Business
Russia-Ukraine conflict: Economic implications for Sri Lanka
By Asanka Wijesinghe
The Russian invasion of Ukraine deepens the existing global economic woes – persistent supply chain bottlenecks and associated rising inflation – clouding the prospects of a smooth global economic recovery from the pandemic. The West, led by the US and the EU, swiftly imposed strict economic sanctions, targetting Russian banks, oligarchs, political leaders, and state-owned and private entities, generating additional uncertainty over the global economic outlook. The initial disunity in the West on cutting off Russia from SWIFT-a global financial telecommunication system that allows the smooth and rapid cross-border transaction of money- was resolved over the weekend. Such a move will inevitably make payments for Russian exports and imports hard. The ongoing military conflict in Europe could not have come at a worse time for Sri Lanka given its own prevailing high inflation, rising energy costs, and scarcity of foreign exchange. Against this backdrop, this article discusses the economic impact of the European conflict on Sri Lanka, the sectors that will be hit hard, and ways to mitigate the negative impact.
Global Economic Impact
Immediately after the Russian invasion on 24 February, commodity markets rallied up. The Brent spot price of a crude oil barrel reached USD 105 for the first time after 2014. Similarly, the cost of wheat futures for March 2022 in the Chicago Board of Trade (CBOT) exchange peaked, at its highest since mid-2008 (Figure 1). The Russian Federation and Ukraine-known as Europe’s breadbasket- are major cereal, fertiliser, critical minerals, and iron and steel exporters. Meanwhile, the Western powers were busy over the weekend in negotiations to tighten sanctions on Russia.
While the fate of Ukraine hangs in the balance, the consensus among analysts is that the Ukrainians were mounting a fierce and unexpected resistance, effectively increasing the costs for Russia. The US, EU and their allies are contributing to the military conflict by providing financial and military assistance to Ukraine while imposing sanctions on Russia to make dollar transactions difficult. Thus, the severity of the global economic impact will be determined by the scope and duration of the conflict and the effectiveness of Western sanctions.
Western countries will be keen to minimise the spillover effects of sanctions on their economies. Like Germany, the major European economies heavily depend on Russian energy, making it necessary to exempt the energy sector from sanctions. Indeed, the sanctions package unveiled by the Biden administration did not target the energy sector. As long as payments for energy-related transactions go through non-sanctioned and non-US financial institutions, an unconstrained flow of money is guaranteed. Thus, oil prices dropped with futures closing below USD 93 a barrel in New York. However, that optimism was largely fading in early trade on 28 February. The Brent price rallied over 100 dollars again while wheat, soybean, and corn futures were up. Cutting off Russia from SWIFT and imposing sanctions on the Russian Central Bank can deal a severe blow to the Russian economy in the long run. The collapsing ruble can be a harbinger of Russia’s economic collapse. A possible economic fallout will reduce Russian demand for foreign products, and if Russia cuts off natural gas to the European market, a likely outcome will be a recession.
Implications for Sri Lanka
Overall, Russia and Ukraine account for 2% of Sri Lanka’s imports and 2.2% of exports in 2020. However, both countries are vital import sources for wheat and export destinations for Sri Lanka’s black tea (Figure 2 and 3). Russia and Ukraine purchase about 18% of fermented black tea (>3kg) exported by Sri Lanka. Similarly, 45% of Sri Lanka’s wheat imports are sourced from Russia and Ukraine. In addition, more than half of Sri Lanka’s imported soybeans, sunflower oil and seeds, and peas are from Ukraine. Moreover, Russia and Ukraine are significant import sources for asbestos, semi-finished products of iron and steel, copper (cathodes), and potassium chloride for fertiliser.
Unless the Ukraine crisis is not solved immediately, the fuel and commodity prices can rally further. The inflationary pressure in the Western markets, especially in Europe due to high energy prices and supply chain bottlenecks, may reduce consumers purchasing power, lowering the demand for goods exported by Sri Lanka. Europe is a significant export destination for readymade garments, tea and spices, and seafood.
There is also a growing tendency for increased military expenditure in the long run, which might reduce the “peace dividends” for European households. For example, the German Chancellor committed 2% of GDP for defence expenditure, addressing an extraordinary session of Bundestag. Replacing consumerism with militarism will adversely affect countries like Sri Lanka that depend on the European export market. In addition, a prolonged crisis may impede Sri Lanka’s ability to purchase necessary raw materials like fertiliser. Importantly, Sri Lanka’s exposure to the situation is mainly through linkages to the commodity and European export markets rather than direct exposure to the two countries involved in the conflict.
