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Fixing the dollar exchange rate: A major mistake

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by Romesh Dias Bandaranaike, Ph.D.

Until September last year the US Dollar (USD) – Sri Lanka Rupee (SLR) exchange rate was determined on the basis of a “managed float.” This meant that demand and supply of USD in the market were the primary determinants of the exchange rate. Official (Central Bank) market intervention, by way of sale or purchase of USD in limited quantities, smoothed out any large fluctuations in the exchange rate, when needed.

In September 2021 the Central Bank (CB) set an upper limit of SLR 203 per USD that authorized dealers in foreign exchange, including banks, must adhere to for all foreign exchange transactions. This restriction, now in effect for five months, has had severe adverse impacts on the functioning of the Sri Lankan economy.

Since the demand for USDs has been higher than the supply of USDs at the upper limit of SLR 203 per USD, the CB restriction essentially results in the exchange rate being “fixed” at this rate. Banks have been compelled to address this shortage, by restricting allocation of their inadequate USDs among customers for all permitted foreign expenditures, at this “fixed” rate. The shortage has worsened substantially over the past months. In response, the CB, while stubbornly maintaining the “fixed” rate, has issued a number of additional directives, which have failed to address the adverse consequences of this shortage, as detailed below.

When the demand for a foreign currency exceeds its supply in any country, the fixed official exchange rate does not allow market adjustment to reflect that difference. The natural consequence is the emergence of an alternative market for the currency in shortage, commonly termed a “black market.” Such a black market has recently developed in Sri Lanka with USDs “selling” in excess of SLR 240 per USD compared with the “official” rate of SLR 203.

Migrant Remittances: Sri Lanka’s single largest source of USDs are remittances from migrant workers abroad, primarily in the Middle East. Informal currency transfer arrangements for workers in the Middle East from many South Asian countries (Pakistan, Bangladesh, Nepal, etc.) have been in place for decades, since many such workers did not have bank accounts in their home countries. These arrangements, termed “Hawala” and “Undiyal” are very reliable. Workers hand over foreign currency in the country where they work and the designated person in the home country is given the money in local currency at the agreed exchange rate.

In the past, most Sri Lankan workers did not resort to such arrangements because they had bank accounts in Sri Lanka to which they transferred their foreign earnings at a realistic official exchange rate. With the recent significant price difference between the official and black market rates for the USD, the Hawala/Undiyal arrangements have provided a ready alternate avenue for Sri Lankan workers. As more of these workers became aware of the alternate option, remittances through the banking system have declined precipitously, from USD 600-700 million per month, to USD 200-300 million per month.

The CB tried to reduce this decline by initially offering SLR 2 per USD over the “official” rate for worker remittances, and later an additional SLR 8 per USD. When remittances declined further, the Central Bank tried to “threaten” workers by saying that using alternate methods were illegal and may even be funding “drug dealing.” In November 2021, foreign worker remittances through official channels had declined by USD 340 million compared with November 2020. While the official exchange rate remains misaligned to market demand and supply, this loss will only increase as more workers become aware of alternate avenues. The adverse impact on Sri Lanka’s foreign exchange earnings will be a staggering USD 4 billion per year. This alone should be reason enough to dispense with the “fixing” of the exchange rate.

Export Earnings: With the fixing of exchange rates, exporters have been delaying the repatriation of their export earnings for as long as possible, till the CB is finally forced to succumb to the pressure and let the currency float. The CB has introduced more and more regulations to push exporters to bring back these funds to Sri Lanka and mandatorily convert portions of these amounts to SLRs. Despite all CB regulations, the USDs officially coming into the country from exports is less than if the currency was allowed to find the level at which supply and demand balance.

