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Paranoia does not prevent trade, Lanka should go for CEPA with India Prospects for deeper South Asian economic integration improves-IMF

The Island, Sri Lanka

Paranoia does not prevent trade,
Lanka should go for CEPA with India

Prospects for deeper South Asian economic
integration improves-IMF

By Devan Daniel in Washington DC

26 April 2010

The International Monetary Fund (IMF) believes that South Asia’s prospects for a regional grouping have greatly improved and that prospects for deeper economic integration within the region and with the rest of Asia would continue to improve in future.

Asia is leading the global recovery and rebounded much faster than more advanced economies in the world where unemployment is higher, household balance sheets are impaired and bank credit remains anemic, said the Director and Deputy Directors of the Asia and Pacific Department of the IMF at a press conference in Washington DC on the sidelines of the IMF-World Bank annual sessions.

Asia’s economy is expected to grow by about 7 percent in 2010 and 2011, while China and India are expected to record economic growth rates of 10 percent and 8.8 percent respectively. Low income countries are estimated to grow at much lower levels.

The Island Financial Review raised a question as to the importance of South Asia’s attempt to form a comprehensive regional grouping, which the SAARC process has been trying to do for the past few decades but failing to make much headway, which would ensure equitable growth in the region.

Today, South Asia has two faces; one highly sophisticated with access to international markets and the latest technologies and the other languishing in poverty.

"There has been not much progress (in forming a comprehensive regional grouping) until now, but prospects are very good right now. The region is also home to a rapidly growing India. India is also integrating with the rest of Asia. So prospects for South Asian economies to integrate within the region and also with the rest of Asia have greatly improved and would continue to do so," Kalpana Kochlar, Deputy Director, IMF Asia and Pacific Department said.

Although Indo-China trade has been skewered towards Chinese imports, Ms. Kochlar believes that trade between the two economies have grown rapidly over the years.

The Head of the IMF Asia and Pacific Department, Anoop Singh, said that the IMF was in favour of such regional groupings.

"We put a lot of priority in the growth of regional institutions, organizations and communities across the world. And we are supporting to the extent we can civil society grouping as well in East Asia and South Asia. We are very much in favour in the developments of such regional groupings and doing what we can to support them," Singh said.

Right throughout the spring sessions, the IMF has been lobbying for measures that would address global economic imbalances. This calls for advanced economies (with mounting debts) to depreciate their currencies and boost their exports while emerging economies are expected to appreciate their currencies and improve domestic demand, a step, the IMF says, China has already began to take. Intra regional trade is expected to make this transition smoother.

At the heart of this recommendation is the intension to improve demand in lagging economies of advanced countries and way out for emerging economies to depend on each other to grow their exports without depending on advanced economies.

Trade and paranoia…

A senior official of the IMF not wanting to be quoted later told the Island Financial Review that although tensions between India and Pakistan was holding back the process of deep integration of the South Asian region, trade between the two countries has been growing.

While the South Asia Free Trade Area languishes in cold storage thanks to Indo-Pak paranoia and tough bureaucracies, Sri Lanka has signed two free trade agreements with both India and Pakistan. In 2008, Sri Lanka and India were on the verge of signing a comprehensive economic partnership agreement (CEPA) but here again, paranoia set in and a strong lobby group dissuaded the President Mahinda Rajapaksa from signing the agreement.

Economists in South Asia have been trying to convince their leaders that economic and social integration was the best answer for a region that was by and large poor and poverty stricken, but political consideration always took precedence over anything else.

When economists and technocrats worked hard to put the CEPA with India together, in a bid to removing the problems encountered in the free trade agreement, some anti-India businessmen and lobbyists had the audacity to accuse them of being unpatriotic failing to realize that CEPA was formulated to improve conditions for Sri Lanka in dealing with India.

Regardless of the paranoia of an influential few, trade between India and Sri Lanka have increased over the years, and the Central Bank in its annual latest annual report says the CEPA with India could help boost exports, resulting in more earnings and the creation of new jobs.

Also, in 2009 India was the largest source of imports, 17.8 percent of all imports. While lobbyists argue that the CEPA would flood the domestic market with Indian goods, the current FTA has increased imports from India and the CEPA proposes to introduce better controls.

"There is great potential for further growth in bilateral trade and investments under comprehensive economic partnership agreements with India and Pakistan. Despite the improvement in trade between Sri Lanka and these countries since the inception of the respective trade agreements, exporters have not fully utilized the benefits available to them," the Central Bank’s Annual Report 2009 said.

"Given the better investment climate in Sri Lanka, it can lure investments using the trade agreements as a platform to capture the vast markets of India and Pakistan. The proposed CEPA with India addresses issues with the free trade agreement such as conformity assessment procedures and product standards.

"However, CEPA with India remains stalled after thirteen rounds of technical level negotiations and three rounds of negotiations and Commerce Secretary level. Efforts would need to be taken to derive the benefits offered by trade agreements and to move ahead towards forming more economic partnerships," it said.

The CEPA with Pakistan has been put on hold as senior officials said Sri Lanka would not like to ‘intimidate India’.

Treasury Secretary Dr. P. B. Jayasundera told exporters at a recent forum, that it would be foolish to limit imports. "Importers are exporters in another country and we refuse to buy their goods then they could do the same to us".

Dr. Jayasundera stressed that Sri Lanka would maintain imports as they are and that exporters should increase their productivity and diversify.