Killing Sri Lanka’s Golden Goose: Exporters’ dilemma

Forging stronger trade ties with large emerging markets will grant Sri Lanka—and future FDI—easier access to growing consumer bases

The newly imposed 30% US reciprocal tariff on Sri Lankan exports (on top of the applicable tariffs on specific HS codes) has become a major concern. This situation underscores the critical need to model for uncertainty within a broader global context. If these new tariff structures persist, their wide-ranging negative impact on the world economy—especially the US—will be substantial. This would have multiple repercussions: harming the US economy, weakening the dollar’s status as the reserve currency, disrupting world trade, and accelerating a global economic slowdown. 

Should geopolitical tensions rise concurrently, the situation could become chaotic, driving up energy prices and triggering stagflation that impacts secondary sectors like global tourism and remittance flows. Vulnerable economies like Sri Lanka would be affected. While it may be too early to quantify these risks precisely, we cannot afford to overlook them.

Policymakers must prioritise protecting our export sector (both merchandise and services) as a whole, especially SME exporters. This is not to diminish other sectors, but to spotlight that a thriving export community—coupled with intelligent policy—will be Sri Lanka’s “saving grace.”

The false sense of achievement regarding the current tariff rate

While some applaud reducing the tariff from 44% to 30%, it’s crucial to understand that the initial 44% never got executed. US importers adjusted pricing assuming a blanket 10% reciprocal tariff, which was to be the case afterwards. Our strategy must now be vigilant and based on the current 30% rate compared to our competitors’ rates, recognising the 10% level as the previous universal baseline. US importers had finalised cost structures where tariffs were partially or fully absorbed. However, a threefold increase makes full absorption by either party unlikely. We must also anticipate how Asian competitor nations (Vietnam, India, Bangladesh, Thailand, Indonesia, Cambodia, etc.) will react and renegotiate.

Our trade negotiators need to be smarter, crafting a deal attractive more than what is offered by others and perceived better to the US. While Sri Lanka may not be able to offer pure trade deals compared to the Asian larger trade partners to the US, we can be strategic. Negotiations should combine trade terms with hybrid strategic PPP (Public Private Partnerships) investment opportunities. These must leverage Sri Lanka’s strategic location to offer good commercial value to US companies while safeguarding our sovereignty, national security, and the Indo-Lanka Peace Accord. 

Achieving exponential GDP growth to overcome the crisis

Assuming no major external shocks, our current meagre growth pace will leave us struggling by 2028 when significant bond settlements fall due and we must return to external borrowing markets. We must plan for exponential growth (6-8%). This demands strategic policy shifts.

Sri Lanka must move from protectionism towards expansive trade agreements to attract foreign investment. Modernising Export Processing Zones (EPZs) via PPPs can revitalize infrastructure, offer competitive tax incentives, and integrate these zones into global supply chains.

Forging stronger trade ties with large emerging markets will grant Sri Lanka—and future FDI—easier access to growing consumer bases. This necessitates a dedicated trade negotiation and analysis team under the Ministry of Finance. Imports should be viewed not as threats, but as vital intermediates for value-added exports, fostering a more open trade environment that ultimately improves the trade balance.

Enhancing Foreign Direct Investment (FDI)

FDI is essential—injecting capital, technology, and market access while reducing debt reliance. Attracting more FDI requires attractive tax incentives, transparent governance, and establishing high-tech free trade zones through PPPs to position Sri Lanka as a formidable global investment hub.

Supporting the exporters

The Government rightly emphasises value-added exports. Companies utilising primarily local raw materials (e.g., natural latex mattress core and pillow producers) contribute significantly more net value to the trade account. Isn’t this precisely what the Government wants to develop? Support shouldn’t mean tax holidays, but could include credits for overseas marketing activities. The Government must promote forward integration (reaching retail consumers) and geographic diversification for such exporters.

A national policy should strategically identify key exporters/industries and drive targeted credit/investment lines through Government investment banks. These banks need specialised units to advise budding industries, ensuring lending aligns with national policy and yields strategic outputs. Without such micro-level engagement, sustainable growth will be elusive.

The export sector should be categorised into multiple stages based on the size of recurrent revenue, and concurrently the corporate tax should be levied based on a step up approach on each stage. But as you move more tax credit given for market development and local brand building. Highest corporate tax paying exporters should be recognised as national icons. The EDB needs to work tirelessly with Sri Lankan Embassy trade desks in key foreign markets (along with selected exporters) for market development. Thus, EDB/Embassy trade desk officers need to be given clear KPIs for such achievements, which would be recognised at a national level stage. 

These government investment banks need to guide such capital hungry exporters to a specific USD stock exchange platform at the Colombo Stock Exchange at the right time. The fact the exchange is a USD based will exclude the risk of the depreciating LKR, which would entice more foreign investors looking at Sri Lankan stocks that are more exposed to the world trade rather than the local economy, excluding the LKR risk. 

Another critical consideration is abolishing the Simplified VAT mechanism. While boosting immediate treasury liquidity, has sufficient consideration been given to the liquidity crisis it would create for SME exporters reliant on bankrolling for working capital? They would need further borrowing to cover increased VAT requirements. This immediate hit, combined with existing trade uncertainty, could create mayhem starting this quarter. The Government must carefully reconsider this. 

Sri Lanka’s unique commodities—like rubber and cinnamon—are underexploited global assets. Rubber, thriving near the equator, offers untapped export potential. A cohesive national branding strategy, mirroring successful tourism campaigns, can elevate “Made in Sri Lanka” or “Ceylon Product” globally. This should be complemented by targeted “Invest Sri Lanka” branding to promote existing and new economic zones.

(The writer is a Chartered Financial Analyst. He is the CEO of a mid-sized exporter and a Strategy/Investment advisor to companies. He can be contacted through: https://www.linkedin.com/in/saminda-weerasinghe-cfa-a3333358/.)