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Trump tariffs and their effect on world trade and economy with particular reference to Sri Lanka – Part IV

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(Continued from yesterday)

Critique of the International Trade System

President Trump’s tariffs have also highlighted fundamental inequities in the international trade and financial architecture that governs economic relations between wealthy and developing nations.

The World Trade Organization, theoretically designed to provide a rules-based trading system that benefits all members, has proven largely powerless to prevent unilateral actions by powerful economies like the United States. While China has urged the WTO to investigate President Trump’s tariffs as violations of the “most favoured nation” principle that forms the bedrock of the multilateral trading system, the organization lacks effective enforcement mechanisms against major powers.

Similarly, international financial institutions like the IMF have failed to adequately account for trade shocks in their lending programmes and debt sustainability analyses. As discussed earlier, the IMF’s approach to Sri Lanka’s debt restructuring focused primarily on fiscal consolidation while paying insufficient attention to the country’s

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structural trade deficit and vulnerability to external shocks. When Trump’s tariffs suddenly reduce Sri Lanka’s export earnings, the IMF program offers no automatic adjustment mechanisms to accommodate this changed reality.

This situation stands in stark contrast to historical examples of more equitable treatment of indebted nations. The London Debt Agreement of 1953, which restructured West Germany’s external debts, explicitly linked repayment obligations to the country’s trade performance and capped debt service at a sustainable percentage of export earnings. Such an approach recognised the fundamental importance of trade capacity to debt sustainability, a recognition largely absent from contemporary debt restructuring frameworks.

The tariff shock thus reveals not merely technical flaws in trade policy but deeper structural inequities in how the global economic system distributes risks, rewards, and adjustment costs between wealthy and developing nations. While powerful economies can unilaterally reshape trading relationships to serve their domestic political objectives, developing countries must largely accept these changes as given constraints and bear disproportionate costs of adjustment.

Potential Reshaping of Global Trade Patterns

Looking beyond the immediate disruption, President Trump’s tariffs may accelerate several longer-term shifts in global trade patterns with significant implications for developing economies.

First, we may see accelerated regionalisation of trade as countries seek to reduce vulnerability to U.S. policy shifts. Asian economies may deepen integration through mechanisms like the Regional Comprehensive Economic Partnership (RCEP), while African countries might accelerate the implementation of the African Continental Free Trade Area (AfCFTA). These regional arrangements could provide alternative markets for exports previously destined for the United States, though the transition would be neither quick nor painless.

Second, China’s role as both a market and investor for developing economies may expand further. As U.S. tariffs effectively close off portions of its market, developing countries may look more intensively toward China as an export destination and source of development finance. This shift would have significant geopolitical implications, potentially accelerating the fragmentation of the global economy into competing blocs centred around major powers.

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Third, some production may relocate to avoid tariffs, creating winners and losers among developing countries. Nations with lower tariff rates or special exemptions could see increased investment as firms restructure supply chains to minimise trade costs. This dynamic could intensify competition among developing countries for foreign investment, potentially triggering a “race to the bottom” on labour and environmental standards.

Fourth, there may be renewed interest in domestic market development and South-South trade as alternatives to excessive dependence on wealthy consumer markets. While the limited purchasing power in many developing countries constrains this option in the short term, over time it could lead to more balanced and resilient development models.

These potential shifts suggest that President Trump’s tariffs may represent not merely a temporary disruption but a catalyst for more fundamental reconfiguration of global trade patterns. For developing economies like Sri Lanka, navigating this changing landscape will require strategic foresight, policy innovation, and international cooperation to ensure that the emerging trade architecture better serves their development needs than the system currently being disrupted.

POTENTIAL MITIGATION STRATEGIES FOR SRI LANKA

Faced with the severe economic challenge posed by Trump’s 44% tariff, Sri Lanka must develop a comprehensive response strategy that addresses both immediate threats and longer-term structural vulnerabilities. This section explores potential approaches at different time horizons, from emergency measures to fundamental economic reorientation.

Short-term Responses

In the immediate term, Sri Lanka’s government and private sector must focus on crisis management to minimise damage to export industries and protect vulnerable workers. Several approaches warrant consideration.

