Sri Lanka risks losing a lucrative 250,000 ton export quota covering vegetable oils and bakery fats to India under the Indo-Sri Lanka Free Trade Agreement (ISFTA), as investors warn of policy inertia and mounting pressure from regional rivals.
The quota, was introduced in 2008 following negotiations with New Delhi, allowing Colombo-based manufacturers to ship products duty-free into India.
Industry insiders say the facility, worth at least US$50 million annually in foreign exchange, could be reassigned to Nepal or Bhutan if Sri Lanka fails to revive its export capacity.
“This is not just an industrial issue it’s a foreign exchange lifeline,” one Indian investor previously engaged in Sri Lanka’s edible oils sector told Sunday Times Business. “Unless the government acts now, we will lose it.”
Exports began in 2002, and by 2006, twelve factories ten Indian-owned and two Sri Lankan were thriving.
But in 2010, India slashed import duties on edible oils from other suppliers to as low as 5 percent, from 42 percent eroding Sri Lanka’s competitiveness.
Ten factories closed almost overnight. Machinery and equipment were dismantled and sold off, in some cases through politically linked deals, leaving only four companies two Indian and two Sri Lankan to continue operations.
In 2022, India reversed course, raising tariffs again and reinstating Sri Lanka’s quota, while extending approval for bakery margarine and fats. For Colombo, the move was an unexpected reprieve, offering a chance to rebuild capacity.
Yet regional competition looms. Analysts say India may increasingly favor Nepal and Bhutan both tightly bound to New Delhi through trade and political agreements over Sri Lanka.
“If Sri Lanka shows no commitment to using this quota, India has little reason not to shift it northwards,” one South Asia trade analyst noted.
Industry players insist Sri Lanka could quickly capitalise. At least five shuttered factories could be restarted, while two local plants already supplying the domestic market could easily pivot to exports. Together, they could fully utilise the 250,000-ton allocation.
But regulatory roadblocks persist. Companies now fall under the Board of Investment, which demands that outstanding taxes be cleared before operations resume. Investors argue the delay is costing the country dearly.
“The sad truth is that no minister in the present government even understands the importance of this industry,” one investor remarked.
Earnings of “US$50 million a year may not sound transformative, but in Sri Lanka’s fragile balance of payments context, every dollar counts,” said a Colombo university-based economist. “Losing this to Nepal or Bhutan would be a policy own goal.”
For now, the quota remains on paper. But without swift political will, Sri Lanka risks ceding yet another trade advantage this time not to global markets, but to its smaller Himalayan neighbors.
