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Policies call for coordination in power sector

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by Neville Ladduwahetty

The material presented below relates to the policies explored by successive governments to meet the rising demands for water and electric power. Consequently, the policies adopted are with the intention of either increasing demands for water and power generation capacities, directly or indirectly, as a byproduct of another policy. They are presented as contradictions herein as the objective achieved by implementing one policy contradicts directly or impacts negatively on the objectives of another policy. For instance, new projects are pursued at considerable cost without expanding existing facilities to meet near identical power generation capabilities. Another instance is that water demands in one region are met at the cost of impacting negatively on existing power generation capacities.

Addressed below are three projects that expand on the above general claims:

1. Calling for bids to build, operate and transfer a new 350MW Liquid Nitrogen Gas (LNG) plant in Kerawalapitiya at a cost to the government’s Renewable Energy Programme.

2. Building new plants without expanding capacities at Victoria and Kotmale.

3. To transfer water to the Northern Province by transferring water from Randenigala to Moragahakanda at a loss of power generation at Randenigala and impacting negatively on the supply of water to the left and right banks of the Mahaweli at Minipe.

350 MW LNG PLANT at KERAWALAPITIYA

The most recent contradiction in the Power Sector is the Framework Agreement signed by the Government of Sri Lanka with New Fortress Energy (NFE), an American energy-based Company on September 17, 2021, to introduce LNG as the source to generate electric power. Since this is a fossil fuel it would be a set-back to the government’s own programme for Renewable Energy.

According to a press release issued by New Fortress Energy on September 21, 2021, and reported by NEW YORK–(BUSINESS WIRE) “The Government of the Democratic Socialist Republic of Sri Lanka (GOSL) jointly announced today that they have executed a definitive agreement for New Fortress’ investment in West Coast Power Limited (WCP), the owner of the 310 MW Yugadanavi Power Plant, based in Colombo, along with the rights to develop a new LNG Terminal off the coast of Colombo, the capital city. As part of the transaction, New Fortress will have gas supply rights to the Kerawalapitiya Power Complex, where 310 MW of power is operational today and an additional 700 MW scheduled to be built, of which 350 MW is scheduled to be operational by 2023”.

This means that as a result of the deal with NFE the total power generating complex at Kerawalapitiya would consist of the existing 310 MW plant, the 350 MW plant expected to be completed in 2023, and another new 350 MW plant to be built latter, thus making a total of 1010 MW of power generation. Furthermore, all these plants would be operating on LNG. In order to make all three plants operational, NFE has retained the right to develop a new LNG Terminal and as reported, with exclusive rights to supply LNG for a period of five years with the provision to renew supplies for a further 10 years.

Leaving aside the merits and demerits of the deal with NFE, there is a need to understand the overall status relating to the power sector. With implementation of the deal with NFE, what Sri Lanka would end up would be a 1010 MW LNG plant at Kerawalapitiya, 900 MW of a coal-fired plant at Norochcholai and a commitment to increase Renewable Energy (RE). Therefore, instead of expanding the capacities at Kerawalapitiya to 1010 MW, the deal with NFE from the perspective of Sri Lanka’s national interests, particularly from an environmental point of view, should be to convert the existing coal-fired plant at Norochcholai to LNG along with the LNG Terminal from Kerawalapitiya to Norochcholai. Such a shift of focus from Kerawalapitiya to Norochcholai would not affect progress on the RE Programme. Furthermore, converting from coal to LNG would significantly improve the quality of the environment in and around Norochcholai.

EXPANDING CAPACITIES AT VICTORIA AND KOTMALE

Another contradiction is the policy of the government to call for bids to set up a new 350 MW LNG plant at Kerawalapitiya without expanding the capacities of existing plants. A glaring example of this is that the recommendations proposed in a “Feasibility Study for Expansion of Victoria Hydropower Station”, dated June 2009, undertaken for the Ministry of Power and Energy on behalf of Japan International corporation Agency (JICA), have not been explored.

Section 6.1 of this report states: “The expansion of the Victoria Hydropower Station is composed of a headrace tunnel, a surge tank, penstock(s) and a powerhouse. The water intake was already constructed for the purpose of future expansion of the hydropower facility during the construction of the existing Victoria dam…One possible option of expansion plan is simply to place these components nearby the existing hydropower facility…referred to as ‘Basic Option’” (p. 29). Although the Report presents two other options, what is recommended is “to place an expansion powerhouse nearby the existing powerhouse facility.”

In the Section under Conclusions and Recommendations, the Report states: “Based on the results in (5) above, the Project is to connect the existing intake for the expansion and a new powerhouse to be located next to the existing powerhouse with a waterway parallel to the existing waterway. Water for generation of 140 m3/s is to be taken at the existing intake for the expansion and led through the headrace tunnel and penstock to the surface type powerhouse. The installed capacity is 228 MW with 2 units, and 716 GWh of annual energy are obtained with the existing and expansion power facilities (210 MW and 228 MW). Power generated is evacuated to the CEB grid through the existing transmission lines” (Ibid, p.4).