Mitigation
Sri Lanka should focus on safeguarding access to vital raw materials and food commodities. Globally, responding to the crisis, countries are stockpiling grain and exploring alternative ways to do business with Russia in purchasing raw materials. Sri Lanka has limited options to mitigate the impact on already deteriorating food security conditions and access to raw materials. As wheat and rice are substitutes, high wheat prices may increase the demand for rice.
Thus, it is necessary to remove input shortages like fertiliser to ensure domestic production is adequate. Due to the current foreign exchange crisis, Sri Lanka’s ability to effectively face such shocks is constrained. Thus, the urgent priority is to resolve the current foreign exchange crisis to regain the ability to trade swiftly. Achieving debt sustainability and securing dollar inflows from multilateral institutes might be the options at Sri Lanka’s disposal. Then, entering forward contracts for raw materials and fuel and negotiations with friendly countries for food on predetermined prices are possibilities.
Link to Talking Economics blog:
Russia-Ukraine Conflict: Economic Implications for Sri Lanka
Asanka Wijesinghe is a Research Fellow at IPS with research interests in macroeconomic policy, international trade, labour and health economics. He holds a BSc in Agricultural Technology and Management from the University of Peradeniya, an MS in Agribusiness and Applied Economics from North Dakota State University, and an MS and PhD in Agricultural, Environmental and Development Economics from The Ohio State University. (Talk with Asanka – asanka@ips.lk)
Notes upcoming elections are for the people of Sri Lanka to decide
Puts the questions on Bangladesh and Sri Lanka in one basket
By Sanath Nanayakkare
Sri Lanka needs to allow reforms to continue for a period of time, Julie Kozack, Director of the Communications Department, IMF said on September 12, 2024, according to the transcript of an IMF press briefing.Notably she made this comment while taking questions on Sri Lanka and crisis-hit Bangladesh in combination, during the press conference.
“Okay. Any questions on Sri Lanka or Bangladesh?” she asked, upon which, a questioner posed her the following question.
Question: “I would like to ask about Sri Lanka and whether there is any possibility of reopening the programme negotiations based on the possible results of the September 21 presidential election, and what the elections implications could be for that $3 billion program existing currently with Sri Lanka?”
Julie Kozack: Okay, I’ll start with Sri Lanka. So, just stepping back for a moment. On June 12th of 2024, our Executive Board completed the 2024 Article IV Consultation and the Second Review of the EFF program. That provided the country with access of about $336 million U.S. dollars. Programme performance remains strong. Reform efforts are bearing fruit. Economic growth is starting to revive. Inflation is coming down. Reserves, international reserves are increasing, and revenue mobilization is improving. Nonetheless, important vulnerabilities do remain, and sustaining reform momentum is going to be essential.”
“Regarding some of the specific questions about the presidential elections, first, it’s very important to note, of course, that for the upcoming elections, this is really for the people of Sri Lanka to decide, right. Achieving the programme’s objectives is a key priority to give Sri Lanka a chance to emerge from one of its worst crises in history. As I’ve already noted, a lot of progress has been made, but the country is not out of the woods yet, and it is important to safeguard those hard-won gains,” she said.
Taking the question on Bangladesh she said,” First, I do want to say that we are deeply saddened by the loss of lives and injuries during the recent protests. It was very distressing to hear about those losses of lives. From the IMF side, we are working closely with the interim government. An IMF team will visit Bangladesh in late September for a fact-finding mission and to discuss recent economic developments, and further details about the Staff visit will be communicated in due course.”
“We remain fully committed to working with Bangladesh in support of the people within the context of the IMF program, we will continue to work closely with the authorities to help advance the reform agenda. And, of course, as part of the upcoming mission, the team will be assessing all of the economic developments and any potential financing needs in Bangladesh.”
Says it will revolutionise the financial landscape of Sri Lanka
Intellect Design Arena Ltd, the World’s only Enterprise Grade Financial Technology Leader in Composable and Intelligent solutions for progressive Global Financial Institutions, announces the launch of eMACH.ai tailored specifically for the Sri Lankan financial landscape. With an impressive array of 329 microservices, 535 events and over 1757 APIs, this First Principles Thinking-based Platform enables financial institutions in the Island Nation to build future-ready solutions, providing them with a global competitive edge. The platform keeps a bank’s customer in focus, be it Retail, HNI, SME, or Corporate, and the events in their financial journey, besides taking care of events created by banking operations or generated by regulatory and compliance mandates.
