Priority trade and competitiveness reforms for Sri Lanka – Part 3

A recent Policy Note published by the Centre for a Smart Future (CSF) outlined eight priority trade and competitiveness reforms for Sri Lanka, in responding to global economic challenges. In previous articles (16 May and 29 May), we recapped key messages from Priority Areas 1, 2, 4, 5 and 6 contained in the Policy Note. In this third and final article in the series, we cover Priority Area 7 - 'Advancing Commercial Diplomacy'.

- By Anushka Wijesinha and Senith Abeyanayake

Commercial diplomacy as a driver of trade and investment

The foreign service is Sri Lanka's front line when facilitating entry into frontier export markets and responding to international shocks such as tariff increases. A growing body of international literature, including Rose (2007), establishes that diplomatic presence can have a significant positive impact on trade flows. Such impacts can vary due to factors such as the types of goods traded (Moons and de Boer 2014), the firm size of traders (Ferguson and Forslid 2019) and the type of host market (Van veestra 2011; Moons and van Bergeik 2018). On investment flows, in a meeting with the new diplomats, the head of Sri Lanka's Board of Investment (BOI) noted that they should "leverage their networks to create opportunities for partnership and investment in Sri Lanka's growing economy". Though the impact of commercial diplomacy on investment inflows is less explored, Fry-McKibbin et al (2019) observed an increase in Australian FDI inflows by 22 per cent through diplomatic efforts.

President's message vs. the reality

A study conducted by CSF in June 2024 for the Sectoral Oversight Committee on International Relations of the 9th Parliament highlighted that Sri Lanka's commercial diplomacy apparatus suffers from a range of issues – from a lack of clear vision and long-term strategy, low funding and resources, unclear monitoring and evaluation, and a highly fragmented institutional environment with competing and overlapping mandates.