The material presented above clearly demonstrates that a real opportunity exists to double the capacity at Victoria using a resource that is not only the cleanest and cheapest resource to generate power but also one that allows these freely available resources to be wasted without making full use of their potential. It is indeed a serious omission to pursue new power generation units such as at Kerawalapitiya without expanding capacities at existing power generation units such as at Victoria.

TRANSFER of WATER to the NORTH

Yet another contradiction is the construction of the Upper Elahera Canal to transfer water from Moragahakanda to the Iranamadu Tank in the Northern Province. To achieve such an objective, it is necessary to transfer a considerable volume of water from Randenigala which is below the Victoria Hydropower Scheme back to Moragahakanda and in the process, to not only lose the power generating capacity at Randenigala but also to drastically affect the current supply of water to the right and left banks of the Mahaweli at Minipe.

There are several Reports addressing this issue of supplying much needed water to the North Central Province (NCP) and the Northern Province (NP). The concept of diverting water from the South to the North are central to a majority of the Reports because their studies have revealed that current arrangements do not have the capacity to deliver water to the NCP and the NP.

For instance, Paragraph 21 (p. 343) of the Report dated December 2014 prepared for the Ministry Irrigation and Water Resources Management by Technical Assistance Consultant on behalf of the ADB states: “The study has shown an increase in the diversion capacity at Moragahakanda to 974 MCM annually, required for the Upper Elahera Canal (UEC) and NCP canals addition to 617 MCM to the Elehera Minneriya Yoda Ela. The supplemental diversions from Kalu Ganga (772 MCM) Bowatenna (496 MCM) reservoirs and its own watershed (344 MCM) are adequate to cater the water demands under UEC.”

The conclusion that “adequate” water exists to deliver 974 MCM to the UEC and through it to the North Central and Northern Provinces depends on the availability of 772 MCM through the Kalu Ganga. Since arrangements to deliver the 772 MCM currently DO NOT exist, what is available is the water diverted from Bowatenna, namely 496 MCM and the 344 MCM in the existing catchments, making a total of 840 MCM minus the 617 MCM needed for the ancient five tanks from the Elahera Yoda Ela.

Therefore, what possibly could be transferred by the Upper Elahera Canal is 223 MCM. This is less than the 281 MCM intended to be transferred to Mannakkattiya-Eruwewa-Mahakandarawa (155 MCM) and 126 MCM to Huruluwewa according to paragraph 151 in the Report titled “Environment Impact Assessment Report” prepared for the Ministry of Irrigation and Water Resources Management” by the Mahaweli Consultancy Bureau (Pvt) Ltd. in December 2014.

In an independent study carried out by SMEC International (Pvt) Ltd for the World Bank titled “Updated Mahaweli Water Resources Development Plan”, dated November 2013 states in Appendix 5 Table 5.1, p.9 that the Downstream Release from Bowatenne as 651 MCM, the catchment inflow into Moragahakanda as 313 MCM and the release to the five ancient tanks from the Elahera-Minneriya Yoda Ela as 573 MCM. Therefore, water available for transfer to Upper Elahera Canal is 651+313= 964 MCM less 573 MCM, which is 391 MCM. Thus, the quantity of water in excess of what is needed for Mannakkattiya-Eruwewa-Mahakandarawa (155 MCM) and 126 MCM to Huruluwewa) is 110 MCM. Thus, this report confirms the findings of the previous report that there is insufficient water to meet water demands to the areas beyond Anuradhapura to the NCP and the NP.

The conclusions that could be objectively reached from the analysis of data in both reports is that as long as no arrangements exist to transfer water from Randenigala to Moragahakanda the quantities of water available are NOT sufficient to meet the demands of the NCP and the NP.

The proposal therefore is to transfer water from Randenigala augmented by water from Hasalaka Oya and Heen Ganga along the way together with water in 128 sq. km of the Kalu Ganga catchment (say76 MCM) to meet the demands for water in the NCP and NP. Since the water demands in these two small tanks are 75 and 56 MCM respectively, Randenigala would need to divert 772MCM less (76+75+56) which is 565 MCM annually. Diverting 565 MCM of water from Randenigala, which is equal to the active capacity of the reservoir would have a serious impact not only on power generation but also on the amount of water available for diversion to the right and left banks of the Mahaweli at Minipe. Therefore, diverting water to Moragahakanda from Randenigala is NOT an option. Diverting water to the NCP and NP at the expense of power generation and water availability to the East of Sri Lanka is a clear instance of contradictory policies that have been actively pursued by successive governments.

CONCLUSION

What is evident from a review of the projects cited above is that they are conceived and conceptualized in isolation without taking a holistic view at the planning stage and taking into account the impact of either ongoing projects or projects that are planned to be implemented. The three topics reviewed are, the New Fortress Energy(NFE) proposal to increase the power generation capacity at Kerawalapitiya, not capitalizing the capabilities to nearly double the generating capacity at Victoria and the delivery of water to the North.

