Reimagining Sri Lanka-
European Union Relations
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
- 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 cross-
border 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.
