Business

How U.S. tariffs and a fragile rupee are exposing Sri Lanka’s export vulnerabilities

Published

1 year ago

2025/05/16

Prof. Sirimal Ashoka Abeyratne

As Sri Lanka navigates the delicate path of economic recovery, two mounting challenges have converged to expose deep-rooted vulnerabilities in its export economy: the appreciation of the rupee over the past two years and a fresh wave of reciprocal tariffs imposed by the United States. For a country where nearly a quarter of exports are US-bound, these developments carry serious implications—not just for revenue, but for investment, competitiveness, and long-term growth.

According to leading economist Prof. Sirimal Abeyratne, these pressures should be seen less as external shocks and more as symptoms of underlying structural gaps. “The problem isn’t just what Trump did,” he explains. “It’s the fact that Sri Lanka has been running an overly protective and inefficient trade regime for decades. What this tariff move has done is hold a mirror up to our own weaknesses.”

The newly proposed US tariff regime, introduced under the justification of ‘reciprocal trade fairness,’ penalises countries running large bilateral trade surpluses with the US. Sri Lanka, despite its relatively small export volume, is among the top targets. Apparel exporters—already grappling with squeezed margins—will be faced with an additional 44% duty from the 8th of July, on top of the existing Most Favoured Nation tariff rate, threatening their foothold in key global markets. The bigger risk, Prof. Abeyratne warns, is not just losing market share, but losing investments altogether. “If it becomes cheaper to produce in Vietnam or Bangladesh, export oriented companies especially apparel will follow the logic of survival—and shift operations.

Currency volatility adds another layer to this precarious equation. While the Central Bank’s recent management has kept the rupee around the Rs. 300 mark against the dollar, exporters have seen reduced earnings due to rupee appreciation in the past six months. “You can’t have an appreciating currency, shrinking export margins, and increased external tariffs all at once. It strangles competitiveness,” notes Prof. Abeyratne. “And if the US dollar begins to weaken globally—which is likely, given their own trade contraction and inflationary pressure—that adds a whole new level of unpredictability for us.”

Behind the scenes of these challenges lies an even bigger issue: Sri Lanka’s failure to diversify its markets, modernise its trade policy, and connect to global value chains. “We’ve been talking about export-led growth since liberalisation in 1977,” Dr. Abeyratne says. “Yet, we’re still stuck at US$12–13 billion in annual exports. That’s not a success story—that’s a serious policy failure.”

Part of the problem, he argues, is self-inflicted. Complex para-tariffs, erratic import controls, and domestic taxes on inputs have made production more expensive and unpredictable. “Even taxes on imports hurt exports—especially in sectors like apparel, where imported raw materials are critical. When you overtax imports, you essentially tax your exporters too.”

While countries like India have signed over 17 comprehensive Free Trade Agreements, Sri Lanka has struggled to expand beyond a handful of partial trade agreements. Public resistance, politicisation, and poor implementation have all contributed to missed opportunities in integrating with regional supply chains. “We’ve isolated ourselves from global trade patterns, while others moved ahead. Our trade controls are not just outdated—they are counterproductive.”

On the fiscal side, the country’s overdependence on manufacturing and service taxes—nearly 14% of government revenue—presents a further obstacle to reform. Reducing tariffs requires a broader restructuring of the tax system, including stronger mechanisms for direct taxation and digital traceability. “We need a technology-driven way to monitor income and spending. If India can do this with a population of 1.5 billion, why can’t we manage 22 million?” he asks.

The road ahead is not without options. Prof. Abeyratne believes the 90-day window before full implementation of the US tariffs presents a rare opportunity for introspection—and action. “This isn’t just about salvaging our trade with the US. It’s a wake-up call. We must overhaul our trade policy, streamline our tariff structure Eg: removing para-tarrifs, and make it easier for exporters to compete globally.”

He also points to the need for a market driven exchange rate policy that supports exporters without destabilising inflation targets. “Letting the rupee gradually depreciate, when done right, can be a powerful tool to maintain export momentum—especially when external conditions are stacked against us.”

In closing, Prof. Abeyratne offers a sobering reminder: “The damage we’ve done to our export economy over the years—through poor policies and neglect—is far greater than what any foreign government could impose on us. The question now is whether we are willing to fix it.”

Sirimal Abeyratne PhD is Emeritus Professor of Economics at the University of Colombo, Sri Lanka. Currently, he serves as Chair of the Stakeholder Engagement Committee of the Central Bank of Sri Lanka and Executive Director of the Centre for Poverty Analysis (CEPA), while contributing to the development policy dialogue and green financing efforts of the country.