Tourist Earnings: With better control of the Covid-19 pandemic, tourist numbers have increased substantially in December and January, though not to pre-pandemic levels. When it became apparent that tourists too were converting their foreign currencies into SLRs in the black market, the CB required tourists to pay their bills at all registered tourist hotels and guest houses in foreign currency. The attractiveness of Sri Lanka as a tourist destination depends on the costs incurred by tourists in their own currencies. If they officially receive less SLRs for their currencies than with a realistic exchange rate, this will discourage some fraction of tourists from visiting Sri Lanka, which, in turn, will reduce tourist foreign currency inflows.

Shipping and Airlines: As a result of the severe USD shortage, banks are restricting foreign exchange for local agents of shipping and airlines who seek foreign exchange to pay their principals for services provided, after collecting payments in SLRs from clients. Kuwait Airways has already stopped its flights to Sri Lanka. Others will also reduce flights if not paid for tickets sold or goods air freighted. Shipping lines will soon by-pass Sri Lanka as a destination if not paid for their services. The country will face severe economic repercussions from these trends.

Foreign Investments: The Colombo Stock Exchange indices have grown significantly over the past year, totally on the back of local investors. Foreign investors have been very large net sellers. The original foreign investments were made on condition that the foreign investors could freely convert revenue from sale of shares and from dividends back to the currencies they originally brought in for investments. These sellers now face difficulty when trying to remit their sales proceeds in foreign currencies, because of the shortage. One can only imagine the negative impact this will have on investor confidence and any potential new investments.

“Illusory” Benefit: The most often cited “benefit” of fixing the exchange rate at an artificially low rate is that this would control price increases in imported food and other consumer items. This is an illusion. Many importers can only obtain foreign exchange to import such items in the black market. The rates paid for such exchange is further increased beyond the open market rate because of another CB regulation (see below). When importers persuade banks to open LCs for imports and the banks are late in meeting their obligation to pay the LCs after the goods have arrived in the Port, importers incur large demurrage costs. This increases the final consumer price, even if the LC is paid for at the official exchange rate.

Foreign Currency Grab by CB: The CB has introduced a regulation in terms of which any bank which converts SLRs to foreign currency for one of its clients must give the CB foreign currency equivalent to 25% of the converted amount at the official rate. An importer desperate to obtain foreign exchange for any critical need, such as urgent spares to repair machinery, arranges to pay an exporter having USD a premium above the official rate, if the exporter agrees to bring in USD into the exporter’s local bank at the official rate. The importer then asks the same local bank to open an LC on his behalf and use the funds he has arranged for (although it is brought into the exporter’s account) to pay for the urgent import. Because of the CB’s 25% regulation, the bank typically asks the importer to arrange for an extra 25% beyond the LC amount. This effectively means that instead of paying a premium of SLR 37 (say) over SLR 203, it costs the importer a further 25% (SLR 9.25) per USD to fund his LC. In essence, the CB is now asking importers desperate for foreign exchange to purchase an additional 25% on behalf of the CB and to meet the cost of the premium; effectively a “black market” deal on behalf of the CB!

The CB has also, by decree, forced private banks to allocate a share of their limited foreign exchange for the import of fuel, for vehicles and for operating the CEB’s thermal power plants. LCs for such imports were previously opened through the two state banks, which no longer have sufficient funds for this purpose, because of the fixed exchange rate. This has further reduced the foreign exchange available to private banks to service their own customers.

It is abundantly clear to any person with a modicum of sense, although clearly not to the Central Bank, that its attempts to artificially control the exchange rate by diktat is having a massive adverse impact on the functioning of the economy, without any worthwhile offsetting benefits. Will the CB ever come to its senses and let the USD find its true rate to save the country from further misery?

[The author is an economist with extensive experience at CEO level, in both public and private sectors.]



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A visa for bringing in expertise and expanding tourism

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In this article, I introduce an idea which is simple to implement but is powerful and helps with building technical skills, strengthening the country brand and creating international opportunities for Sri Lankans. Furthermore, it can diversify and extend the country’s tourism revenue streams.