Government Support for Affected Industries

The Sri Lankan government could implement targeted support measures for export sectors most affected by the tariffs, particularly the textile and apparel industry. These might include temporary tax relief, subsidised credit facilities, or reduced

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utility rates for export-oriented manufacturers. Such measures could help companies weather the initial shock while they develop adaptation strategies.

However, Sri Lanka’s fiscal constraints present a significant challenge to implementing such support. The country’s IMF programme imposes strict limits on government spending and deficit targets, while tax increases have been a central component of the economic stabilisation strategy. Any support measures would therefore need to be carefully designed to remain within these constraints or negotiated as exceptions with the IMF based on the external nature of the shock.

One potential approach would be to reallocate existing resources rather than expanding overall spending. For instance, funds previously earmarked for export promotion in the U.S. market, if any, could be redirected toward supporting market diversification efforts or providing temporary relief to affected companies.

Diplomatic Engagement with the United States

Sri Lanka should pursue active diplomatic engagement with the United States to seek modifications to the tariff regime. While the country’s limited economic leverage makes a complete exemption unlikely, there may be opportunities to negotiate targeted relief for specific product categories or to secure technical assistance for adjustment.

The Sri Lankan government could emphasise several arguments in these discussions, the disproportionate impact of the tariffs on a country still recovering from economic crisis, the potential humanitarian consequences of mass unemployment in the textile sector, and the strategic importance of economic stability in Sri Lanka for regional security in the Indian Ocean.

One of the most compelling arguments Sri Lanka can make is the need to move beyond narrow fixation on the trade balance and instead consider a broader current account. While Sri Lanka may show a surplus in goods trade with the U.S., that figure is only a part of the story. Our economy is deeply integrated with U.S. linked services. We pay for American banking and credit card services, subscribe to streaming platforms like Netflix and Amazon, purchase of software and apps from Apple and Google, remit interest payment on loans from international banks, bond holders and multilateral institutions, and spend on tourism and education. When all of these outflows are taken into account, the so called “imbalance” is far more nuanced if not fully offset. This is why a fair and modern economic analysist must consider the full current account, not just goods trade in isolation.

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Engagement should occur through multiple channels, including direct bilateral discussions, multilateral forums like the WTO, and coordination with other affected developing countries to amplify collective concerns. Sri Lanka might also leverage its relationships with international financial institutions like the World Bank and IMF, which could highlight the risks the tariffs pose to the country’s economic recovery program.

Emergency Economic Measures

If the full impact of the tariffs materializes, Sri Lanka may need to implement emergency economic measures to maintain macroeconomic stability. These could include temporary foreign exchange controls to prioritize essential imports, accelerated disbursement of already-committed international financial support, or emergency borrowing from friendly countries or international institutions.

The Central Bank of Sri Lanka might need to adjust monetary policy to respond to potential currency pressures resulting from reduced export earnings. However, any such adjustments would need to be balanced against inflation concerns, which remain sensitive following the recent crisis.

Social Protection for Affected Workers

Protecting workers who lose jobs or face reduced hours due to the tariff impact should be a priority. The government could expand existing social safety net programs to specifically target affected textile workers, potentially with support from international donors or development agencies.

Measures might include temporary unemployment benefits, retraining programmess for displaced workers, or community-based support initiatives in areas with high concentrations of textile employment. Given fiscal constraints, international support would likely be necessary to fund such programmes adequately.

Medium to Long-term Strategies

Beyond immediate crisis response, Sri Lanka must develop strategies to reduce vulnerability to future trade shocks and create a more resilient economic model. Several approaches deserve consideration.

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Market Diversification Beyond the United States

Reducing dependence on the U.S. market represents an obvious but challenging strategy. Potential alternative markets include,

* European Union: Already Sri Lanka’s second-largest export destination, the EU offers preferential access through its GSP+ scheme. Expanding exports to Europe would require meeting stringent standards and potentially adjusting product offerings to suit European consumer preferences.

* Regional Markets: Increasing exports to India, China, and other Asian economies could leverage geographical proximity and growing middle-class consumer bases. This would require navigating complex regional trade agreements and potentially developing new product categories better suited to these markets.

