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The Russian-Ukrainian conflict will have severe repercussions on the fragile external finances of the country.

Our Import expenditure will increase, tea export earnings could decline, export manufacturers could face shortages of raw materials and the expected revival in tourism this year is unlikely.

Trade deficit

Consequently, the trade deficit would widen and the balance of payments deficit would increase. With foreign reserves being at a bare minimum, these are serious threats to the economy.

Predicament

Higher fuel prices, higher grain prices, disruption of raw material supplies, reduction in tea exports and a drop in tourist earnings would widen the trade and balance of payments deficits and deplete the perilously low foreign currency reserves. These adverse developments would heighten the current economic and financial crisis to even more serious depths.

People’s plight

The shortages of food, gas, diesel and petrol that people are enduring will worsen as the availability of foreign currency decreases. The economy will be further weakened by the consequences of the current Russian-Ukrainian conflict and further shortages of essentials, soaring prices and unemployment are inevitable.

Economic consequences

The adverse repercussions of the war on the Sri Lankan economy are on the external finances. The country’s external finances that are at a perilously low level will be further eroded by a deterioration of the balance of payments. The trade deficit will widen due to increased import expenditure and a dip in exports. The expected increases in tourist earnings are likely to be thwarted.

Exchange rate

The unrealistic exchange rate policies will reduce remittances that have been the main support to the balance of payments. Consequently, the external reserves will fall further, reducing the country’s import capacity.

Trade deficit

The global trading conditions will lead to an increase in our trade deficit. The biggest impact would be on import expenditure that would increase significantly owing to much higher prices of essential imports. The prices of fuel, grains and raw materials are increasing.

Merchandise imports that increased to US$ 20.6 billion last year, could rise to more than US$ 25 billion this year. On the other hand, last year’s merchandise exports of US$ 13.5 billion could decrease.

Fuel price

No sooner the war broke out the international price of petrol jumped from around US$ 80 per barrel to over US$ 90 per barrel and kept increasing. At mid-week it had risen to US$ 113 per barrel.

Expectations are of a further rise, unless other oil-producing countries respond by increased output. There is also the possibility of OPEC countries restricting production to gain by a further rise in the current situation. Hopefully, other oil-producing countries would increase their oil production.

Fuel Imports

Last year the country expended US$ 3.7 billion on fuel imports when the average price was around US$ 80 per barrel. With the average price increasing by over 25 percent, the fuel bill may increase to US$ five billion. This is a serious drain on the reserves.

Other imports

Prices of other essential imports too are likely to increase. Prices of grains and raw materials are expected to increase significantly. Currently, the country is importing a large quantity of rice from Myanmar at higher prices. Moreover, freight rates will increase and affect exports and imports.

Exports

Russia and Ukraine are important markets for our tea. These exports are likely to be disrupted by the conflict. If supply chains for raw materials for our industrial manufactures too are disrupted, our manufactured exports will decrease. If shipping and air freight are disrupted, the country’s manufactured exports would be threatened.

Production

In addition to these consequences of the war, export manufacture is hindered by the lack of diesel, electricity and transport difficulties of workers. Export manufacturers are warning of an export drop of US$ four billion which is about a third of last year’s merchandise exports.

Tourism

At the beginning of the year, there were signs of a revival of tourist earnings as tourism picked up in December and January. As Russian and Ukraine tourists are among the highest number of recent tourists to the country, this expectation has to be shelved.

This year’s tourist earnings are not likely to reach the anticipated US$ 2.5 to three billion unless there is a dramatic change in international conditions later this year.

Current conditions

Moreover the current unsettled conditions would hardly be conducive for high-spending tourists to travel from European countries. Tourism that suffered a big blow by the Easter Sunday bombing and then COVID-19, is once again facing a setback owing to this war in Europe.

Diplomacy

In this complex international situation, it is vital that the country remains strictly neutral to ensure that our trading position is not imperiled by anyone.

The government has made it clear that Sri Lanka is neutral in this conflict. It has to be firm in this to not jeopardise the country’s economic interests at this critical moment in international relations.

Summary and conclusion

As pointed out, our fragile economy is facing severe external shocks owing to the repercussions of the war. The severest blow is to the external finances of the country.

The trade deficit is likely to widen further owing to increased imports expenditure on fuel, food and raw materials. Exports of tea could be reduced by the inability to export to Russia and Ukraine. Disruption of supply chains could reduce manufactures for export. Russian and Ukrainian tourists would no doubt cease. Other tourist travel would also diminish as long as the conflict lasts.

The perilously low external reserves of the country at the beginning of the year have been further threatened by the impact of the war on the balance of payments. The country’s future is indeed bleak.