The IMF this week urged Sri Lanka to sign the trade deal with India that has been held up by Sinhala nationalist commercial interests allied with the Colombo government.

The CEPA (Comprehensive Economic Partnership Agreement) between India and Sri Lanka has been under negotiation since 2005. It was supposed to be signed in 2008.

Although the agreement has been largely finalized, President Mahinda Rajapaksa’s government has been dragging its feet.

In an effort to get the deal through, last month India agreed to renegotiate aspects of the agreement. But getting a new deal may take all year, the Sunday Times reported.

Meanwhile, interestingly, Japan was surprised when last September Sri Lanka sought out a free trade deal (see the Sunday Leader's report).

Despite oft-repeated claims of Sri Lanka’s ‘turn to the East’, the volumes of trade show Sri Lanka’s dependency on Western markets.

Of Sri Lanka’s exports, just 1% and 4% go to China and India, respectively.

The point was again made this week by the IMF’s Resident Representative for Sri Lanka, Dr. Koshy Mathai, in comments reported in the Daily Mirror.

“Sri Lanka should focus her attention on growing economies such as China and India, rather than entirely on the US or the European region,” he said.

The IMF official also stressed the importance of CEPA, saying fears of Indian labour flooding the domestic market were unfounded, and argued Sri Lanka’s service sector would benefit from Indian clients.

None of these arguments are new (see LBO's analysis of CEPA and the criticisms here). As Sri Lankan economist R.M.B. Senanayake pointed out last May,

“Definitely for there is no more scope for a small country to go it alone in the world of globalization. We should integrate more closely and benefit from the larger regional economy."

(See his interview last May here.)

But Sri Lanka also knows its Sinhala first economic vision is at odds with a globalised economy.

In particular, CEPA could enable a revival of the Northeastern economy (see here).

It will also likely weaken Sinhala nationalist commercial interests close to the Rajapaksa regime. Sri Lankan firms will face competition from Indian ones.

As Senanayake put it,

“[Sri Lanka’s] architects, lawyers, engineers, accountants are able to exploit the local consumer freely. But where lies the interest of the consumers? All protection helps those who want to exploit the public.”

After demonstrations last May, just before President Rajapaksa visited India, he met with protestors and his office released a statement vowing:

“The government will not enter into any pact or agreement that is inimical to its people and economic interests."