Fiscal and Trade Policy for the SAARC Region - Vision 2020 Dr. Anura Ekanayake

Fiscal and Trade Policy for the

SAARC Region - Vision 2020

Dr. Anura Ekanayake

Deputy Vice Chairman, The Ceylon Chamber of Commerce

SOUTH ASIAN TAX SUMMIT 2008

April 2008Karachi, Pakistan

“The only way of discovering the limits of the possible is to venture a little way past them into the impossible.”

- Late Arthur C. Clark, renowned scientist, S-F writer and a distiguished citizen of South Asia.

Why do we need them? Tools to raise Government revenue Influence demand and supply Encourage exports Stabilize Exchange rate/BOP Encourage investments Accelerate economic growth Create employment

How are they inter-related?Trade policy is very much a part of Fiscal policy. It is used to

raise/spend government revenue

They strive to contribute to the achievement of similar objectives - Growth, Income, and Employment

Fiscal and Trade Policies

Fiscal Policy Situation -

Despite the differences in the size and development of the countries in the region, there are some characteristics that seem to stand out in terms of fiscal policy

We seem to be high spenders relative to what we earn (high budget deficits and low government revenue)

Our countries experience relatively high rates of inflation and high growth

Poverty is high in our countries and income low

Current Position of intra-SAARC Trade - Data and issues in brief.

Some indicators

Per capita GNP

(US$)

GDP Growth rate

Inflation2006

Fiscal Balance

(% of GDP)

Govt. Revenue(% of GDP)

% of the people below

poverty line

Afghanistan 6.1 5.1 -3.1 18.3 N.A

Bangladesh 480 6.6 7.2 -3.2 10.7 50%

Bhutan 1410 7.8 4.9 -0.8 34.5 N.A.

India 820 9.6 5.4 -6.4 21.1 29%

Maldives 2680 19.1 3.5 -6.7 51.8 N.A.

Nepal 290 3.1 8.0 -1.6 13.1 42%

Pakistan 770 6.6 7.9 -4.3 14.2 33%

Sri Lanka 1300 7.7 9.6 -8.1 16.4 25%

Average 1107 8 6 -4 23 36%

Trade liberalization started late (late 70s early 80s) and slow progress

Tariff barriers are still significantly high

Protection in agriculture is higher than protection in non agriculture

Non tariff barriers are significant

Trade facilitation can bring many benefits however not much progress has been made

Intra regional trade is low, however, intra regional trade is more important for smaller SAARC countries than for larger ones (e.g. Bhutan 73% of total trade is within SAARC and Nepal 62%, in contrast for Pakistan intra regional trade is only 4% and India 3%)

SAARC Countries’ Trade Policy- The Current Situation

A Brief Comparison of SAARC with the European Union and the ASEAN

Membership Trade Liberalization

Original Current Intra regional trade - 2005

SAARC 7 8 SAPTA – 1993SAFTA – 2005

4-5%

ASEAN 5 10 AFTA – 1992 25%

EU 6 27 EU single market

completed in 1993

66.6%

Source: www.aseansec.org , http://europa.eu/ , www.saarc-sec.org

Importance of Trade within SAARC for SAARC Member Countries - 2005

Country As a % of total imports

As a % of total exports

As a % of total trade

Bangladesh 18 2 10

Bhutan 69 78 73

India 1 5 3

Maldives 15 16 15

Nepal 65 57 62

Pakistan 3 4 4

Sri Lanka 22 10 17

Source: www.trademap.org, Annual Report of the Central Bank of Sri Lanka

Tariff Profile of South Asia

Country Year Simple average applied tariff

Bangladesh 2006 15.2

Bhutan 2005 22.1

India 2005 19.2

Maldives 2006 20.2

Nepal 2005 13.9

Pakistan 2006 14.3

Sri Lanka 2006 11.2

Average for SAARC 16.6

Average for ASEAN 8.1

Source: World Tariff Profiles, 2006 (www.wto.org)

Potential for growth in South Asia

Based on Deutcshe Bank Research -A forecast by Deutsche Bank Research on 34 economies indicate that Growth in future will come from Asia. According to this Study done in March, 2005:India (5.5%), Malaysia (5.4%), and China (5.2%) will post the highest GDP growth rates overall during 2006-2020 period

The growth of India already is and will be a major driving force of growth in the SAARCPakistan is the gateway to the middle east and AfricaYet, are we ready to make use of these opportunities?All the big businesses around the globe are eying to make profits from themWhat are we neighbors doing? Are we hiding behind our fears, suspicions and historical hostilities and turn a blind eye to this chance of a lifetime?

How can the Region move Forward?

Find synergies, Find Win-Win situationsLook for harmony not for conflictThere are things we can share and benefit from

Some examples of such situations:Some examples of such situations: Cricket World Cup 1996

“Let us share our own backyard for the world to play cricket”

Health tourism : Combine medical expertise of India with hospitality in Sri Lanka “Professional medical care in a home away from home”

Trade: Combine increased trade of India with maritime expertise of Sri Lanka “Let your neighbor deliver your goods to the world”

Apparel: Combine designing skills of India with production technology of Sri Lanka “Together let us dress the world”

Improve Connectivity We are neighbors, we share borders We share culture, language, religion

Yet, doing business with each other is expensive both in terms of time and money:

Saying hello to my neighbor is quite expensive – “Cost of telecommunications”

Visiting to see my neighbor’s factory is quite expensive and time consuming – “Air connectivity”

Sending my goods to my neighbor is quite expensive and time consuming – “Air, sea and land connectivity”

Bringing down barriers must be seen as an opportunity rather than a threat –

It will help reduce the dependence on few outside markets like U.S.A. and E.U.,

It reduces the vulnerability of being over dependent on these markets

How can the Region move forward?

(…Contd.)

Cost of trading across borders – 2006

SAARC Average(excl.

Afghanistan)

ASEAN Average(excl. Brunei,

Myanmar)

Documents for export (number)

8 7

Time for export (days) 30 29

Cost to export (US$ per container)

1055 806

Documents for import (number)

13 11

Time for import 35 32

Cost to import (US$ per container)

1408 901

Source: Cost of Doing Business Report – World Bank

Role of the Government

Role of the Government would be to act as a Facilitator

To: Facilitate Trade Facilitate movement of people Improve infrastructure

Role of the private sector

Make use of each others strengths to make your business a success

Few thoughts…

India’s Entrepreneurs and Professionals

Sri Lanka’s Maritime Expertise and Hospitality

Labour and Commodities in Bangladesh and Nepal

Innovative Poverty Alleviation Schemes (for e.g. Grameen Bank)

Maldives Tourism - Sun and the Beaches

Bhutan’s pristine Natural Beauty and Gross National Happiness

Pakistan – the gateway to the Middle East

The direction of Trade Policy of SAARC in future should strive to

Have lesser direct and indirect trade barriers for Intra SAARC trade

& the direction of Fiscal Policy of SAARC should strive to Invest more on developing infrastructure Reducing wasteful recurrent expenditure Curtailing budget deficits Reducing poverty through growth

In Conclusion…

THANK YOU

Appreciation: EIU of the Ceylon Chamber of commerce