Integrating with ASEAN-2
There is a path now open for Sri Lanka to realise its 57-year old dream to join the Association of South East Asian Nations (ASEAN), and benefit economically. It is an “indirect path” through a Free Trade Agreement (FTA) with the Regional Comprehensive Economic Partnership (RCEP).
As we discussed last week, Sri Lanka had a direct route to ASEAN to become one of its founding members in 1967. At its inaugural meeting the founding members were expecting to admit Sri Lanka, but it was Sri Lanka itself that missed the opportunity.
Even though Sri Lanka’s dream did not dry out and the country actually made several attempts to join it, 40 years later ASEAN itself closed the door. The ASEAN Charter as adopted at the 13th ASEAM Summit in 2007 included a clause confining its membership to the countries located within Southeast Asia only. Accordingly, Sri Lanka cannot be a member of ASEAN anymore.
ASEAN and RCEP
After eight years of preparation, in 2022 ASEAN formed another pact called ASEAN+1FTA, that is RCEP and opened it for other countries in the Asia-Pacific to join. RCEP consists of 15 nations: 10 ASEAN member countries and five AsiaPacific countries which have entered FTAs with ASEAN; that is Australia, China, Japan, New Zealand, and South Korea. And the 10 members of ASEAN are Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand and Vietnam.
Although Sri Lanka missed the opportunity to become an ASEAN member realising its long-awaited dream, this time it has already sent a Letter of Intent to the ASEAN Secretariat. This is, however, a long journey, again. Preparation and negotiation take many years, while the completion of integration also takes many more years, perhaps as long as
15 – 20 years.
FTA with RCEP is not a bilateral agreement like the Sri Lanka’s FTA with India and neither is it an FTA for trade in goods. It would be a multilateral FTA which is expected to be broader in terms of its coverage: trade in goods, trade in services, investment, economic and technical cooperation, intellectual property, competition, e-commerce, small and medium enterprises (SMEs), government procurement, and other related areas. The integration that is expected to be under RCEP is deeper than any other agreement that Sri Lanka has so far signed.
World’s largest free trade area
RCEP consists of 15 countries with diverse developmental achievements. There are high-income countries such as Singapore, Malaysia, Australia, Japan, New Zealand, and South Korea. There are middle-income emerging market economies like China, Indonesia, Thailand and Vietnam. There are low-income countries such as Cambodia, Laos, and Myanmar.
The Philippines was once considered to be a potentially 2nd generation newly industrialised country together with
Sri Lanka, but then continued to miss the bus, just like Sri Lanka. Brunei is a whole different story of a rich country; its economy is oil-dependent, and people are subsidy-dependent.
Despite all of its divergences, RCEP is today’s largest free trade area in the world. It represents 2.3 billion people, which is closer to 30 per cent of the world population. Being the fastest-growing region in the world, it also has a rapidly expanding “middle-class’ consumer society which creates massive aggregate demand flows in the world. RCEP produces nearly 30 per cent of world GDP. It amounts to US$ 29.5 trillion in 2022, larger than EU’s GDP of $17 trillion and, US’s GDP of $25 trillion. And more importantly, GDP of the RCEP region is growing faster than that of the EU or the US.
While GDP growth is linked directly with export growth, it also generates imports from other countries. RCEP region’s exports also amount to 30 per cent of world’s exports. On average, RCEP region’s exports account for 25 per cent of its GDP, while exports from many ASEAN countries such as Cambodia, Laos, Malaysia, Singapore, Thailand and Vietnam remain in the range of
50 – 110 per cent of their GDP.
The big deal
The above information shows the big deal that Sri Lanka has by joining the RCEP. While an FTA with RCEP is expected to provide “free” access to the world’s largest free trade area with potential for generating exports and imports of both goods and services, and to materialise trade flows with investment flows. Other areas of collaboration and integration are expected to supplement and complement trade and investment flows.
Sri Lanka has been lethargic in promoting exports and been “allergic to free trade deals” for a long time, so that the strategy to fill the resulting foreign exchange gap has been foreign borrowings. Total foreign borrowings at the end of 2023 amounted to $37 billion out of which bilateral borrowings was about $11 billion and commercial borrowings $15 billion.
Even if Sri Lanka succeeds in bringing about its foreign debt restructuring process to a conclusion, it would not end Sri Lanka’s debt issue. It is the country’s ability to repay foreign debt without burdening the economy, which is called debt-sustainability. Export growth is the only way to assure the country’s debt sustainability, and economic progress beyond recovery.
Although Sri Lanka has declared its inability to meet about $5 – 6 billion of its annual debt obligations, by international standards $37 billion is not a big amount of money. The problem is that Sri Lanka has not developed its exports. It is quite strange to think that after 45 years of experience with trade liberalisation, Sri Lanka could achieve a maximum of only $13 billion export revenue a year. This should be compared with current exports revenue of some of the ASEAN countries is well above $100 billion – $292 in Indonesia, $352 in Malaysia, $515 in Singapore, $287 in Thailand and, $371 in Vietnam.
No panacea
Sri Lanka has a trade deficit with the RCEP region. Sri Lanka sells about $1.2 billion worth exports to this region but buys about $6.9 billion worth imports. It is absurd to envisage that this would turn out to be a trade surplus after joining RCEP. Perhaps, the country’s trade deficit would expand further. The problem is that mere trade deficit is a bad indicator to measure a country’s trade performance.
What Sri Lanka must expect from joining RCEP is to promote its overall trade performance with the entire world and export promotion. Even if Sri Lanka will increase its trade deficit with RCEP region, the country’s effective integration with RCEP will generate the country’s general export capacity to the world.
Joining RCEP alone does not guarantee a successful export expansion and economic growth for Sri Lanka. This is very clear by looking at differences in performance in different countries within the group itself. ASEAN was established in 1967 by five countries, namely Indonesia, Malaysia, Philippines, Singapore and Thailand. They all had similar levels of exports around $1 billion at that time, but they all performed differently in the subsequent years. Singapore had the best performance while the Philippines was the worst performer. The other three countries too did not perform smoothly throughout the entire period.
Sri Lanka has been lethargic in promoting exports and been “allergic to free trade deals” for a long time, so that the strategy to fill the resulting foreign exchange gap has been foreign borrowings.
Homework, abandoned
It would be the same for Sri Lanka too; why? This is where I find the biggest challenge of Sri Lanka. In general, many of the RCEP countries that are important for Sri Lanka have been adopting reforms, whereas Sri Lanka has given up reforms during the past 25 – 30 years.
Apparently, it is a painful exercise for Sri Lanka to integrate competitively with RCEP region, because its adjustment cost is high. Even though we are now led by the “crisis” for integration and liberalisation, the country’s “unilateral reform” agenda is a precondition for joining RCEP. It is quite normal that some countries within RCEP or ASEAN do better than others, because they have been doing their homework with or without a regional association.