* Emerging Markets: Countries in the Middle East, Africa, and Latin America represent potential growth opportunities, though penetrating these markets would require significant market research and relationship building.

The Joint Apparel Association Forum’s statement that “We have no alternate market that we can possibly target instead of the US” reflects the difficulty of this transition. Established buyer relationships, specialized production capabilities, and compliance certifications all create path dependencies that make market diversification a multi-year project rather than an immediate solution.

Product Diversification Beyond Textiles

Sri Lanka’s heavy reliance on textile and apparel exports creates vulnerability to sector-specific shocks. Diversifying the export basket could create greater resilience, though this too represents a long-term structural challenge rather than a quick fix.

Promising sectors for export diversification include:

* Information Technology and Business Process Outsourcing: Sri Lanka has developed a growing IT/BPO sector that could be expanded with appropriate investment in education, infrastructure, and international marketing.

* High-Value Agricultural Products: Speciality tea, spices, and organic produce could command premium prices in international markets while building on Sri Lanka’s agricultural traditions.

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Sustainable Manufacturing: Leveraging Sri Lanka’s relatively strong environmental credentials to develop green manufacturing capabilities in emerging sectors like electric vehicle components or renewable energy equipment.

Tourism Services: While not directly affected by goods tariffs, expanding tourism could help diversify foreign exchange earnings. However, this sector’s vulnerability to external shocks (as demonstrated during the pandemic) suggests it should be one component of a diversification strategy rather than its centrepiece.

Successful product diversification would require coordinated public-private investment in research and development, skills training, quality infrastructure, and international marketing. It would also necessitate a supportive policy environment that reduces barriers to innovation and entrepreneurship.

Value Chain Upgrading

Even within existing export sectors like textiles, Sri Lanka could pursue strategies to capture more value and reduce vulnerability to tariffs. Moving up the value chain from basic contract manufacturing to design, product development, branding, and direct-to-consumer sales could increase margins and provide greater control over market access.

Some Sri Lankan companies have already begun this transition, developing their own brands or establishing direct relationships with consumers through e-commerce platforms. Government support for such initiatives through design education, intellectual property protection, and export promotion could accelerate this evolution.

Regional Trade Integration

Deepening integration with regional trade blocs could provide both alternative markets and opportunities for participation in regional value chains. Sri Lanka is a member of the South Asian Free Trade Area (SAFTA) and has bilateral trade agreements with India, Pakistan, and Singapore, and more recently with Thailand, though implementation challenges have limited their effectiveness.

More ambitious regional integration through mechanisms like the Regional Comprehensive Economic Partnership (RCEP) or the proposed Bay of Bengal Initiative for Multi-Sectoral Technical and Economic Cooperation (BIMSTEC) Free

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Trade Area could create new opportunities. However, managing domestic concerns about increased competition from larger economies like India and China would require careful policy design and implementation. (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.

(To be concluded)



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Opinion

KOICA – Volunteer Partner’s Day Meeting 2025

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On 20th May 2025, KOICA Volunteer Partner’s Day of year 2025 was held at the Courtyard by Marriott with the presence of the Country Director of KOICA Sri Lanka office Mrs. LEE Yooli, Mr. Samantha Bandara, the Director General of External Resources Department and officials from the Department of Technical Education & Training, National Institute of Education, Schools, Universities, National Youth Services Council, Colombo Public Library and over fifteen (15) volunteer partner organization representatives in Sri Lanka.

At present, there are thirteen (13) KOICA volunteers serving in Sri Lanka and the meeting organized by KOICA (WFK Division) was to share the know-how, experience and knowledgeable resources with the respective partner organizations. The main goals of the knowledge sharing session were to deliver relevant information about the KOICA Volunteer program and to generate insights from the partner organizations that will be useful in recalibrating WFK program’s future direction, including safety and security.

During the session, participants of partner organizations showed their strong need to obtain the services of volunteers, especially for the fields of Korean Language, ICT, Electronics, Social Welfare, Electronics and Auto-Mobile Engineering. Furthermore, they appreciated and emphasized the importance of expanding of KOICA Volunteer Program to rural areas in Sri Lanka.