The simple idea is to introduce a hassle-free visa for Internships, Volunteering, Expert Exchange Programs and Short-term Studies. For brevity, let me call it a Knowledge Transfer Visa or KTV. There are three important clarifications to make up-front. Firstly, this visa is not for those seeking paid employment in Sri Lanka. Secondly, the local partner needs to ensure that if any local permits or permissions are applicable, these are in place and cover any KTV holders. Thirdly, it is not a resident’s visa and tourist rates will have to be paid by KTV holders for their sightseeing.

It is also important to spell out up-front a critical requirement for success. This is that an applicant from a country who is entitled to obtain an online tourist visa quickly and easily should be able to obtain a KTV with the same ease and convenience. It would be reasonable for the Department of Immigration to have an additional information box in the visa application to ask for the name and contact details of the local partner (corporate or individual). But it should not be the role of the visa issuing officer in a Sri Lankan foreign mission or the Department of Immigration to examine paperwork to assess the credentials of the visitor and the local partner. This should be left to the applicant and local partner to assess each other. By analogy, a tourist is not asked to demonstrate that the hotel they have booked into is validly registered as a tourism business. Nor does the visa issuing process ask the hotel if they have vetted the tourist’s ability to pay. If the KTV is kept as simple as an online tourist visa, it will succeed, otherwise it will fail to deliver the potential benefits.

A reader may ask why this sort of visa is needed. The answer is that Sri Lanka is well positioned to benefit from activities covered in a knowledge transfer visa. However, such visits will only materialise if foreign nationals are reassured that they can arrive for such purposes with a visa where the purpose of their visit is explicitly recognised and they are confident that their visit is welcomed. Visitors on a KTV will bring in hard currency revenues in much the same way as ordinary tourists but importantly lead to other benefits such as the import of expertise, building international networks for local corporates and individuals and being potential repeat visitors. Let me explain by running through the various strands.

Internships

With the first strand, Internships, there is an overt intention that people want to work in a very structured manner and obtain useful work experience to help obtain paid employment back in their home country. Sri Lanka for various reasons, wishes to have tight controls over foreign workers and to limit foreign nationals on work visas. It is important to point out that facilitating internships need not conflict with this thinking. Incoming foreign interns are different to full-time foreign workers and caters to a younger demographic looking for a short period of work experience. If Sri Lanka restricts foreign internships to unpaid internships, this will limit the candidate pool to those interns who have parental financial support. Nevertheless, this is still a start and better than not opening the door at all.

In many sectors, Sri Lanka can offer meaningful summer internships of up to 3 months or longer. Two obvious examples are Tourism and Information Technology (IT). Sri Lankan companies cannot run viable business models by relying on a supply of foreign interns. Therefore, foreign interns do not in any way threaten the prospects for locals for employment. On the contrary, foreign interns from developed economies can benefit locals working with them in various ways. These could include improving language skills, and locals gaining exposure to skills such as time-management and project planning. Internships can also be used for foreign students to engage in undergraduate and postgraduate university projects with local academics.

To explain how foreign interns can be very useful, let me construct an example. It is a fact that Sri Lankan companies are writing the software for some of the most technologically advanced companies in the world. Imagine Sri Lankan IT companies actively pitch this to foreign universities in advanced economies and foreign undergraduates take up internships in Sri Lanka. Not only do they gain work experience of an equivalent standard to working in London or New York, but they will have a more exciting time in a tropical country. When they graduate, they will take up jobs in London, New York or wherever. When their employers are looking to outsource work, they may recommend the companies they worked with in Sri Lanka. Some of these foreign interns may even start their own companies in the future and look to outsource work to the Sri Lankan companies they worked with. If the new start-ups do well, there may be frequent business visits. When their former interns start families, they will visit Sri Lanka on visits which combine business meetings with a family holiday. Their children in turn will grow up with Sri Lanka being a place that was a regular holiday destination and, in the future, bring their own children on holiday. Internships in Sri Lanka to foreign students can grow future business revenues and also create a multi-generation chain of tourists.

