A GENERAL EQUILIBRIUM ANALYSIS: IMPACT OF THE INDO-LANKA FREE TRADE AGREEMENT ON SRI LANKAN ECONOMY

Abstract

The Indo Lanka Free Trade Agreement (ILFTA) which was signed in December 1998 at the highest political level and subsequent implementation in March 2000 marked an important milestone in India – Sri Lank relations and in trade relations in particular, as it concretized and paved the way for closer economic integration. This paper provides quantitative assessment of the impact of the ILFTA on macroeconomic variables, welfare and output focusing on the Sri Lankan economy. Further, the study investigates the impact of trade liberalization on trade structure and trade partners of Sri Lanka. We perform simulation using the Global Trade Analysis Project (GTAP) model Version 6, to quantify the impact liberalized trade between Sri Lanka and India. GTAP is a computable general equilibrium mode (CGE) of the world economy. The results indicated that both Sri Lanka and India will experience welfare gains from the ILFTA. Moreover, it was evident that Indo-Lank full trade liberalization scenario ensures high welfare to both the countries than Indo-Lanka FTA with negative lists. The industry analysis reflected that the industries such as met products, paper products and publishing electronic equipment, chemical, rubber and plastic products, machinery and equipment necessaries and other primary products will benefit due to the ILFTA. However, it could be seen that the industrial sector benefits are more than the agricultural sector benefits due to trade liberalization between the two countries.

Keywords: Free Trade Agreement, Genera Equilibrium, GTAP

For full Paper: fmscresearch@sjp.ac.lk