All News Advertisement

Business

Committee appointed for restructuring SriLankan Airlines

Published

10 hours ago

2026/06/12

Priyan

The Cabinet of Ministers has approved the appointment of a Committee, chaired by Senior Presidential Advisor on Digital Economy Dr. Hans Wijayasuriya, to conduct a strategic review and restructuring of SriLankan Airlines.

The other members of the committee are as follows:

• Senior Presidential Economic Advisor Duminda Hulangamuwa

• Financial and corporate strategy expert Deshal De Mel

• Transaction and investment banking, mergers and acquisitions expert Dumith Fernando

• The Secretary to the Ministry of Finance or his Representative

• The Secretary to the Ministry of Transport, Highways and Urban Development / a representative of the Civil Aviation Authority

• The Chairman of SriLankan Airlines

• Legal experts with specialised knowledge in corporate, aviation and public law

• Aviation industry experts to be appointed

The Government has recognised the urgent priority of undertaking a comprehensive strategic review of SriLankan Airlines, taking into account the broader macroeconomic context.

The main objective of this exercise is to establish a financially sustainable and commercially efficient national carrier, while reducing the long-term fiscal burden on the Government.

Accordingly, it has been deemed appropriate to establish a dedicated committee to carry out the strategic review and restructuring process in collaboration with the International Finance Corporation (IFC), which is serving as the Transaction Advisor.

The committee will be responsible for:

• Conducting an independent review and assessment of the airline’s strategic direction and future course of action

• Recommending restructuring requirements and possible restructuring models

• Evaluating specific strategic options and identifying the most suitable course of action aligned with the Government’s overall objectives

• Providing oversight, guidance and support for the implementation of the selected strategy and execution framework determined by the Government

The committee will function for the duration of the strategic review and restructuring process, or until it is formally dissolved by the Government of Sri Lanka.

(PMD)

Business

CMTA warns of further Rs. 40 billion revenue leakage in 2026, calls for urgent removal of 15% depreciation

Published

22 hours ago

2026/06/12

Thilina Walpola

(L to R): Andrew Perera, Chairman, Ceylon Motor Traders Association and Lakmal de Silva, Senior Vice Chairman, Ceylon Motor Traders Association

The Ceylon Motor Traders’ Association (CMTA), the senior-most automotive association in Sri Lanka affiliated with the Ceylon Chamber of Commerce, has issued an urgent appeal to the government to abolish the 15% depreciation currently granted on used vehicle imports, warning that the concession is causing massive revenue leakages at a time when the country can least afford them.

The Association estimates that the existing depreciation mechanism resulted in approximately Rs. 40 billion in lost government revenue in 2025 alone. If corrective action is not taken immediately, a similar level of revenue leakage could occur in 2026, further impacting the government’s fiscal position and depriving the country of much-needed funds for national development and public services.

The Association notes that loopholes within the existing system have created opportunities for misuse, resulting not only in unfair advantages for certain importers but also in substantial losses to government revenue. Addressing these abuses, alongside the removal of the 15% depreciation concession, is essential to ensuring greater transparency, strengthening regulatory oversight, and protecting the integrity of Sri Lanka’s vehicle import sector.

While no official announcement has yet been made regarding the removal of the 15% depreciation, the CMTA has consistently highlighted the issue through multiple budget proposals submitted via the Ceylon Chamber of Commerce. The Association has repeatedly maintained that there is no viable justification for the continued application of this concession on used vehicle imports.

Currently, used vehicles receive a 15% depreciation on their Cost, Insurance and Freight (CIF) value for duty calculation purposes. However, the vast majority of vehicles entering the country through the used vehicle market are virtually zero-mileage units, with CIF values that are often comparable to those of brand-new vehicles. In such circumstances, the CMTA argues that granting a blanket 15% depreciation creates an unfair and unjustifiable tax advantage while significantly reducing government revenue collections.

The Association acknowledges that if the objective through this concession is making vehicles more affordable for consumers, then the CMTA stresses that affordability cannot be achieved through arbitrary concessions that create market distortions and substantial losses to the Treasury. If the intention is to reduce vehicle prices, similar policy considerations could be extended to brand-new vehicles rather than selectively benefiting one segment of the market.

Consumers who purchase brand-new vehicles benefit from manufacturer warranties, which help mitigate maintenance and repair costs during the warranty period. As a result, vehicle owners are less likely to incur additional expenses associated with importing replacement parts, providing greater long-term value, reliability, and peace of mind.