For instance, the CEB had called for international bids to install a 350 MW LNG plant at Kerawalapitiya. Prior to the closing of bids, the government entered into a Framework Agreement with NFE to build two 350 MW LNG plants alongside the existing 300 MW plant at Kerawalapitiya together with a Floating Storage Regasification Unit (FSRU) to handle the LNG. The generating capacity at Kerawalapitiya would then be 1010 MW. In the meantime, the existing 900 MW coal fired at Norocholai would continue to belch pollutants associated with coal-fire power units. Therefore, the intended project should be redefined to convert the plant at Norochcholai to LNG and for the FSRU that was to be built at Kaeawalapitiya to be moved to Norochcholai. In addition, the needed increase in power generation should be met by doubling the capacity at Victoria as suggested in a Report to the Ministry of Power and Energy prepared by Japan International Cooperation Agency with any shortcomings being provided by Renewable Energy.

With regard to delivery of water to the North, the data presented above clearly demonstrates that as long as current levels of diversion from Bowatenna continue and water from its own catchments prevail, the quantities of water at Moragahakanda are insufficient to meet the demands in the NCP and NP. The ONLY way water demands of the NCP and NP could be met through the Upper Elahera Canal is by transferring nearly 565 MCM, which is equal to the active capacity of Randenigala Reservoir to Moragahakanda. The impact of transferring such a significant amount of water would not only be to curtail power generation but also to impact seriously on availability of water to fulfill the needs on the right and left banks of the Mahaweli at Minipe. This is a clear example of the policy of Mahaweli water to the North contradicting the policy of power generation and supply of water for agriculture.

These hard realities are known only to a few. Consequently, the expectation that water would eventually reach the North is so real that the general belief is that water to the North from the South is what would unify Sri Lanka. Therefore, it is imperative that measures are adopted to correct these misplaced perceptions and for alternative strategies to be developed to meet the demands for water in the NCP and the NP with the participations of the people concerned.

It is hoped that the material presented above would alert governments and project planners to take a holistic perspective when projects are conceptualized and not take compartmentalized approaches as demonstrated by the few examples cited above.



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Features

Banking Rules fail the elderly and informal sector

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Yesterday, I received a phone call from a well-known private bank. A polite female voice on the line asked whether I was interested in obtaining a housing loan. Knowing how things typically work in the Sri Lankan banking system, I decided not to waste her time—or mine. So, I responded candidly: “I’m over 60. Are you still interested in offering your service to me?”

As expected, she politely replied, “No sir, we offer housing loans only to customers below the age of 60.”

Now, let’s think about this for a moment. If you’re 59 years old, does that mean the bank will give you a housing loan with just a one-year repayment period? Apparently, yes. What kind of absurd banking logic is this? Such rigid age cut-offs do not reflect risk management, but sheer bureaucratic laziness.

Banks and other financial institutions follow rules set by the Central Bank of Sri Lanka. One of the main reasons for these rules is to protect the money that people deposit. Figure 1 shows one of those orders to regulate home loans provided by banks.

Employees are to provide banks with confirmation from their respective employer regarding the retirement date/age, as applicable. This requirement introduces administrative friction for the borrower and places unnecessary dependence on employer documentation. Many private sector employers do not maintain strict retirement policies, and contract-based employment has become common. Mandating employer confirmation becomes especially problematic in such cases.

Eligibility Criteria for Housing Loans Under the Terms of This Order (Effective from 10 December 2020) specify the following individuals are eligible to obtain housing loans:

Salaried Employees

* Individuals must be employed in either the public sector (e.g., government departments, state-owned enterprises) or the private sector (e.g., registered companies, private institutions).

Confirmed in Service

* The employment must be confirmed, i.e., the borrower should have completed any probationary period and be in permanent or long-term service. Probationary employees or temporary/contract workers may not be eligible under this order.

This eligibility criterion is narrow and exclusionary, especially in an evolving labour market where:

* Many skilled workers are self-employed, on a contract basis or work in the gig economy would find hard to provide evidence to prove their repayment capacity.

* Job confirmation timelines are often extended due to changing employment practices.

* Real estate investment is increasingly seen as a retirement or family-planning strategy, including among older or self-funded individuals.

While the intent may be to minimise risk for banks by ensuring repayment capacity and employment stability, this overly conservative approach may discriminate against capable, creditworthy individuals, especially older citizens or those outside traditional salaried employment structures.

Tenure of a loan

Figure 2

is an excerpt from the directive issued by CBSL, highlighting the restrictions imposed on the tenure of home loans.

Interestingly, Deshamanya Lalith Kotelawela was one of the few who had the courage—and arguably the foresight—to challenge such irrational norms. While some of his business decisions were controversial, especially the appointment of non-professionals to key financial roles, his thinking on housing loans for older customers was progressive. He proposed that housing loans should be extended even to individuals aged between 60 and 70, with repayment periods of 20 to 30 years. However, he also recommended attaching insurance to these loans—an approach that could benefit his own insurance companies. Naturally, the premiums would be significantly higher for older or higher-risk borrowers.

