An EU trade economist says Sri Lanka’s apparel sector has a good record in labour standards but urged the industry to develop a more mature relationship with the EU and move away from dependence.

"The EU does not depend on Sri Lanka. The buyers do not depend on Sri Lanka. It is important to realize that all the bargaining chips are held with the EU and if Sri Lanka wants an extension of GSP Plus the government and the industry will have to get its act together and comply with EU conditions," Razeen Sally, Co-Director of the European Centre for International Political Economy, a think-tank based in Brussels told a seminar in Colombo recently.

"Unfortunately Sri Lanka has to chase after the GSP Plus concessions and if not to rely on these concessions Sri Lanka will have to diversify its export markets," he said.

Sally says a way out of depending on powerful foreigners was to liberalise its capital account.

"If not Sri Lanka will perpetually rely on powerful foreigners. Sri Lanka should be in a position to be more mature," he said.

"Take Vietnam for instance, they are not haggling with the EU over human rights issues, aid or trade preferences but discussing the day-to-day nitty-gritty of creating more market access both ways. For Sri Lanka to do this it had to diversify its exports, reform its policies on trade and the domestic economy," Sally said.

Deputy Governor of the Central Bank, W. A. Wijewardena, told a public seminar last month the failure to liberalize the country’s capital account and allow the inflow and outflow of medium to long term capital would result in painful repercussions which the country cannot escape from.

"Policy makers should now think of proper mechanisms to gradually liberalize the capital account," he said.

Economists believe a major problem for countries like Sri Lanka is the lack of domestic savings mobilization to finance investments required for high economic growth, this is called the circle of poverty, hence the need to attract investments,

Liberalizing the capital account, contrary to popular notions, would generate more inflows of foreign capital rather than the outward flight of capital.

It would also allow domestic companies to setup businesses overseas which could generate more foreign exchange revenues.

The deficit financing has to be through government’s foreign borrowings or reduction in official foreign assets if the capital account is not liberalized in order to facilitate the private sector to raise foreign funds to finance their domestic resource gap.

Assistant Governor of the Central Bank P. Samarasiri pointed out at a seminar that in most years, 60 to 90 percent of the current account deficit had been funded though long term foreign borrowings of the government.

Total long term net foreign borrowings since 1978 is US$ 9 billion, and the current outstanding is about US$ 14 billion (44 percent of GDP).

"Given the current high level of domestic and foreign debt burden of the government and constraints on official reserves, the current status of current account liberalization is not sustainable unless the capital account is liberalized appropriately," Samarasiri said.

"Otherwise it may be necessary again to introduce certain measures of current account controls to manage the deficit and this would not be acceptable in terms of international best practices and comparative advantages of globalization.

"Further, such measures may lead to socio-political issues that may be unfavourable for economic development," he said.

Liberalisation will also require that the exchange rate is allowed to reflect the trade balance.

The investigation into Sri Lanka’s compliance with EU conditions, mainly the politically toned human rights issue, is ongoing.

Sally said he expects the investigations would be completed by October this year and that a ruling on the extension, or discontinuation, of GSP Plus may be announced by the first quarter of 2010.

"What is clear is that Sri Lanka will have to get its act together. Since labour standards have a good record it is only the political considerations that have to be dealt with. What is required is for the government to be pragmatic and they have all to play for when the writing is on the wall," he said.

He suggested the private sector take the lead in bargaining for an extension.