Some foreign interns can also work in a three-way collaboration between their university, a local university and a private sector company. Take for example, a hotel that has placed camera traps on its property to study wildlife. If they do it on their own, it may simply be for marketing the hotel. If they can partner with a local academic or conservation NGO, it could be elevated into a formal study, perhaps even a long-term study. For both the local academic and the hotel, it would be useful if any work they do is part of a long-term study with a foreign university. International collaborations like this are also more useful to the hotel in their efforts for international publicity. For the local academic or conservation NGO, the international collaboration could also open opportunities for funding and recognition and invitations to present in international conferences. A win for all.

If Sri Lanka companies open up to foreign interns, it may result in them realising the value of well-structured internship programs and the dialogue with overseas interns and their academic supervisors may lead to good internship programs being set up for both local and foreign applicants. This can only help young resident Sri Lankans who at present are frustrated by the paucity of structured internship programs even amongst Sri Lanka’s leading companies.

Before I continue to the next two strands, it is useful to reiterate why a knowledge transfer visa is important. The above-mentioned benefits can only arise if potential foreign interns and volunteers have a mechanism of a special visa to reassure them that the purpose of their visit is properly disclosed and that their activity in Sri Lanka is welcomed and completely above-board within the stated purpose of the visa.

The same will apply, with voluntourism, which is a form of commercial tourism activity. Overseas companies that have a business model of arranging voluntourism abroad are more likely to add Sri Lanka as a destination if a KTV existed.

Volunteering

The second strand is Volunteering and here I define it narrowly to cases where a volunteer is not volunteering to build out their CV to help them gain paid employment in their home country. If they are doing so, it is covered under the Internship category. Under this definition, volunteers are people who fall into two broad categories. They may be volunteering for recreational purposes, coupled with wanting to do something that is societally useful. Or they may be people who are retired and on a comfortable retirement income who now have time and money to give something back to society. For example, a person in a highly paid job may come and volunteer for two weeks on a science (e.g. biodiversity surveys) or an arts project (e.g. cataloguing temple art). They may do this because they enjoy doing something different from their day job which is related to their personal interests and societally useful. This type of volunteering has become a significant form of tourism, known as voluntourism.

For the second type of volunteering an example would be a retired wildlife reserve manager from overseas who is happy to work for free with a Sri Lankan hotel or game lodge to train guides and provide practical help in rewilding the grounds of the property. They may enjoy mentoring and want to share their experience with others who are happy to learn from them. To take another example, it could be a retired museum curator who is happy to volunteer at a government museum to train local staff and inject fresh thinking into how exhibitions are curated.

The host country receives free expertise and valuable time from such volunteers. The volunteers are also paying tourists.

In G20 countries, volunteering is highly organised and has resulted in businesses that provide on-line platforms to match volunteers with recipient organisations. Sri Lanka can benefit from making it easy for people to volunteer and to come over, whether it is to paint hospital wards, help in beach clean-ups, or to help at a literary, music or cultural festival or to train local wildlife guides. Many volunteers will also look to add on a holiday extension to their volunteering stay. It is not just free people-hours of work and spending as foreign visitors: Carefully chosen good volunteers also bring in ideas, know-how, enthusiasm and energy.