His reasoning was rooted in both financial logic and social realism: in most Sri Lankan families, children would never allow their parents to lose the family home. In the worst-case scenario, the property—often the most secure asset one can offer—serves as reliable collateral. From a regulatory standpoint, too, this makes sense. According to the Basel framework for banking supervision, residential mortgage loans carry a risk weight of only 50% when calculating capital adequacy. That means such loans are already considered relatively low risk.

So, why are banks clinging to these outdated, “one-size-fits-all” rules that ignore real-world dynamics, demographic shifts, and even their own financial regulations?

These are not just outdated policies—they are stupid banking rules.

Age Discrimination and Financial Exclusion

This condition is fundamentally age-based and introduces structural discrimination against older borrowers. By linking repayment tenure strictly to the borrower’s retirement date, it disproportionately excludes capable individuals nearing retirement—even if they are financially stable, have substantial savings or collateral, or have alternative income sources such as pensions, business income, or rental properties. It presumes that retirement equals financial incapacity, which is not always true in the modern economy. Today, some retired government employees receive monthly pensions exceeding Rs. 100,000.

Ignores Multigenerational and Alternative Repayment Scenarios

This policy does not account for cases where a housing loan is taken for the benefit of the family, and repayment responsibility can logically transfer to a younger family member (such as an adult child or co-borrower). In South Asian cultures especially, joint-family structures and intergenerational financial support are common. Denying long-tenure loans, based on an individual’s remaining years of employment, ignores these sociocultural realities.

Penalises Those Who Start Later

Not everyone begins salaried employment early in life. Some people shift careers, pursue entrepreneurship, or even migrate and return to salaried employment later. Under this rule, a 45-year-old starting a government job would be eligible only for a 15-year loan, regardless of income or asset base. This rigid approach fails to reflect the dynamic nature of modern work and life paths.

Common sense

Banking is often celebrated as a sector driven by logic, data, and risk mitigation. Yet, it is riddled with regulations and practices that are outdated, unempathetic, and at times, downright illogical. A prime example of this is the age discrimination embedded in housing loan policies in many Sri Lankan banks—and indeed in banks across much of the world. The author’s anecdote of receiving a call from a reputed private bank offering a housing loan, only to be told that customers over 60 are ineligible, highlights a major flaw in modern banking systems.

At the heart of this issue lies a fundamental contradiction: while banks are supposed to be institutions that assess individual risk, they often make blanket decisions based on crude demographics such as age. If a person is 59 years old, they are technically eligible for a loan, but only for a tenure of one year, assuming the cut-off age is 60. That assumption, of course, is absurd. Imagine a healthy, wealthy 59-year-old customer being allowed to borrow only on terms designed for a dying man. This “stupid banking rule” lacks nuance and punishes individuals who might otherwise be low-risk borrowers with good collateral.

The Need for Reform

Age should not be the sole determinant of loan eligibility. In an era where people live longer, work well into their seventies, and often own significant assets, banking institutions must adopt more flexible, holistic credit assessment methods. Factors like health, income stability, family support, insurance coverage, and asset base must be considered alongside age.

Additionally, banks should be encouraged—or even regulated—to adopt inclusive lending practices. Policies that facilitate family-based guarantees, property-backed loans with transfer clauses, or reverse mortgage models can ensure that elderly individuals are not financially excluded.

(The writer, a senior Chartered Accountant and professional banker, is Professor at SLIIT, Malabe. He is also the author of the “Doing Social Research and Publishing Results”, a Springer publication (Singapore), and “Samaja Gaveshakaya (in Sinhala). The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official policy or position of the institution he works for. He can be contacted at saliya.a@sliit.lk and www.researcher.com)

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Trump tariffs and their effect on world trade and economy with particular

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Apparels

reference to Sri Lanka – Part III

(Continued from yesterday)

Textile Industry Significance

The textile and apparel sector holds outsised importance in Sri Lanka’s economy. It accounts for approximately 40% of the country’s total exports and directly employs around 350,000 workers, predominantly women from rural areas, for whom these jobs represent a crucial pathway out of poverty. When indirect employment in supporting industries is included, the sector supports the livelihoods of over one million Sri Lankans.

The industry’s development was initially facilitated through quotas assigned by the Multi-Fiber Agreement (1974-1994), which allocated specific export volumes to developing countries. When this agreement expired, Sri Lanka managed to maintain its position in global apparel supply chains by focusing on higher-value products, ethical manufacturing practices, and reliability. The country has positioned itself as a producer of quality garments, particularly lingerie, activewear, and swimwear for major global brands.

However, this success has created a structural dependency on continued access to markets in wealthy countries, particularly the United States. As the Secretary General of the Joint Apparel Association Forum, the main representative body for Sri Lanka’s

apparel and textile exporters, bluntly stated following the tariff announcement, “We have no alternate market that we can possibly target instead of the US.”

