Abstract:
This paper attempts to estimate Pakistan-Sri Lanka Free Trade Agreement using the gravity model of trade. Panel
data for the period 1980-2010 across two countries is employed in the analysis. The coefficients obtained from
the model are used to predict the trade potential of both countries worldwide as well as within specific SAARC
region. The results expose that Sri Lanka’s existing trade potential with Pakistan is high. Therefore, Sri Lanka
should explore ways and means to further improve its trade relations with Pakistan and also concentrate more on
new products to increase its market share as far as possible. However, the volume of trade of Sri Lanka with
Pakistan is lower than that of India, despite the existing significant potentials. The main obstacles to this end are
the political, ethnic and social tensions with India, which is the key player of SAARC. Moreover, Sri Lanka and
Pakistan face several major challenges such as diminishing marginal returns to economic integration, importance
of non-tariff barriers to trade, homogeneous products and lack of leadership in Pakistan. It is pointed out that Sri
Lankan entrepreneurs and exporters need to diversify from traditional export markets to industrial markets in
Pakistan. In addition to that, post-PSFTA scenario explained that Sri Lanka’s trade dependency ratios have
increased compared with pre-PSFTA scenario. This is evidenced from continuously increased post-PSFTA trade
deficit. Hence, Sri Lanka should encourage investors from Pakistan to invest in Sri Lanka. Finally, the bilateral
agreement is compared with SAARC and SAFTA and it is found that due to bilateral agreement there is a
potential market for new products. In addition, a few important measures that should be taken in order to sustain
the trade with Pakistan are pointed out.
