Introduction
The Framework Agreement of Pakistan Sri Lanka Free Trade Agreement (PSFTA) signed on 1st August 2002. Following the signing of the Framework Agreement, the two countries, having conducted several rounds of bilateral negotiations, were able to finalize the annexes to the Agreement in December 2004. During the visit of Her Excellency the President to Pakistan in February 2005, the two governments exchanged Diplomatic Notes, confirming the finalization of the Annexes. In addition, the two sides also signed a Protocol, which aims at expanding the scope of the current Free Trade Agreement and moving towards a Comprehensive Economic partnership Agreement, covering trade in services and investment cooperation.

SRI LANKA-PAKISTAN Trade Relations

The value of total trade between the two countries, which stood at SL Rs. 8,731.10 Mn (US $ 97.72 Mn) in 2001, has increased up to SL Rs. 21,304.00 Mn. (US $.196.00 Mn) in 2006.
However, the balance of trade has been in favour of Pakistan since 1984 due to the increased imports of products such as rice, cotton, big onions, potatoes, dried fish and decline in our tea exports to Pakistan as there was a shift to CTC tea consumption in that country.

Sri Lanka 's Trade with Pakistan

Followed by India , Pakistan ranks as the second largest buyer of Sri Lanka in the SAARC region, accounting for 9.7% of Sri Lanka 's total exports to the region. Sri Lanka 's exports to Pakistan reached SL Rs 6,066.00Mn (US $. 56.00 Mn) in 2006, registering a 40% growth over the previous year. This is mainly due to the increased exports of spices, natural rubber, coconuts and coconut products.

Trade Developments Under Pakistan -Sri Lanka Free Trade Agreement (PSFTA)  

A substantial improvement in bilateral trade is recorded after the implementation of the FTA from 12 th June 2005. The value of exported products from Sri Lanka covered under the Agreement, had registered at US $ 26.62 Million in the 2 nd half of 2005 compared to US $ 14.8 Million recorded before the implementation, an increase of 80%. Sri Lanka 's exports to Pakistan under the agreement reached US $. 59.30 Mn in 2006, registering a 43% growth over the 2005.

Export performance under PSFTA

As seen from the table above, a substantial improvement in exports of main commodities has been recorded since the Agreement came into force. Some items such as fresh pineapple, sports goods, Tamarind with seeds, Coconut, Edible Oil and activated carbon have gained access to the Pakistani market.

Similarly, imports from Pakistan have also registered an increase from the pre-Agreement value of US$ 53.0 Million to post Agreement value of US$ 62.65 Million in year 2005. The total value of import from Pakistan had increased to US $ 140 Million in 2006 over the year 2005, an increase of 21%.

However, it is still premature for testing the trade impact of the PSFTA. Given the wide range of products covered under the Agreement along with the more flexible rules of Origin criteria, it is expected that trade between the two countries will improve significantly while the product base being diversified in the near future.

Recent Developments under the PSFTA

First Ministerial Bilateral Review Meeting PSFTA - 14 th to 16 th March 2007

The first Ministerial Bilateral Review Meeting of PSFTA was held in Islamabad from 14 th to 16 th March 2007. The Sri Lanka delegation was led by Prof. G.L.Peiris, Minister of Export Development and International Trade, while the Pakistan delegation was headed by H.E. Mr. Humayun Akhtar Khan, Minister of Commerce, Government of Pakistan.

After discussion on the proposal tabled by Sri Lanka at the meeting following decisions were taken with concession.

1. Pakistan agreed with the proposal to reduce tariff concession on Margin of Preferences on Betel Leaves from 35% to 20% and remove the annual quantity restriction of 1200 MT.

1. Pakistan will provide tariff concessions on Herbal Cosmetics manufactured and marketed by the National Brands of Sri Lanka on Margin of Preferences of 50%.

1. Sri Lanka in return, would not issue Certificate of Origin on tariff lines of Auto-sector indicated by Pakistan at the Technical Level Meeting held on 14 th to 15 th March 2007. Besides a permanent solutions for this issue will also be worked out.

Export of Tea

The tariff rate quota of 10,000 MT granted by Pakistan for export of tea at Zero duty under the FTA, would help Sri Lanka to regain it's market share over the time. However Sri Lankan exporters need to promote their brands in the Pakistan market for this purpose. After the First Ministerial Review Meeting, Hon. Minister of Export Development and International Trade took up the matter with the Ministry of Plantation Industry and a Committee comprising of government and private sector officials has been appointed to work out strategies to promote Ceylon tea in the Pakistan Market.

Export of Betel Leaves

Pakistan imports 5,000-6,000 MT of betel leaves annually. Sri Lanka is the largest supplier. Thailand , Bangladesh and India are the other main suppliers. Pakistan is the only market for Sri Lanka 's betel leaves.

Sri Lanka 's Export of Betel Leaves to Pakistan

The MOP 20% on betel leaves without quota restrictions agreed by Pakistan at the last Ministerial meeting, would help Sri Lanka to increase its market share in Pakistan .

Apparels

Pakistan has offered TRQ of 3 Mn Pieces per year for 21 products categories of apparel with a preferential duty margin of 35% under FTA. The main product categories, which could be exported under this arrangement include men's and boys under pants and briefs, women and girls under pants and briefs of cotton and other textile materials. However the maximum quantity that can be exported under any of these categories is limited to 200,000 pieces per annum. Sri Lanka 's exporters are yet to explore the potential in this market for apparel.

Import of Basmati Rice

Total quota per calendar year is 6000 MT on duty free basis to be imported from Pakistan . A mechanism has been worked out at the last Ministerial meeting to facilitate the import of basmati rice under PSFTA.

Import of Potatoes

Under the Agreement, Sri Lanka offered Tariff Rate Quota (TRQ) of 1000 MT per year. However imports to be made during off-seasons. i.e. 2/3 rd during June-July and 1/3 rd during October-November. The total quota was allocated to CWE during the year 2006. Of which the CWE imported only 25 MT in year 2006 due to high prices prevailing in Pakistan .

Phasing out of Tariff

Sri Lanka effected the 2 nd tariff reduction from 15 th September 2006. There was a delay in effecting the tariff reduction due to certain technical problems. Next tariff reduction by both countries is due on 12 th June 2007.

the main objective of the Agreement is to promote closer economic integration between the two countries for realization of enhanced trade and investment opportunities for the mutual benefit of both countries. As a result of successful implementation, the positive trend is expected to continue in both directions with diversification of exports under the Agreement. The scope of the FTA would be expanded covering areas of services and investment co-operation.