This dependency is reinforced by the industry’s integration into global supply chains dominated by U.S. brands and retailers. Many Sri Lankan factories operate on thin margins as contract manufacturers for these international companies, with limited ability to quickly pivot to new markets or product categories. The industry has also made significant investments in compliance with U.S. buyer requirements and sustainability certifications, creating path dependencies that make rapid adaptation to new market conditions extremely challenging.

The textile and apparel sector’s significance extends beyond its direct economic contributions. It has been a crucial source of foreign exchange earnings for a country that has consistently run trade deficits and struggled with external debt sustainability. In the ten years leading up to Sri Lanka’s default on external debt (2012-2021), debt repayments amounted to an average of 41% of export earnings, highlighting how vital steady export revenues are to the country’s ability to service its international obligations.

The sector has also played an important role in Sri Lanka’s social development, providing formal employment opportunities for women and contributing to poverty reduction in rural areas. Many of the industry’s workers are the primary breadwinners for their families, and their wages support extended family networks in economically disadvantaged regions of the country.

Given this context, the imposition of a 44% tariff on Sri Lankan goods, with the textile and apparel sector likely to bear the brunt of the impact, represents not merely an economic challenge but a potential social crisis for hundreds of thousands of vulnerable workers and their dependents.

SPECIFIC IMPACT OF TRUMP TARIFFS ON SRI LANKA

The imposition of a 44% tariff on Sri Lankan exports to the United States represents a seismic shock to an economy still recovering from its worst crisis in decades. This section examines the immediate economic consequences, the implications for Sri Lanka’s debt sustainability, and the broader social and political ramifications of this dramatic policy shift.

Immediate Economic Consequences

The most immediate impact of President Trump’s tariffs will be a severe erosion of Sri Lankan goods’ competitiveness in the U.S. market. A 44% price increase effectively prices many Sri Lankan products out of reach for American consumers and businesses, particularly in price-sensitive categories like apparel, where margins are already thin and competition from other producing countries is intense.

Economic analysts project significant declines in export volumes as a result. The PublicFinance.lk think tank estimates that the new tariff rates will lead to a 20% fall in exports to America and an annual loss of approximately $300 million in foreign exchange earnings. Given that Sri Lanka’s total merchandise exports in 2024 were around $13 billion, this represents a substantial blow to the country’s trade balance and economic growth prospects.

The textile and apparel sector will bear the brunt of this impact. Industry representatives have warned that numerous factories may be forced to reduce production or close entirely if they cannot quickly find alternative markets for their products. The Joint Apparel Association Forum has indicated that smaller manufacturers with less diversified customer bases and limited financial reserves will be particularly vulnerable to closure.

These production cutbacks and potential closures would translate directly into job losses. Conservative estimates suggest that tens of thousands of workers in the textile sector could lose their livelihoods if the tariffs remain in place for an extended period. Given that many of these workers are women from rural areas with limited alternative employment opportunities, the social impact of these job losses would be particularly severe.

Beyond the direct effects on textile exports, the tariffs will have ripple effects throughout Sri Lanka’s economy. Supporting industries such as packaging, logistics, and input suppliers will face reduced demand. The loss of foreign exchange earnings will put pressure on the Sri Lankan rupee, potentially leading to currency depreciation that would increase the cost of essential imports including fuel, food, and medicine.

The timing of these tariffs is especially problematic given Sri Lanka’s fragile economic recovery. After experiencing a GDP contraction of 7.8% in 2022 during the height of the economic crisis, the country had only recently returned to modest growth. The IMF had projected GDP growth of 3.1% for 2025, but this forecast now appears overly optimistic in light of the tariff shock. Some economists are already revising their growth projections downward, with some suggesting growth could fall below 2% if the full impact of the tariffs materializes. We must hope they will be proven wrong.

Impact on Sri Lanka’s Debt Sustainability

Perhaps the most concerning aspect of Trump’s tariffs is their potential to undermine Sri Lanka’s hard-won progress on debt sustainability. After defaulting on its external debt in April 2022, the country has undergone a painful restructuring process that concluded only in December 2024. This restructuring was predicated on assumptions about Sri Lanka’s future ability to generate foreign exchange to service its remaining debt obligations.

The IMF’s debt sustainability analysis, which formed the basis for the restructuring agreement, focused almost exclusively on debt as a share of GDP while making insufficient distinction between domestic and foreign debt. This approach has been criticized for ignoring the structural trade deficit and the critical importance of foreign currency earnings to Sri Lanka’s ability to meet its external obligations.

The $300 million annual reduction in export earnings projected as a result of the tariffs directly threatens these calculations. Sri Lanka’s external debt stood at approximately $55 billion in 2023 (about 65% of its GDP), and even after restructuring, debt service payments will consume a significant portion of the country’s foreign exchange earnings in coming years.