Since the initiation of KOICA Sri Lanka office in 1991, volunteer dispatch activities have taken place throughout most regions in the country. There has been a significant demand for KOICA volunteers in the educational sphere targeting areas of Korean Language, ICT, etc. The expertise received from Korea has not only shown developmental potential in partner organizations but has also provided invaluable expertise for the youth to excel in the job market.

The Country Director of KOICA Sri Lanka office Mrs. LEE YOOLI expressed her gratitude to all the participants of partner organizations and added “KOICA Headquarters, together with the Sri Lanka Office, is pleased to continue the volunteer program under its ODA endeavors towards Sri Lanka; while introducing new focused volunteer fields in alignment with the SDG goals and the Sri Lankan government priorities.”

In the meeting, Mr. Samantha Bandara, Director General of the External Resources Department, extended his deep appreciation to KOICA for overall technical cooperation towards Sri Lanka and especially, appreciated the services of volunteers who contribute for the social and economic growth of the country, by sharing their expertise and Korea’s development experience.

The Korea International Cooperation Agency (KOICA), the grant aid division of the Embassy of the Republic of Korea, is the Korean government agency for grant aids under the mission of “Contributing to the common prosperity and the promotion of world peace through inclusive, mutual development cooperation leaving no one behind.”

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Has AKD lost the plot?

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The election of the JVP/NPP leader as the executive president of Sri Lanka was no doubt momentous, perhaps, second only to the election of Ranasinghe Premadasa to the same coveted position. Though it was the first time the ‘caste barrier’ was broken, unfortunately, instead of hailing this social revolution Premadasa had other ideas; he attempted to rewrite history by attempting to change his heritage thus missing a great opportunity to show that Sri Lanka indeed was a country of equality and opportunity! AKD shares with Premadasa the same great achievement of reaching the top from very humble beginnings. In addition, AKD is the only leader of the country to be elected from a party with a ‘terrorist’ heritage and many were hopeful that this would not be a baggage. As recent events have shown, it looks as if he is not able to shed that baggage. It is said that a leopard cannot change its spots! This is past repeating itself, as well illustrated by the actions of our first executive president JRJ; he was a manoeuvrer who could not stop doing so, even when he reached the top, which no doubt contributed to his downfall!

AKD started well, just like all his predecessors have done, but wheels seem to be coming off the wagon pretty soon! He continues to behave like an opposition politician continuing with attacks on his opponents, past and present, instead of concentrating on statecraft, to take action to alleviate the suffering of the masses burdened with severe economic hardships and chart a course for future prosperity. Perhaps, this may at least be partly due to his having to face election after election but this should not be an excuse. Prior to the presidential election he portrayed that he was surrounded by groups of experts, of all modalities, who were ready with policies for rapid implementation but these experts seem to have disappeared into thin air! Only experts in economics seem to be from the much-maligned IMF. The message from the voters seems to be falling on deaf ears as shown by absurd explanations given for the erosion of the vote at the last local government elections.

He seems to be a one-man band which, worryingly, dashes hope for the long-promised abolition of the presidency. He would be totally ineffective without the executive powers of the presidency. This seems yet another addition to his unfulfilled promises. He is apparently being supported by a group of amateurs! Prior to elections there was much hype about the PM, a respected academic, who seems to have been pushed to the background. She does not seem to be functioning efficiently even as the minister of education. Ragging continues in universities resulting in suicides. Even worse was the suicide of a student sexually molested by a teacher, humiliated by a friend of the accused teacher, a private tutor who contested on the NPP ticket. The initial punishment for the teacher, till public protests erupted, was a transfer to a distant school. To make a terrible situation even worse was the action of the minister tasked with ensuring the safety of women and children. She claimed that the parents had not met her and handed over a petition.

This lack of leadership is replicated by the President himself. AKD’s mantra during the parliamentary election campaign was cleansing of Diyawannawa but no sooner had the guardian of the house been elected than his doctorate from a private Japanese university was questioned. After much hesitation, the speaker resigned, claiming that he would prove his academic qualifications. He has not done so and he is still an ‘honourable’ MP! Another MP, a female lawyer had the audacity to state that under the NPP government anyone was free to lie and admitted that she had lied about billions of dollars airlifted to Uganda by the Rajapaksas! AKD has taken no action against these MPs.