Expert Exchange

The third strand in the knowledge transfer visa is for Expert Exchange. This is for people who are established in their discipline and looking to diversify their experience and build an international network by engaging in short term unpaid assignments overseas. For example, let’s assume a senior academic would like to spend a month working with local counterparts. Perhaps it is someone from a Management Science faculty who is interested in South Asian trade and wishes to work with local counterparts in a Sri Lankan professional institution or the Management Science faculty of a university. Or, perhaps it is an academic with an interest in contemporary Asian art. In such situations, a mutually useful arrangement between the foreign visitor and any local counterparts would be for the visitor to be provided a desk and some working space in the local faculty. Perhaps the visiting academic or professional can even undertake to give a certain number of lectures to Sri Lankan students. Relationships established in this way could lead to reciprocal invitations for Sri Lankan academics to attend foreign conferences and workshops and possibly help with Sri Lankan students receiving guidance and support with doing a PhD overseas. The visiting academic or expert is not being paid by the local partners in Sri Lanka and will continue to be on the payroll of their employer in their home country. Again, such visitors need to be reassured that what they are doing is deemed above -board and welcomed. They would not wish to come to Sri Lanka on a standard tourist visa for an engagement of this kind.

Short-term Study

The final strand of the knowledge transfer visa is for Short-term Study. Sri Lanka already has the skilled teachers and education infrastructure to offer undergraduate degrees from several foreign universities. It also runs accredited courses for professional qualifications from organisations that are based in G20 countries, whether it is in Accountancy or Marketing or IT. This capability can be expanded to provide ‘summer schools’ where foreign students arrive for a combination of classroom and field teaching. Local educational institutions can use their business initiative to develop curricula in consultation with foreign universities to meet the coursework credit requirements. If it is simple and easy to obtain a visa to attend such a course in Sri Lanka, this becomes a tempting offer for foreign students. In areas spanning from medicine, tourism, and the biological sciences, Sri Lanka can become an exciting destination for classroom and field work.

Conclusion

The results won’t be seen immediately as it takes years for local counterparts and foreign counterparts to respond and adapt to the benefits of such a visa. But slowly and steadily, we will see benefits accruing to the country. We also need to keep in mind that with anything that involves people, sometimes things don’t work out. A few foreign visitors or the Sri Lankan partners may not fulfil their obligations properly. We should not allow misguided fears of a few bad apples to block the massive potential for Sri Lanka to benefit from a simple but powerful idea that is easy to implement. It would benefit the private sector, state institutions, the universities, and many other sectors to encourage the government to introduce such a visa.

To conclude, if a knowledge transfer visa (KTV) is created which is as simple and quick to obtain as an online tourist visa, it will create a comforting and reassuring environment to encourage foreign visitors who are looking for something more than a short holiday. This will result in hard currency revenues in multiple ways as with ordinary tourism. However, there are potentially significant additional benefits from the bringing in of know-how, skilled people-hours of work, the scope for new types of businesses to develop, and allow Sri Lankan individuals, corporates and institutions to have doors opened for them for international business and academic opportunities. Furthermore, there is a huge Sri Lankan diaspora out there whose children and grandchildren do not have dual nationality but could be encouraged to bring their money and know-how for a longer length of time in Sri Lanka through a knowledge transfer visa.

by Gehan de Silva Wijeyeratne

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Corruption outed; Stirrings in the West

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Former President Mahinda Rajapaksa and wartime Defence Secretary and former President Gotabaya Rajapaksa paid floral tributes at the war heroes' memorial near Parliament on 20 May.

TV news showed Keheliya Rambukwella with a walking aid and grizzled unshaven, attending courts and leaving in a prison van. His son Ramith is implicated in a corruption case being heard against his father. So it’s a case of like father, like son. We recall this cricketer son was no gentleman. He supposedly broke into an office in his college – Royal, Colombo 7 – to interfere with a marks sheet or whatever.  More notoriously, returning from Australia as a member of a cricket team, he attempted opening a door of the Sri Lankan plane they were in. Doors in planes are extra strong and difficult to open; otherwise if he had succeeded, there would have been a fierce rush of air and he surely would have been dragged out to fall to the ocean or land and sure death. More seriously, havoc would have been created within the plane accompanied by dire danger to passengers.  He is supposed to be unemployed but living in a very expensive, luxurious flat.

