Sri Lanka stands to make major gains if it joins the Information Technology Agreement (ITA), the Information Technology and Innovation Foundation (ITIF) said in a report.
The Information Technology Agreement, a trade agreement that eliminates tariffs on hundreds of information and communications technology (ICT) products, has been one of the most successful trade agreements in the World Trade Organization’s (WTO) history.
The government has made a commitment to transform Sri Lanka into a creative, knowledge-based society by digitally empowering its citizens and economy, recognizing that ICTs make a vital contribution to Sri Lanka’s economy, both directly and in terms of powering productivity and innovation across all other sectors of the economy.
Sri Lanka’s ICT/business-process outsourcing sector represents one of the country’s most important and fastest-growing economic sectors. The sector has grown by more than 120 percent over the past five years, reaching $900 million in exports in 2016 while supporting over 85,000 jobs, and accounting for 3.4 percent of the country’s current account receipts.73 The sector reports impressive economic margins and estimates 95 percent value addition.
By 2022, SLASSCOM, the Sri Lanka Association of Software and Services, estimates the country’s ICT/business-process outsourcing sector will grow to $5 billion in revenues, support 200,000 direct jobs, and seed over 1,000 start-up enterprises.
Sri Lanka’s ICT/BPO sector has been internationally recognized, named by the United Kingdom’s National Outsourcing Association as the “Offshoring Destination of the Year” in 2014 and ranking 16th according to the AT Kearney Global Services Location Index.
As Sri Lanka has an extremely limited ICT production sector, its ICT services/BPO sector needs to import low-cost, best-of-breed ICT equipment such as computers, servers, and mobile devices to maintain a globally competitive sector.
ITIF estimates Sri Lanka’s imports of ITA-covered ICT products were just under $20 billion for 2014, with a realized average tariff rate of 4 percent. This essentially mean Sri Lanka’s ICT/BPO sector pays 4 percent more than necessary for critical ICT inputs, and Sri Lanka’s ICT/BPO enterprises have to factor this cost into the prices they charge their clients. This means they have to raise their prices as much as 4 percent, a considerable amount given the razor-thin margins in the fiercely competitive global ICT/BPO sector.
ITA accession for Sri Lanka could play a powerful role in decreasing prices for these vital ICT inputs. ITIF estimates that ITA accession would contribute to Sri Lanka’s GDP by 0.96 percent, larger than would otherwise be the case ten years post-accession, with the ITA-attributable increase in GDP output reaching $1.4 billion. In terms of tax impact, ITIF estimates that, in the tenth year post accession, Sri Lanka would recover 47 percent of tariff revenue forgone as a result of ITA accession, with $87 million in tariff income forgone offset by $27 million in newly generated income tax revenue and $14 million from new goods and services (GSA) tax receipts. But a difference of just over $40 million in tariff receipts is a small price to pay for the expanded economic and employment growth ITA accession would be poised to engender over that ten-year period.