AKD also had an exposition of the Sacred Tooth Relic to be held in the run-up to the recent local elections. It did not pay dividends may be because the arrangements were in shambles. He visited Vietnam to deliver a lecture for the International Vesak Day but apparently did not find time to pay homage to the Buddha’s sacred relics on display a short distance away from the conference hall. He did find time to lay a wreath at the memorial of the war dead and flew back on a private jet so that he could vote in the LG elections! Another promise broken but it is claimed that a Buddhist society had paid for the private jet!

AKD’s actions regarding the ceremony to remember and honour war heroes clearly shows that he has completely lost the plot. To the shock and horror of all patriotic Sri Lankans, an announcement was made a couple of days ago by the secretary of defence that the ceremony would be presided over by the deputy minister of defence! In short, the commander of the forces is too busy or too reluctant to attend the remembrance of those who sacrificed their lives for the integrity of the country. I doubt it has happened in any country! If he was of the opinion that this event was superfluous or that it hampered reconciliation, he should have had the guts to issue a statement to that effect. Coming from a ‘terrorist’ heritage, the JVP may be having a soft corner for the terrorists killed by the armed forces and may have thought it was hypocritical for him to attend!

As the public outcry could not be patched over, he decided not only to attend the ceremony but also visit the disabled and allow them to take selfies. It is a shame that AKD seems to have developed selective amnesia for his past statements. During the time Rajapaksas were leading the campaign to eradicate the Tigers, AKD was a strong supporter and at times claimed that he told them what to do! What has brought about this change? Was it the backing from the pro-LTTE groups in other countries?

To add insult to injury, during his speech he alluded that the ‘war’ had been fought for political gains. Though it may have produced political gains, doesn’t he realise that it was fought, at a tremendous cost, to defeat terrorism for the purpose of continuing the integrity of the country? He and his acolytes are spreading the canard that this is different as we did not fight a foreign country. Had the Tigers succeeded, we may well be fighting a different country in our little island! His virtual equation of dead terrorists to our fallen heroes added further insult.

Unfortunately, we seem an ungrateful country insulting our fallen war heroes and allowing hypocritical Western nations insulting our living heroes.

by Dr Upul Wijayawardhana

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Opinion

Make Sri Lanka Great

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Sri Lanka holds immense untapped economic potential, bolstered by its strategic location along major global trade routes, rich natural resources, and a vibrant cultural heritage. Yet, despite these advantages, the nation has faced significant setbacks in recent decades—civil conflict, political instability, economic mismanagement, and rising poverty. Against this backdrop, the call to “Make Sri Lanka Great” is more than a slogan; it is a mission. It represents a collective vision to restore economic stability, promote inclusive growth, and unlock a future of opportunity for all Sri Lankans.

Reclaiming Sri Lanka’s Historical Greatness

Historically, Sri Lanka was a flourishing centre of commerce, education, and cultural exchange in the Indian Ocean. Its location between East and West positioned it as a maritime trade hub linking Asia, the Middle East, and Europe. Ports such as Colombo, Galle, Trincomalee, KKS connected global traders, scholars, and travelers, fostering a dynamic and prosperous economy.

Today, reviving this legacy is crucial. Economic renewal must be anchored in a fusion of historical insight, national unity, and bold innovation. To move forward, Sri Lanka must:

*  Reclaim its legacy of knowledge, resilience, and productivity.

*  Promote confidence in its global economic potential, encouraging innovation, entrepreneurship, and investment.

*  Ensure social inclusion, recognising that unity across ethnic and religious lines is foundational to sustainable growth.

By leveraging its geographic strengths, investing in human capital, and creating a transparent, investor-friendly environment, Sri Lanka can once again become a leading player in regional and global trade.

Economic Challenges

Sri Lanka’s development path is obstructed by a complex web of systemic challenges. An ongoing economic crisis—driven by high debt, poor fiscal discipline, and import dependency—has caused inflation, job losses, and currency depreciation. Political instability and inconsistent policymaking further undermine investor confidence and long-term planning.