In the decade preceding Sri Lanka’s default (2012-2021), debt repayments consumed an average of 41% of export earnings, an unsustainably high ratio that contributed directly to the eventual crisis. The loss of export revenues due to President Trump’s tariffs risks pushing this ratio back toward dangerous levels, potentially setting the stage for renewed debt distress despite the recent restructuring.

This situation highlights a fundamental flaw in the approach taken by international financial institutions to debt sustainability in developing countries. Unlike the treatment afforded to West Germany through the London Debt Agreement of 1953, where future debt repayments were explicitly linked to the country’s trade surplus and capped at 3% of export earnings—Sri Lanka and similar countries are expected to meet rigid repayment schedules regardless of their trade performance or external shocks beyond their control.

The tariffs thus expose the precariousness of Sri Lanka’s economic recovery and the fragility of the international debt architecture that underpins it. Without significant adjustments to account for this external shock, the country could find itself sliding back toward debt distress despite all the sacrifices made by its people during the recent adjustment period.

Social and Political Implications

The economic consequences of Trump’s tariffs will inevitably translate into social and political challenges for Sri Lanka. The country has already experienced significant social strain due to the austerity measures implemented under the IMF program, including tax increases, subsidy reductions, and public sector wage restraint. The additional economic pain caused by export losses and job cuts risks exacerbating social tensions and potentially triggering renewed protests.

The textile industry’s workforce is predominantly female, with many workers supporting extended family networks. Job losses in this sector would therefore have disproportionate impacts on women’s economic empowerment and household welfare, potentially reversing progress on gender equality and poverty reduction. Many of these workers come from rural areas where alternative formal employment opportunities are scarce, raising the spectre of increased rural poverty and potential migration pressures.

Politically, the tariff shock presents a significant challenge for President Anura Kumara Dissanayake’s government, which came to power promising economic revival and relief from the hardships of the crisis period. The administration has appointed an advisory committee consisting of government officials and private sector representatives to study the impact of the tariffs and develop response strategies, but its options are constrained by limited fiscal space and the conditions of the IMF programme.

The situation also raises questions about Sri Lanka’s foreign policy orientation. The country has traditionally maintained balanced relationships with major powers, including the United States, China, and India. However, the unilateral imposition of punitive tariffs by the United States may prompt some policymakers to reconsider this balance and potentially look more favourably on economic engagement with China, which has been a major infrastructure investor in Sri Lanka through its Belt and Road Initiative.

Such a reorientation would have significant geopolitical implications in the Indian Ocean region, where great power competition has intensified in recent years. It could potentially accelerate the fragmentation of the global economy into competing blocs, a trend that President Trump’s broader tariff policy seems designed to encourage despite its economic costs.

The social and political fallout from the tariffs thus extends far beyond immediate economic indicators, potentially reshaping Sri Lanka’s development trajectory and its place in the regional and global order. For a country still recovering from political instability triggered by economic crisis, these additional pressures come at a particularly vulnerable moment.

BROADER IMPLICATIONS FOR DEVELOPING ECONOMIES

Sri Lanka’s experience with Trump’s tariffs is not unique. The sweeping nature of these trade measures has created similar challenges for developing economies across the Global South, revealing structural vulnerabilities in the international economic system and raising fundamental questions about the sustainability of export-led development models in an era of rising protectionism.

Comparative Analysis with Other Affected Developing Countries

While Sri Lanka faces a punishing 44% tariff rate, it is not alone in confronting severe trade barriers. Bangladesh, another South Asian country heavily dependent on textile exports, has been hit with a 37% tariff. Like Sri Lanka, Bangladesh has built its development strategy around its garment industry, which accounts for more than 80% of its export earnings and employs approximately 4 million workers, mostly women.

Other significantly affected developing economies include Vietnam (46% tariff), Cambodia (49%), Pakistan (29%), and several African nations that had previously benefited from preferential access to the U.S. market through programs like the African Growth and Opportunity Act (AGOA). Many of these countries share common characteristics, relatively low per capita incomes, heavy reliance on a narrow range of export products, and limited domestic markets that make export-oriented growth their primary development pathway.

The pattern of tariff rates reveals a troubling dynamic, some of the highest tariffs have been imposed on countries that can least afford the economic shock. While wealthy nations like Japan or Germany certainly face challenges from these trade

barriers, they possess diversified economies, substantial domestic markets, and financial resources to cushion the impact. By contrast, countries like Sri Lanka or Bangladesh have far fewer economic buffers and face potentially devastating consequences from similar or higher tariff rates.

This disparity highlights how President Trump’s “reciprocal tariff” formula, ostensibly designed to create a level playing field, actually reinforces existing power imbalances in the global economy. By treating trade deficits as the primary metric for determining tariff rates, the policy ignores the vast differences in economic development, productive capacity, and financial resilience between countries at different stages of development.

