Loss of GSP Plus could trim SL’s trade surplus with EU by US$ 700 mn

• Apparel, agriculture, fisheries and industrial products exports could face potential margin contraction
• The scheme provided duty free access to EU markets for over 7,200 products
• SL’s GSP Plus utilisation increased to 61.8% in 2020 
• Withdrawal of GSP Plus status has been based on concerns regarding PTA and general human rights situation in the country

Sri Lanka stands to lose US$ 700 million in its trade surplus with the European Union (EU), if the EU decides to move ahead to halt the GSP Plus scheme to the country.

“Whilst the GSP Plus helps significantly boost the country’s export performance, the loosing of it would not create a major vacuum on a broader level besides the loss of a strong potential trade surplus with the EU. On a micro level, individual businesses engaged in the export of apparel, agriculture, fisheries and other industrial products would face a potential margin contraction due to the loss of concessions and lower industry growth,” Softlogic Stockbrokers said in a note.

Sri Lanka reclaimed its GSP Plus status in 2017 on the condition that the country would commit to implementing 27 international conventions on human rights and other aspects of good governance.  Consequently, the average trade surplus with EU shot up by 117 percent during 2018-2020, rising from US$ 581 million to US$ 1.26 billion.
The exports also grew at 9 percent on average from 2017-2019, before witnessing an inevitable decline due to the COVID-19 pandemic in 2020.

The GSP Plus scheme provides selected countries with duty free access to EU markets for over 7,200 products and in return, the recipient nations are required to ensure the implementation of international conventions in human rights, labour rights, environment and good governance.

However, the EU Commission is currently considering a temporary withdrawal of Sri Lanka’s GSP Plus status due to concerns regarding the Prevention of Terrorism Act and general human rights situation, after the EU parliament adopted a resolution.

In 2020, the EU absorbed 22.4 percent of Sri Lankan exports, which was dominated by textiles and clothing exports, accounting for 52.3 percent of the country’s total exports to the EU in 2020.

Notably, Sri Lanka’s GSP Plus utilisation also increased to 61.8 percent in 2020 from 58.2 percent in 2019 as the country’s exporters looked to capitalise on the concession amid rising competition due to the pandemic.  Therefore, loss of GSP plus concession is expected to impact Sri Lankan exporters adversely.

“The loosing of a unique tax arbitrage via the GSP plus would inevitably hurt local exporters who would now be faced with a high tax regime c.f. with its peer countries who continue to enjoy the benefit. This would make their products more expensive to the European consumer resulting in a demand slump or a margin contraction by way of a haircut on the pricing structure,” Softlogic Stockbrokers noted.

Sri Lanka along with Pakistan and Philippines were the top three beneficiaries of GSP Plus scheme in 2019.
As no major apparel exporters are listed on the Colombo Stock Exchange (CSE) with the exception of very few fabric manufacturers, Softlogic Stockbrokers doesn’t expect major impact on listed entities from a possible loss of GSP Plus.