The CMTA further notes that as far back as 2013, a structured depreciation framework was implemented based on the age of a vehicle, rather than a flat-rate concession. Under this proposal, depreciation would be calculated according to a defined scale and capped at a maximum of 10%, ensuring greater fairness, transparency and alignment with the actual value of the vehicle.

The Association stated that the continued application of a blanket 15% depreciation is resulting in significant and unnecessary revenue leakages for the government. At a time when every rupee of revenue is critical to the country’s economic progress, this issue requires immediate attention and decisive action.

The CMTA therefore strongly urges the relevant authorities to take swift action to abolish the current 15% depreciation concession and close this avenue of revenue leakage without delay. The Association emphasises that every month of inaction increases the risk of further losses to the state and undermines efforts to strengthen public finances.

Should the government determine that some form of concession should continue to be extended to the used vehicle market, the CMTA maintains that it must be implemented through a structured and transparent framework based on vehicle age and capped at a reasonable level. Such an approach would ensure fairness while safeguarding government revenue and maintaining a level playing field across the automotive industry.

Business

Climate adaptation now a business survival imperative, experts warn

Published

22 hours ago

2026/06/12

Thilina Walpola

Businesses in Sri Lanka risk severe financial and operational disruption unless they urgently invest in climate adaptation and resilience measures, leading climate experts warned at a high-level dialogue on “Climate-Proofing Business Sri Lanka” held on Wednesday at Genesis – The Dilmah Centre for a Sustainable Future.

The event, jointly organized by Genesis and the Ceylon Chamber of Commerce, brought together corporate leaders, sustainability professionals, policymakers and climate specialists to discuss how climate change is rapidly emerging as one of the biggest risks facing Sri Lanka’s economy.

Climate Change and Disaster Risk Management Specialist Rohan Cooray said climate-related disasters were already exacting a heavy economic toll globally and locally.

He noted that climate-induced losses divert resources that could otherwise be invested in economic development and business growth and stressed the need for stronger adaptation measures to protect investments and livelihoods.

Delivering the keynote address, internationally renowned climate lawyer and governance specialist Dr. Lalanath de Silva said climate change was no longer a future threat but a present-day economic reality that businesses could not afford to ignore.

“The impacts are coming whether we like it or not,” he said. “The question is whether we prepare now or pay a much higher price later.”

Dr. de Silva explained that while global efforts have largely focused on mitigation—reducing greenhouse gas emissions—adaptation has become equally important, particularly for vulnerable countries such as Sri Lanka.

“Sri Lanka contributes less than one percent of global greenhouse gas emissions, yet we are among the countries most vulnerable to climate impacts,” he said.

He warned that climate change would alter rainfall patterns, intensify floods and droughts, increase the frequency of extreme weather events and place growing pressure on infrastructure, agriculture, water resources and businesses.

“We are very good at producing plans in Sri Lanka. What we have not been good at is implementing them.”

Calling for stronger institutional coordination, Dr. de Silva proposed the establishment of a high-level climate coordination mechanism operating at the highest level of government to ensure coherent action across ministries and agencies.

Providing scientific context to the discussion, Cooray presented projections based on global and regional climate models adopted by Sri Lanka’s Department of Meteorology.

According to Cooray, rainfall patterns across Sri Lanka are expected to become increasingly erratic.

The wet zone is projected to receive more intense rainfall events while many dry-zone regions could experience prolonged drought conditions interspersed with extreme rainfall episodes.

“The danger is not simply that some places become wetter and others become drier. The danger is the increasing variability and unpredictability of rainfall,” he said.

While mitigation projects often generate measurable returns, adaptation investments require innovative financing mechanisms and stronger public-private partnerships, speakers noted.

The event also featured contributions from Dilhan C. Fernando, chairman of Dilmah Ceylon Tea Company PLC; Shiran Fernando, Secretary General and CEO of the Ceylon Chamber of Commerce; and Yasangi Randeni, Chief Sustainability Officer of Aitken Spence PLC.

Speakers agreed that climate-proofing businesses is no longer simply about environmental responsibility but about safeguarding assets, maintaining competitiveness, protecting supply chains and ensuring long-term economic sustainability.

The consensus emerging from the forum was clear: while mitigation remains important, Sri Lanka’s immediate priority must be preparing businesses, communities and institutions for climate impacts that are already unavoidable.

By Ifham Nizam