Despite its proximity to India, Pakistan, Bangladesh and Nepal, intra-regional trade accounts for less than 5% of total trade in South Asia. This is partly due to limited logistics, major regulatory barriers and protectionist policies, as well as disproportionate trade costs in the region. According to the World Bank, South Asian trade costs 20% more than in the Association of Southeast Asian Nations. Although the South Asian Free Trade Agreement (SAFTA) has been in place since 2006, para-tariffs have discouraged activities. As a developing economy without commercial oil and gas resources, increased fuel imports have pushed Sri Lanka`s trade deficit to new heights. While Brent crude oil prices fell to about $51 per barrel at the end of the year, the price of oil peaked at more than $85 in October, leading to a 28.9% increase in fuel imports. In the meantime, exports are mainly intermediate and industrial goods, as well as raw materials such as tea, rubber, minerals and metals. The main local products are textiles and clothing. At the same time, SAFTA is undergoing a transformation. The 2004 agreement brings together Sri Lanka, Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal and Pakistan to remove tariff and non-tariff barriers. However, according to CBSL Governor Indrajit Coomaraswamy, more than a third of intra-regional trade under SAFTA is on the sensitive list, while border restrictions between Pakistan and India hinder merchandise trade and prevent regional integration.
However, the sector is not without its problems. The outlook for emerging markets has darkened and U.S. interest rate hikes have affected global trade balances. In Sri Lanka, export growth in recent years has lagged behind GDP growth, and industry experts and government officials are working to address it. A new export strategy has been developed, as well as a major explosion of economic diplomacy, to draw more global attention to trade and investment. In 2018, the EDB has launched its five-year national export strategy (NES), which focuses on four pillars: export diversification; Harness geostrategic advantages to become an efficient shopping and logistics centre; Strengthening entry and compliance practices for aussrimic exporters; Establish a transparent, predictable and operational policy and regulatory framework. The growing trade deficit shows no signs of slowing down and is growing by 2.88 billion euros. $4.75 billion at the end of June 2017 and $5.7 billion in the first half of 2018.
Preliminary data from the Central Bank of Sri Lanka (CBSL) for November 2018 showed that the trade deficit had increased from $999 million in November 2017 to $785 million in October 2018. The country has also made progress in creating international actors for the development of commercial, transport and logistics infrastructure, with an important objective for foreign direct investment (FDI).