Wages of sin

Not many like to see others suffering, particularly mothers of sons. But there was no sorrow, not a twinge, on seeing Keheliya limping and getting into a prison van; so different from the suave man he was. The reason is that one has to pay for sins and transgressions including the procurement of substandard and fake medicinal drugs for government hospitals.

There is no sympathy in Cass’ heart, even for Rambukwella Jr. since he developed within himself his father’s nature. The uppermost thought in her is that retribution is inevitable. Most people think it passes to manifest itself in the sinner’s next and future births. Not always. They suffer in this life too. Here is a solid example to prove this point.

When we women talk about corruption in this beautiful island some note that entire families are corrupt to the core and have collected vast amounts of illicit money, safely stashed away. They seem to be fine; the younger ones grinning from ear to ear, cock sure of themselves. But what about their minds, their nightly dreams? Are they afraid? Do nightmares torment them? Sure the older thieves suffer thus.

“Retribution often means that we eventually do to ourselves what we have done unto others.”

Qatar’s gift to President Trump

Why two remembrances?

Politicians particularly, often prove that Sri Lanka is a land like no other – negatively – Cass adds. The Medamulana Rajapaksa family proved this point on Tuesday 20 May.

The War Heroes Commemorative ceremony, which is Remembrance Day in Sri Lanka, is observed on May 19, when the end of the civil war in 2009 is marked. Those who died in the 28 year war, both armed forces personnel and civilians, are remembered on this day. A solemn ceremony was held in Battaramulla in the grounds of the stately National War Memorial, with the President, and army, navy and air force heads of that time present.  Also the nearest kin of those who gave their lives to save the country, mostly mothers and wives, laid red roses at the foot of the memorial.

Then surprise, surprise, another ceremony was held the following day at the same venue and most prominent were Mahinda and Gotabaya Rajapaksa. The news reporter of the channel Cass watched announced it was a memorial service for war heroes. But the war heroes had already been duly remembered the previous day by the entire nation. Pohottu members would have been present but it was not an SLPP ceremony. What was it then? A public remembrance by private persons since both brothers are out of politics and out of job now.

It is only in Sri Lanka that such a ‘circus’ can be staged. IWere the dead being used to shore waning popularity? Perfectly true, the two brothers did much to bring peace to the country; they went to war against severe objections and obstacles placed by local persons in secondary power, and foreign nations. But that does not justify a separate remembrance.

Maybe they do not know how such ceremonies are conducted in civilized foreign countries. They would not have watched the anniversary of VE Day (May 8) held in London and the respect and homage paid to WWII veterans and the remembrance of those who died in battle. Such an impressive, dignified late morning ceremony with King Charles III, Queen Camilla and other Royals present.  The country and its leaders unified in remembrance and gratitude. No politics whatsoever. In this country politics rears its Medusa head in all public occasions and even very private ones like weddings. Next year we may have two separate celebratory events for National Day – February 4.

Lies and subterfuges

As usual a mega Trump deal is surrounded by lies, denials, drawing the wool over the public eye and subterfuges which last means “deceit used in order to achieve one’s goal.”  The goal was getting a replacement for the presidential airplane which certainly is old – 40 years – and its interior not up to Trump’s garishly lavish standards. The Trump administration first approached Qatar to acquire a redundant Boeing 747 with a price around USD 400m to replace Air Force One. The other story is that Qatar reached out and offered the jet as a gift to Trump. The 747 flew to Florida in March so Trump could inspect it, which he did. A circulated report is that Qatar gifts the 747 to Trump personally to be used as his presidential jet and once he leaves the White House, it is his private possession. This tale one could well believe knowing the sort of a person Trump is and how wily Middle East potentates are: no giving without getting in return.