Social divisions, rooted in a civil war that ended in 2009, continue to impact national unity. Additionally, youth unemployment and the outmigration of skilled workers are weakening the nation’s human capital. Environmental degradation through deforestation, pollution, and unregulated urbanisation threatens tourism, agriculture, and long-term resilience. Addressing these interconnected issues is essential to laying a foundation for economic recovery and sustainable progress.

A New National Vision

To become truly great, Sri Lanka must redefine development beyond GDP and infrastructure. A developed Sri Lanka should be:

*  Economically strong, with robust industries in technology, tourism, agriculture, and services.

*  Socially cohesive, where every citizen is treated equally and with dignity.

*  Globally respected, as a democratic, peaceful, and environmentally responsible nation.

· Empowering to youth, offering them opportunities to succeed at home, not just abroad.

Foreign-to-Local Citizen Ratios

The Foreign-to-Local Citizen Ratio is more than just a demographic statistic — it serves as a valuable indicator of a country’s openness, safety, and attractiveness to the global community. A healthy ratio often reflects a nation’s ability to provide freedom, security, and economic opportunity to foreigners who visit, live, work, or invest. (See Table)

Foreign-to-Local Citizen Ratios

For example, Singapore’s 44% foreign-to-local ratio has supported its rise as a financial and innovation hub by filling labour gaps and driving productivity. While Sri Lanka’s 1.3% ratio reflects low foreign participation, strategic immigration and talent attraction could contribute to economic revitalisation.

Singapore, the UAE, and Germany have higher foreign-to-local ratios, signaling environments where international residents feel safe, welcomed, and empowered. These nations offer stable governance, clear legal frameworks, and strong institutions that attract foreign workers, investors, and entrepreneurs.

A favourable ratio also shows that a country:

*  Ensures security and legal protection for foreigners.

*  Provides infrastructure and services that support international living and business.

*  Encourages foreign direct investment (FDI) and startup ecosystems by reducing red tape and fostering trust.

*  Embraces cultural diversity, creating a dynamic and innovative society.

For Sri Lanka, improving its foreign-to-local ratio can boost its global reputation as a safe, business-friendly, and forward-looking nation. By creating an environment where foreigners feel confident to visit, reside, invest, and contribute, the country can unlock new economic opportunities and accelerate its journey toward sustainable development.

Economic Renewal

To make Sri Lanka great, a comprehensive strategy is required:

*  Good Governance: Eliminate corruption, strengthen democratic institutions, and promote transparency and rule of law.

*  Economic Transformation: Support local production, SMEs, and ethical foreign investment. Create a resilient, diversified, and export-oriented economy.

*  Education and Skills: Modernise the education system to meet future job demands, especially in IT, engineering, tourism, and creative sectors. Expand vocational training to empower youth.

*  Social Inclusion and Reconciliation: Promote national unity through inclusive governance, equal rights, and decentralis`ation to ensure all regions benefit from development.

*  Environmental Sustainability: Invest in clean energy, eco-tourism, and sustainable agriculture. Protect forests, oceans, and heritage sites to maintain long-term economic and ecological balance.

*  Fiscal and Institutional Reform: Improve tax systems, streamline public spending, and create a stable investment environment to manage debt and rebuild confidence.

*  Knowledge Economy: Position Sri Lanka as a digital hub in South Asia by investing in R&D, digital infrastructure, and innovation ecosystems.

Conclusion

The country has the potential to follow the path of nations like South Korea, Japan, and Singapore — countries that transformed crisis into opportunity through strong leadership, national unity, and long-term reform. To achieve this, Sri Lanka must embrace good governance, invest in human capital, promote entrepreneurship, and prioritise sustainable development. The nation’s future greatness depends on bold economic transformation rooted in its unique strengths. With a clear vision, inclusive policies, and collective commitment, Sri Lanka can rise above its challenges and secure a peaceful, prosperous, and globally respected future.

Visvalingam Muralithas is a researcher in the legislative sector, specializing in policy analysis and economic research. He is currently pursuing a PhD in Economics at the University of Colombo, with a research focus on governance, development, and sustainable growth. He holds a Bachelor of Arts in Economics (Honours) from the University of Jaffna and a Master’s degree in Economics from the University of Colombo.

by Visvalingam Muralithas

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