The escalating global trade war is likely to impact developing economies like Sri Lanka, especially through potential volatility in food prices as the situation develops.
Food price volatility will remain a risk and complex debt dynamics will continue to burden economies such as Bangladesh, Pakistan, and Sri Lanka, United Nations Trade and Development (UNCTAD) has projected in a recent report.
Predicting that the global economy is set to slow down this year, despite a slightly ‘stronger-than-expected’ growth performance of 2.8% in 2024, the report notes many low-income countries face a convergence of risks: worsening external conditions, heavy debt burdens, and weakening domestic growth.
“If the geoeconomic confrontation continues to disrupt the global economy, poorer nations can face a perfect storm,” the report warns.
Prices of agricultural and food products play a critical role in livelihoods and environmental sustainability and they have been on the rise since bottoming out in early 2024.
“Commodity markets are not immune to global uncertainty, and prices of agricultural and food products tend to respond more to idiosyncratic factors and have so far been less affected by the overall economic uncertainty,” UNCTAD notes.
Serious vulnerabilities
Speaking to The Sunday Morning, University of Peradeniya (UOP) Department of Economics and Statistics Professor Wasantha Athukorala outlined some of the impacts of the global trade situation on the Sri Lankan economy.
“There are two ways the current situation may have an impact on the Sri Lankan economy. Firstly, through the exchange rate; over the last few weeks, the value of the rupee has been depreciating, because the inflow of dollars is less than the outflow. When global inflation is higher, the amount we have to spend to purchase goods will be higher and imports will always be higher than exports,” he said.
“Secondly, most of the food that we consume domestically, such as rice, are imported. Therefore, global inflation will have an impact on domestic inflation as well,” Prof. Athukorala added.
For instance, the World Bank Sri Lanka Development Update for April notes that beyond an economic slowdown, the ongoing reliance on regressive indirect taxes could worsen the poverty outlook. The increased prevalence of stunting and malnutrition raises concerns about long-term human capital development and intergenerational poverty transmission.
“Food price volatility has a direct impact on the poor, rather than the rich. If you consider income, rich people spend a relatively small share on food. However, the poor spend a larger portion of their income on food,” Prof. Athukorala noted.
“Most of the essential foods are imported, such as rice, coconut, onion, potato, and dhal, in addition to milk, which are essential parts of Sri Lankan life. Any volatility of these goods will have serious impacts,” he warned.
In order to prevent food insecurity, sound policymaking is essential. “The Government should be able to increase medium and long-term domestic production. The food items we are currently importing can be produced domestically, but there is no mechanism to do this, ” Prof. Athukorala noted.
According to him, domestic measures to minimise imports is a missing component in Sri Lanka’s policymaking, which needs to be treated seriously.
However, as previously reported by The Sunday Morning, Sri Lanka’s domestic production of key crops such as paddy, tea, coconut, and rubber, along with fish has declined over the first two months of the year, with paddy production for the 2024/2025 Maha season, based on the sown extent as of end-January, being forecast at 2.61 million MT, a 4.2% decline from the previous Maha season.
Nevertheless, Essential Food Commodities Importers’ and Traders’ Association (EFCITA) Spokesperson Nihal Seneviratne told The Sunday Morning that the global trade uncertainty was yet to impact food imports significantly.
He highlighted the sheer uncertainty of the situation, noting that prices could even drop in future if the Chinese Yuan were to depreciate. While the rupee has depreciated, this will drive up prices somewhat; should it depreciate further, import costs will be impacted.
Economic uncertainties
UNCTAD notes that April has seen major financial turbulence due to concerns over the global economic context and the impact of trade policy shifts, with the international ramifications of tariff tensions adding to investor anxiety regarding the prospects for economies worldwide.
In this global context, developing countries are vulnerable to global financial volatility, with the economies of Asia particularly affected by financial turbulence.
The challenging economic landscape for the countries of the Global South is compounded by the build-up of debt, with resources being increasingly diverted from critical spending needs to cover the debt-servicing cost, along with a further crowding out of financial flows to the developing world.
Addressing the impact on the Sri Lankan economy, Prof. Athukorala said: “Uncertainty within the economy has not decreased yet, because of debt payment and other macroeconomic growth factors. While domestic inflation and interest rates are low, given the global scenario, we will be unable to sustain these conditions, and in time, there will be uncertainties about macroeconomic variables.”
He noted that given that the US and China were among the biggest economies in the world, whatever uncertainties they faced would impact the Sri Lankan economy directly. However, this is a task that the Government has to handle.
“The long-term impact on the economy depends on the measures being undertaken by the Government. It should be smart enough to identify the challenges and face the situation, such as devising alternative avenues of revenue to tourism and remittances in order to generate a trade surplus in the economy. If not, we should at least be able to minimise the trade deficit,” Prof. Athukorala stated.
Despite the key factor being the measures taken by the Government to minimise this deficit, he expressed the belief that the Government had failed to comprehend the realities and risks of the scenario, given the lack of a proper plan.
Meanwhile, when contacted by The Sunday Morning, Deputy Minister of Trade, Commerce, and Food Security R.M. Jayawardana said that they were unable to take a decision as yet regarding the possible impacts of the global trade war on food prices in Sri Lanka.
He however noted that should the recent India-Pakistan issue escalate into a conflict, there could be some impact on Sri Lanka, adding that the Government was paying attention to this unfolding situation.
“We are paying attention to the global situation. Apart from taking an appropriate decision when such an issue arises, we have no specific plan at present, since the situation will determine the response. Therefore, we have not held ministry-level discussions on this matter yet,” he said.