Sri Lanka is at a pivotal point in its digital transformation journey. The launch of eMACH.ai in Sri Lanka comes at a time when fintech innovation is rapidly reshaping the financial services landscape globally. Key trends such as the rise of digital payments, AI-driven banking solutions, Open Banking frameworks, and cloud-based infrastructure are redefining how financial institutions operate across the world. Sri Lanka, too, is witnessing this shift, with a growing focus on digital transformation to improve financial inclusion, streamline operations, and create customer-centric experiences. By investing in cutting-edge technologies, enhancing digital infrastructure, and fostering a conducive regulatory framework, Sri Lankan banks can improve financial inclusion and operational efficiency and attract foreign investments.
eMACH.ai simplifies technology for Sri Lankan banks, empowering them to create solutions that are not just optimised but transformative. Its composable architecture aligns with the financial sector’s future needs, ensuring that banks can meet evolving customer expectations while remaining resilient in the face of rapid technological change. It enables them to develop strategies centered around customer needs, focusing on creating substantial business impacts rather than optimising technology.
Intellect already works with several prominent financial institutions in Sri Lanka, including HDFC Sri Lanka, Regional Development Bank (RDB), Cargills Bank, Commercial Development Bank (CDB), Central Finance, Seylan Bank, and Union Bank of Colombo. These institutions have been at the forefront of adopting digital transformation strategies to enhance their operational efficiency and customer experiences. With the introduction of eMACH.ai, Intellect is poised to strengthen its partnership with several other leading financial institutions in Sri Lanka, helping them deliver innovative financial services to a broader customer base.
With eMACH.ai, the banks and financial institutions in Sri Lanka can now have a global edge. The platform will,
Empower banks with 329 Microservices, 1757 APIs and 535 Events, enabling them to design future-ready technology solutions
Act as a Catalyst for Enterprise Connected Intelligence by signifying the shift with Intellect’s leadership guiding banks to stay ahead
Foster financial innovation and redefine the future of financial technology in the Sri Lankan market, giving the region its global edge
Discover new growth avenues by transforming enterprise with this composable and intelligent open finance platform, elevate experience with iTurmeric, a MACH composable platform and enhance operations with decision-grade intelligence platform, Purple Fabric
Ramanan SV, CEO-India & South Asia of Intellect Design Arena Ltd, expressed his excitement about launching eMACH.ai, stating, “With eMACH.ai, we are not just introducing a platform; we are unlocking the future of banking in Sri Lanka. We aim to empower financial institutions to lead with intelligence, agility, and innovation. Built on First Principles Thinking, eMACH.ai is engineered to transform the entire financial ecosystem—driving transparency, accelerating digital adoption, and fostering resilience. This platform is not only a game-changer for banks but also a catalyst for Sri Lanka’s journey towards becoming a financial powerhouse in the global arena.”
Robust framework adopted by the company to boost its export volumes
Pelwatte Dairy Industries Ltd. has strengthened its commitment to promoting a culture of safety and environmental sustainability. The company has dedicated itself to fostering a safe workplace while ensuring its operations align with both local and international standards for health, safety, and environmental protection.
As part of its overarching safety strategy, Pelwatte Dairy has adopted ISO 45001, the global standard for Occupational Health and Safety (OH&S). This certification establishes a framework to enhance employee safety, reduce workplace risks, and create better, safer working conditions. The main objectives under this standard include promoting a safety culture by encouraging leadership and employee participation, ensuring legal and regulatory compliance with local laws such as the Factory Ordinance and international standards like those from the International Labour Organization (ILO), and preventing workplace injuries through robust risk assessments aimed at achieving a zero-accident environment.
In addition, Pelwatte Dairy Industries highlighted its ongoing efforts to improve environmental performance through the adoption of the ISO 14001 framework. This internationally recognized standard provides a structured approach to managing and reducing environmental impact, enhancing sustainability across the company’s operations. In line with the ISO 14001 objectives, Pelwatte Dairy is committed to preventing harmful environmental impacts through diligent impact assessments. The company integrates sustainable practices across its operations by optimizing resource use, reducing waste, and improving energy efficiency.
The FSSC (Food Safety System Certification) is another critical framework adopted by Pelwatte Dairy, ensuring that all products meet global food safety standards. The company also promotes a culture of continuous improvement in food safety practices through regular assessments and audits, ensuring that their operations consistently meet international standards.
Akmal Wickramanayake, Managing Director of Pelwatte Dairy Industries Ltd., emphasized the need for leadership to take charge in setting safety standards and for employees at all levels to actively participate in creating a safer workplace. “At Pelwatte, we believe that safety is everyone’s responsibility. By encouraging leadership, fostering employee participation, and prioritizing continuous improvement, we aim to embed safety into the core of our operations,” stated Wickramanayake.
“Our goal is simple but critical—zero accidents and a hazard-free environment. Safeguarding the environment is a priority at Pelwatte Dairy, not just for compliance but as a key part of our sustainable growth strategy. As we expand into export markets, maintaining these high standards will ensure we remain competitive globally while upholding our commitment to safety and environmental responsibility. Pelwatte’s commitment to FSSC reinforces consumer and business partner confidence by maintaining the highest levels of food safety and regulatory compliance.”
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