"There are few nagging issues like exports of vansapati oil to India that we are unable to iron out at the trade level. They have to be taken up at the high or political level before CEPA talks can make headway," Deputy Director of Commerce, Nimal Karunatilake said.

India is currently Sri Lanka's third largest export market, with just under two billion dollars in bilateral trade. India is also the island's fourth largest investor, with investments of over US$ 450 million in the island.

But a surge in duty free exports of sensitive products like Vanaspati and pepper from Sri Lanka to India has Indian demands that it be capped, has both sides riled.

Sri Lankan exports of Vanaspati – a vegetable oil - to India have doubled to 200,000 metric tonnes in 2005, from less than 100,000 metric tonnes the year before.

The surge in exports has worried India who wants Sri Lankan vanaspati exports capped at 100,000 metric tonnes to prevent flooding its market, which Sri Lanka says it cannot do.

Sri Lanka voluntarily agreed to cap exports at 250,000 metric tonnes in 2003, and recently imposed a US$ 30 a tonne levy on raw material imported into the island for processing and re-export as vansapati.

"We need to have quantitative restrictions, but there are huge investments that have already been made in this sector on the basis of what was agreed," Karunatilake said.

"The predictability and stability of an agreement is important in encouraging investment and the stability of the investment regime is at risk. We have asked India to consider this."

India also wants pepper exports from Sri Lanka capped at 2000 metric tonnes a year from about 6000 metric tonnes currently. Sri Lanka exported Rs.1.0 billion in pepper to India in 2005, a 1.94 percent increase on 2004.

Staying Negative

Ahead of CEPA talks, now in May, the two countries are also trying to whittle down their negative lists – lists of sensitive, protected goods that have no tariff concessions.

"We are examining the Indo-Sri Lanka Free Trade Agreement negative lists and we are trying to see in the context of CEPA, how we can reduce or remove some items from this so that it encourages trade," Karunatilake said.

A list of goods that might be taken off is still being discussed, but the Department of Commerce has asked industries and trade chambers to raise any queries or concerns.

Sri Lanka has 1180 products on its negative list, with pressure from India to bring it down to 500. India has about a 1000 products on its negative list.

Free Services

When CEPA talks finally get off ground, Sri Lanka is asking for greater flexibility in retail trade, shipping, tourism, financial services and aviation.

India wants telecom, professional services, construction, computers, education, energy, maritime, Information Technology, tourism, health, transport and logistics opened up.

"Our problem is that we don't have offensive interests. We have very few companies that tell us to open this sector or that. Not many firms are also in a position to compete, apart from the financial services sector," Karunatilake said.

"We have not received much representation, so our list is quite short."

But Sri Lanka, being a smaller economy, is not expected to open up the same service sectors or to the same extent India will.

Neither is Sri Lanka liberalising all its professional services.

Lists on services to be opened up have already been exchanged between both sides.

-Zainab Ibrahim: zainab@vanguardlk.com