Sri Lanka scrambles to avert major economic fallout from crippling US tariffs
Foreign exchange markets are in disarray, garment manufacturers are in a quandary and apparel shares at the Colombo bourse were down as
Sri Lanka examined limited options to counter crippling new US tariffs, rising to 44 per cent from around 12-13 per cent. Preparations are also underway for a top Sri Lankan delegation to visit the US in a bid to negotiate reduced tariff rates before they become effective on April 9.
Bankers and economists cautioned not to panic in the interim, amidst the government appointing a high-powered committee to negotiate with the US. A report by the committee was to be handed over to the President on Friday.
“The rupee will likely depreciate and there will be pressure on the interest rates to increase,” Damith Pallewatte, MD/CEO HNB, told The Sunday Times Business. He also pointed out that if exports are driven away from the US due to tariff revision, the country needs to diversify exports to support building its reserves. “If our reserves start shrinking, we may not be able to build them up as quickly as we wanted to. We need to look at reciprocal taxing and decide on what and which imports need to be taxed from the US to curb a larger impact,” he said in terms of countering the initial impact of US tariffs. US President Donald Trump announced a set of reciprocal tariffs, and has introduced a 10 per cent flat tariff on imports, with higher rates applied to major trading partners with trade deficits such as, Cambodia, Vietnam, Sri Lanka, and China which face the extreme tariffs at 49 per cent, 46 per cent, 44 per cent and 34 per cent, respectively.
Dr. Priyanga Dunusinghe, Economist, University of Colombo, told The Sunday Times Business that if the exports and foreign direct investments decline, there will be pressure on the exchange rate. “It takes time, but Sri Lanka should diversify exports and export markets. More prominence must be given to domestic structural reforms to improve productivity and competitiveness. The government has not taken a single step to move towards that. Time is running out.”
He also said that Sri Lanka must make representations to the US and discuss possible avenues, whilst highlighting domestic issues and debt obligations, which would also be addressed by the government committee examining the implications of the tariffs.
Mr. Pallewatte said it is essential to be cautious and take a more pragmatic view without panicking, especially in the exchange markets. If crude oil prices reduce in anticipation of lower-than-predicted economic growth that will positively impact our FX position.
Sri Lanka’s apparel industry is concerned about the US Reciprocal Tariff policy, which could disrupt the country’s largest export sector and put thousands of jobs at risk. Joint Apparel Association Forum (JAAF) said that the tariffs, which will increase from a 10 per cent baseline tariff on imports to a 44 per cent “reciprocal” tariff on Sri Lankan exports, could lead to the bulk of the US business moving to competitor markets. The government has begun consultations with the industry and stakeholders to form a suitable course of action.
However, certain analysts noted that there is no point in worrying, as it is not a selective tariff. “This tariff is applied right across the board. Apparel from Sri Lanka will be a little more expensive than before,” one analyst said.
A second analyst noted that the competitive positioning in the region for Sri Lanka will be affected when India, which is taxed at 27 per cent, benefits from the lower duty, a shipping industry professional noted.
“Tariffs will impact international trade, reshaping markets, supply chains, and service decisions in the global container shipping industry, potentially reducing or shifting trade volumes.”
A top company CEO noted that the United States will revise after regular intervals and not in a hurry. “They will decide to revise after every country’s reaction.”
At a growth conference held this January, Anna Twum Economist, Macroeconomics, Trade and Investment – World Bank, noted that Sri Lanka has one of the highest averages in tariffs in the world.
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