Structural Vulnerabilities of Export-Dependent Economies

The tariff shock has exposed fundamental vulnerabilities in the export-led development model that has dominated economic thinking about the Global South for decades. Since the 1980s, international financial institutions have consistently advised developing countries to orient their economies toward export markets, specialize according to comparative advantage, and integrate into global value chains as a path to economic growth and poverty reduction.

This model has delivered significant benefits in many cases. Countries like Vietnam, Bangladesh, and, to some extent, Sri Lanka have achieved impressive poverty reduction and economic growth by expanding their manufacturing exports. However, President Trump’s tariffs reveal the precariousness of development strategies built on continued access to wealthy consumer markets, particularly the United States.

Several structural vulnerabilities have become apparent,

1. First, export concentration creates acute dependency on a small number of markets and products. When Sri Lanka sends 23% of its exports to the United States and concentrates 40% of its total exports in textiles and apparel, it becomes extraordinarily vulnerable to policy changes affecting that specific market-product combination.

Diversification, both of export markets and products, has often been acknowledged as desirable in theory but has proven difficult to implement in practice due to established trade patterns, buyer relationships, and specialized production capabilities.

2. Second, participation in global value chains often traps developing countries in lower-value segments of production with limited opportunities for upgrading. Sri Lanka’s textile industry, while more advanced than some of its regional competitors, still primarily engages in contract manufacturing rather than controlling higher-value activities like design, branding, or retail. This position in the value chain yields lower returns and creates dependency on decisions made by lead firms in wealthy countries.

3. Third, the mobility of capital relative to labour creates a fundamental power imbalance. If tariffs make production in Sri Lanka uneconomical, global brands can relatively quickly shift their sourcing to other countries with lower tariffs or costs. However, Sri Lankan workers cannot similarly relocate, leaving them bearing the brunt of adjustment costs through unemployment and wage depression.

4. Fourth, developing countries typically lack the fiscal space to provide adequate social protection during economic shocks. Unlike wealthy nations that can deploy extensive safety nets during trade disruptions, countries like Sri Lanka, already implementing austerity measures under IMF programmes, have limited capacity to support displaced workers or affected industries. This exacerbates the social costs of trade shocks and can trigger political instability. (To be continued)

(The writer served as the Minister of Justice, Finance and Foreign Affairs of Sri Lanka)

Disclaimer:

This article contains projections and scenario-based analysis based on current economic trends, policy statements, and historical behaviour patterns. While every effort has been made to ensure factual accuracy, using publicly available data and established economic models, certain details, particularly regarding future policy decisions and their impacts, remain hypothetical. These projections are intended to inform discussion and analysis, not to predict outcomes with certainty.

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Opportunity for govt. to confirm its commitment to reconciliation

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Minister Herath at UNHRC

by Jehan Perera

The international system, built at the end of two world wars, was designed with the aspiration of preserving global peace, promoting justice, and ensuring stability through a Rules-Based International Order. Institutions such as the United Nations, the UN Covenants on Human Rights and the United Nations Human Rights Council formed the backbone of this system. They served as crucial platforms for upholding human rights norms and international law. Despite its many imperfections, this system remains important for small countries like Sri Lanka, offering some measure of protection against the pressures of great power politics. However, this international order has not been free from criticism. The selective application of international norms, particularly by powerful Western states, has weakened its legitimacy over time.

The practice of double standards, with swift action in some conflicts like Ukraine but inaction in others like Palestine has created a credibility gap, particularly among non-Western countries. Nevertheless, the core ideals underpinning the UN system such as justice, equality, and peace remain worthy of striving towards, especially for countries like Sri Lanka seeking to consolidate national reconciliation and sustainable development. Sri Lanka’s post-war engagement with the UNHRC highlights the tensions between sovereignty and accountability. Following the end of its three-decade civil war in 2009, Sri Lanka faced multiple UNHRC resolutions calling for transitional justice, accountability for human rights abuses, and political reforms. In 2015, under Resolution 30/1, Sri Lanka co-sponsored a landmark commitment to implement a comprehensive transitional justice framework, including truth-seeking, reparations, and institutional reforms.

However, the implementation of these pledges has been slow and uneven. By 2019, Sri Lanka formally withdrew its support for UNHRC Resolution 30/1, citing concerns over sovereignty and external interference. This has led to a deepening cycle with more demanding UNHRC resolutions being passed at regular intervals, broadening the scope of international scrutiny to the satisfaction of the minority, while resistance to it grows in the majority community. The recent Resolution 51/1 of 2022 reflects this trend, with a wider range of recommendations including setting up of an external monitoring mechanism in Geneva. Sri Lanka today stands at a critical juncture. A new government, unburdened by direct involvement in past violations and committed to principles of equality and inclusive governance, now holds office. This provides an unprecedented opportunity to break free from the cycle of resolutions and negative international attention that have affected the country’s image.