Cancer stalks American VVIP

Trump’s immediate predecessor has had another trauma.  President Joe Biden announced he had been diagnosed with aggressive prostate cancer, which means his days are numbered. He was the oldest US Prez but much admired and polled to be the 14th best president in the history of the US. His first wife and one-year daughter died in a car accident on December 18, 1972, just four years after marriage. He was a devoted father to his two sons aged 2 and 3 years then. At age 46, in 2015, his elder son Beau died of brain cancer, which Biden maintained was due to his service in the Kosovo war where dangerous gases were used. And now this illness at 82.  A good man given more than his fair share of tribulations.

Cruelty beyond measure

Deaths in the Gaza strip increase by the day as Israel bombards it with air missiles and debars food aid getting in. Children are dying by the hundreds and doctors in large numbers as hospitals are targeted for attack. Netanyahu has pronounced he wants the entire Gaza strip as part of Israel. How can he possibly expect this? However, at the rate the war is proceeding he will soon overcome Hamas and ride into Gaza as a vanquisher and acquirer. No nation seems to be ready to help the Palestinians.

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Trump’s trade tariffs pose hidden threats to Sri Lankan economy

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President Trump

Colombo, Sri Lanka – While U.S. President Donald Trump’s trade war primarily targeted global economic heavyweights like China and the European Union, its ripple effects are being felt across smaller economies including Sri Lanka. Experts warn that Trump’s protectionist trade policies, particularly the imposition of tariffs and the “America First” doctrine, could significantly impact Sri Lanka’s export-driven growth model.

Global Supply Chains Under Pressure

One of the most immediate threats stems from the disruption of global supply chains. Sri Lanka’s key industries, including textiles, apparel, and electronics components, are heavily reliant on imported raw materials. The U.S. tariffs on Chinese and other foreign goods increased global production costs, leading to delays and price hikes that affect Sri Lankan exporters.

“These disruptions trickle down,” says an economist at the Central Bank of Sri Lanka. “Higher input costs and reduced access to affordable materials can hurt the competitiveness of our exports.”

Falling Global Demand Hits Exports

Trump’s tariffs contributed to broader economic uncertainty, weakening global trade and slowing growth. This downturn has lowered demand for Sri Lankan goods, particularly in Western markets. Apparel exports, which account for over 40% of Sri Lanka’s total exports and rely heavily on U.S. consumers, are especially vulnerable.

“As American retailers reevaluate their sourcing strategies, Sri Lankan garment manufacturers face increased competition from countries like Vietnam and Bangladesh, some of which benefit from more favourable trade agreements,” notes a trade policy analyst in Colombo.

Foreign Investment and Tourism at Risk

The trade tensions also made investors more cautious, leading to a decline in foreign direct investment (FDI) in emerging markets. Sri Lanka, already grappling with high debt levels and political instability, may find it increasingly difficult to attract investment in its export-oriented industries and infrastructure projects.

Tourism a vital source of foreign exchange could also see knock-on effects. Global economic instability tends to reduce travel spending, which directly impacts Sri Lanka’s tourism sector.

Regional Spillovers from China and India

China, a key trading partner and infrastructure investor in Sri Lanka, was one of the main targets of Trump’s tariffs. As Chinese economic growth slows due to reduced U.S. trade, its demand for Sri Lankan commodities and its ability to invest abroad could also decline. Similarly, any reduction in India’s economic engagement due to trade tensions with the U.S. may impact regional cooperation and investment flows.

Out of the Trade Bloc Loop

Perhaps, more concerning in the long term is the global realignment of trade alliances. As the U.S. withdrew from multilateral trade deals and others like the Regional Comprehensive Economic Partnership (RCEP) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) gained momentum, Sri Lanka risks being left behind.

A Wake-Up Call for Trade Policy Reform

The indirect but significant threats posed by Trump-era tariffs underline the urgent need for Sri Lanka to diversify its markets, join new trade alliances, and upgrade its export infrastructure.

While the Trump administration, the shift towards economic nationalism and trade protectionism continues to influence global policy. Sri Lanka, as a small and open economy, must adapt quickly or risk falling further behind.

By M. I. D Perera,
Economist

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