13bn (£10bn) into the World Bank and its private lending arm, with conditions that aimed to limit the bank’s lending, and focus resources more on poorer countries. The reforms are aimed at pushing more middle-income countries towards private sector lending, and limiting World Bank staff salary growth.

White House Senior Adviser Ivanka Trump speaking during an interview with Associated Press, Wednesday April 17, 2019 in Abidjan, Ivory Coast, where Trump is promoting a White House global economic program for women said her father asked her if she was interested in the job of World Bank Chief but she was happy with her current role in the administration.

President Trump recently told The Atlantic: “I even thought of Ivanka for the World Bank. She would’ve been great at that because she’s very good with numbers.”

Ivanka Trump worked on the selection process for the new head of the 189-nation World Bank, David Malpass. She said he’ll do an ‘incredible job.’

 

US Monetary Policy Normalization

US Monetary Policy Normalization President Trump called on Federal Reserve to lower interest rates and wants return of quantitative easing arguing that the Central Bank’s policies have held back the US economy and there is no inflation.The Federal Reserve, which has increased interest rates numerous times in the last few years, recently signalled that it does not plan to increase interest rates any more for the remainder of this year.

Beyond simply cutting interest rates, President Trump also wants the Fed to bring back its policy of quantitative easing, to increase liquidity in the market and keep interest rates low. In the wake of the financial crisis in 2007/2008, the Fed enacted QE, but that program ended in late 2017.

According to Trump, if the Fed were to undertake those policies, the economy would improve dramatically, despite the fact that in Trump’s eyes, things are already going well.

Global Growth Outlook ‘Precarious’

International Monetary Fund (IMF) Managing Director Christine Lagarde in a preview of the April 12-14 IMF and World Bank Spring Meetings, said that global growth has lost momentum amid rising trade tensions and tighter financial conditions. The IMF Chief explained that the global economy is “unsettled” after two years of steady growth, with the outlook “precarious” and vulnerable to trade, Brexit and financial market shocks. However, she said that the IMF does not anticipate a recession in the near term, and the Federal Reserve’s “more patient pace of monetary policy normalisation” will provide some thrust to growth in the second half of 2019 and into 2020.

Global Growth Outlook 'Precarious'Lagarde cautioned, however, that years of high public debt and low interest rates since the financial crisis a decade ago have left limited room in many countries to act when the next downturn arrives, so countries need to make smarter use of fiscal policy. This means striking a better balance between growth, debt sustainability and social objectives and acting to address growing inequality by building stronger social safety nets.

Lagarde also said that the IMF has revised its analysis of the US-China trade war’s effects, showing that if all trade between the world’s two largest economies were subjected to a 25 percent tariff, US gross domestic product (GDP) would fall by up to 0.6 percent while China’s would fall by up to 1.5 percent.

Nobody wins a trade war,” Lagarde added. “That is why we need to work together to reduce trade barriers and modernise the global trade system.”

Source: News Agencies