KEEPING GSP+

The NPP government has emphasised its commitment to treating all citizens equally, regardless of ethnicity, religion, or region. This commitment corresponds with the spirit of the UN system, which seeks not to punish but to promote positive change. It is therefore in Sri Lanka’s national interest to approach the UNHRC not as an adversary, but as a partner in a shared journey toward justice and reconciliation. Sri Lanka must also approach this engagement with an understanding of the shortcomings of the present international system. The West’s selective enforcement of human rights norms has bred distrust. Sri Lanka’s legitimate concerns about double standards are valid, particularly when one compares the Western response to Russia’s invasion of Ukraine with the muted responses to the plight of Palestinians or interventions in Libya and Iraq.

However, pointing to hypocrisy does not absolve Sri Lanka of its own obligations. Indeed, the more credible and consistent Sri Lanka is in upholding human rights at home, the stronger its moral position becomes in calling for a fairer and more equitable international order. Engaging with the UN system from a position of integrity will also strengthen Sri Lanka’s international partnerships, preserve crucial economic benefits such as GSP Plus with the European Union, and promote much-needed foreign investment and tourism. The continuation of GSP Plus is contingent upon Sri Lanka’s adherence to 27 international conventions relating to human rights, labour rights, environmental standards, and good governance. The upcoming visit of an EU monitoring mission is a vital opportunity for Sri Lanka to demonstrate its commitment to these standards. It needs to be kept in mind that Sri Lanka lost GSP Plus in 2010 due to concerns over human rights violations. Although it was regained in 2017, doubts were raised again in 2021, when the European Parliament called for its reassessment, citing the continued existence and use of the Prevention of Terrorism Act (PTA) and broader concerns about rule of law.

The government needs to treat the GSP Plus obligations with the same seriousness that it applies to its commitments to the International Monetary Fund. Prior to the elections, the NPP pledged to repeal the PTA if it came to power. There are some cases reported from the east where trespass of forest had been stated as offences and legal action filed under the PTA in courts which had been dragging for years, awaiting instructions from the Attorney General which do not come perhaps due to over-work. But the price paid by those detained under this draconian law is unbearably high. The repeal or substantial reform of the PTA is urgent, not only to meet human rights standards but also to reassure the EU of Sri Lanka’s sincerity. The government has set up a committee to prepare new legislation. The government needs to present the visiting EU delegation with a credible and transparent roadmap for reform, backed by concrete actions rather than promises. Demonstrating goodwill at this juncture will not only preserve GSP Plus but also strengthen Sri Lanka’s hand in future trade negotiations and diplomatic engagements.

INTERNATIONAL PARTNERSHIP

The government’s recent emphasis on good governance, economic recovery, and anti-corruption is a positive foundation. But as experience shows, economic reform alone is insufficient. Political reforms, especially those that address the grievances of minority communities and uphold human rights, are equally critical to national stability and prosperity. There is a recent tendency of the state to ignore these in reality and announce that there is no minority or majority as all are citizens, but which is seen by the minorities as sweeping many issues under the carpet.

Examples give are the appointment of large number of persons from the majority community to the council of Eastern University whose faculty is mainly from the minority communities or the failure to have minority representation in many high level state committees. Neglecting these dimensions risks perpetuating internal divisions and giving ammunition to external critics. The government’s political will needs to extend beyond economic management to genuine national reconciliation. Instead of being seen as a burden, meeting the EU’s GSP Plus obligations and those of UNHRC Resolution 51/1 can be viewed as providing a roadmap.

The task before the government is to select key areas where tangible progress can be made within the current political and institutional context, demonstrating good faith and building international confidence. Several recommendations within Resolution 51/1 can be realistically implemented without compromising national sovereignty. Advancing the search for truth and providing reparations to victims of the conflict, repealing the Prevention of Terrorism Act, revitalising devolution both by empowering the elected provincial councils, reducing the arbitrary powers of the governors as well as through holding long-delayed elections are all feasible and impactful measures. The return of occupied lands, compensation for victims, and the inclusion of minority communities in governance at all levels are also steps that are achievable within Sri Lanka’s constitutional framework and political reality. Crucially, while engaging with these UNHRC recommendations, the government needs to also articulate its own vision of reconciliation and justice. Rather than appearing as if it is merely responding to external pressure, the government should proactively frame its efforts as part of a homegrown agenda for national renewal. Doing so would preserve national dignity while demonstrating international responsibility.

The NPP government is unburdened by complicity in past abuses and propelled by a mandate for change. It has a rare window of opportunity. By moving decisively to implement assurances given in the past to the EU to safeguard GSP Plus and engaging sincerely with the UNHRC, Sri Lanka can finally extricate itself from the cycle of international censure and chart a new path based on reconciliation and international partnership. As the erosion of the international rules-based order continues and big power rivalries intensify, smaller states like Sri Lanka need to secure their positions through partnerships, and multilateral engagement. In a transactional world, in which nothing is given for free but everything is based on give and take, trust matters more than ever. By demonstrating its commitment to human rights, reconciliation, and inclusive governance, not only to satisfy the international community but also for better governance and to develop trust internally, Sri Lanka can strengthen its hand internationally and secure a more stable and prosperous future.

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