Sri Lanka’s fragile economic recovery will face its latest test as the Government dispatches a team to the United States to attempt to negotiate down any potential increase in tariffs on the country’s exports to the US.
In the face of Trumponomics and US President Donald Trump’s drive to return his country to an ‘America First’ approach, Sri Lanka must prepare to navigate the changing tides within global politics and the global economy.
Sri Lanka currently enjoys its largest trade surplus with the US, having recorded a surplus of $ 2.6 billion in 2024. Accordingly, last year the country imported only $ 368 million worth of goods from the US while it exported more than $ 3 billion.
With the looming threat of an increase in tariffs on Sri Lanka’s exports, particularly in the apparel industry, the recovery of the country’s economy faces a renewed threat.
The trade surplus with the US has been on the increase in the last couple of years, aligning with the increases in Sri Lanka’s foreign reserves and overall foreign earnings. To protect the hard-fought gains following the 2022 financial crisis, proactive efforts on the part of the Government are required.
When examining Sri Lanka’s foreign markets, the country enjoys trade surpluses with four of the top 10 economies of the world (the US, the UK, Germany, and Italy). However, as Trump’s tariff war continues to expand, the possibility of a global economic contraction becomes ever more present.
Of the four countries that Sri Lanka enjoys trade surpluses with, Germany’s economy experienced a contraction in 2024 and Italy saw a stagnation in the second half of last year. The UK’s economy experienced a 0.9% growth in 2024; however, Sri Lanka’s exports to the country reduced to $ 800 million compared to $ 900 million the previous year.
Economic engagement with Asia
With the shift in the global economy becoming clearer, Sri Lanka’s approach to global trade requires a re-orientation.
Last year Asia saw a period of sustained growth. Economies in Southeast Asia enjoyed a growth rate of more than 4.5% and in South Asia the economies recorded a growth rate of 6.4%, while across East Asia the growth rate was close to 4.8%. These figures all point to the resilience of the region, driven by increased domestic consumption, despite Europe and the US facing a slowdown in their own economies.
Currently, Sri Lanka’s economic engagement with the Asian region is far from beneficial. Three of the top five global economies are in the Asian region (China, India, and Japan) and by 2030 it is predicted that Indonesia will be the sixth largest economy, increasing Asia’s share of the top 10 economies to four.
However, currently Sri Lanka has recorded trade deficits with all four countries, with Indonesia and Japan being on the lower end of the scale. This is a common trend across Asia, with the country recording trade deficits with many of the growing Asian economies.
A complete reorientation
The question that arises is how does Sri Lanka address the increasing uncertainty in global trade, while capitalising on the shifting global power structures?
During a recent interview, former President Ranil Wickremesinghe called for the country to adopt the ambitious target of producing a $ 1 trillion economy by 2055. On the surface, this proposal looks beyond the realms of possibility, with the country’s economy having been marked at just under $ 100 million in 2024.
However, the former President pointed to the fact that India was targeting a tenfold increase in its economy to reach $ 30 trillion over the next 30 years. This is similar to the rate of growth that Sri Lanka would also have to target over the same period if it were to achieve the ambitious $ 1 trillion mark.
The question that now needs to be answered is how the country would go about preparing its economy for this substantial growth. As mentioned previously, the productive export markets of Sri Lanka are predominantly based in Europe and the US, two regions which are undergoing political and economic realignment.
As such, the potential of further growth by Sri Lanka in those nations is becoming increasingly less likely. Instead, a complete reorientation of the country’s economic engagement must be the priority for the Government.
Integrating with India
Less than 40 km north of Sri Lanka lies India, the fifth largest economy in the world, with the expectation that it will be the third largest by 2030. The success of Sri Lanka’s economic growth relies heavily on the ability of the country to engage with and integrate our economy with India’s.
During the 2022-’24 period, Sri Lanka had undertaken an aggressive campaign to drive forward investments from India in the fields of energy and agriculture. With Sri Lanka boasting a renewable energy capacity in excess of 40 gigawatts, efforts to establish India as a market for Sri Lankan energy had been undertaken.
The joint development of renewable energy projects to connectivity projects, including an oil pipeline connecting the Trincomalee Port with India, were all given priority. Separately, the two countries were preparing the groundwork that would have seen the revitalisation of Sri Lanka’s dairy industry through yet another joint venture.
The implementation of this project would not only have seen the country ensure self-sustainability for its dairy products, but it would have also been able to export to the Indian market. Ventures such as these would have seen Sri Lanka’s trade deficit with India reduced, as well as allowing the country to increase its economic footprint in the region ahead of the expected economic boom.
A return to protectionism?
However, recent weeks and months under the new Government have highlighted the concerning trend of the country once again moving its economy away from an open and integrating stance to one dominated by protectionism.
The announcement by the Adani Group that it would be withdrawing from the 485 MW wind power plant project due to the Government’s attempts to re-negotiate the agreement will certainly place a strain on Indo-Lanka relations. Alongside this withdrawal, the Government has also indicated that it will not be proceeding with the divestment of the National Livestock Development Board and Milco to an Indian dairy investor.
Earlier this week the Minister of Foreign Affairs and Tourism outlined moves underway for the Government to promote local online booking platforms to break the dominance held by the multinational Booking.com.
While recognising that the international online platform is not currently susceptible to local taxes, concerns have been raised over whether the Government’s hard-handed approach will yield positive results or simply serve as yet another deterrent to foreign investments.
The actions taken by the Government point to the very real possibility that as Trump attempts to close off the US’s economy, the National People’s Power (NPP) Government may also be exploring a similar vein of action.
Aside from the calls for the country to adopt an ambitious economic growth target over the next 30 years, the sustainability of Sri Lanka’s economic recovery hinges on the commitment to further liberalisation of the economy. A failure to do so will not only see the public once again burdened with a financial crisis far graver than what was experienced in 2022, but will also relegate Sri Lanka to a backseat as the economic tide swings in favour of Asia.
(The writer has previously served as the Director of International Affairs to former President Ranil Wickremesinghe)