Economist warns of deepening economic vulnerabilities for SL amid US tariff policy

Economist Rehana Thowfeek Pic by Shehan Gunasekara 

• Economist Rehana Thowfeek cautions on 90-day tariff pause nearing its end, SL faces more than just potential decline in orders as it risks shock to already fragile economic recovery
• Believes solution doesn’t lie solely in diplomacy with Washington, but in bold domestic transformation
• Points to significant opportunity in India with 1.5 b people, booming middle class, calling it huge untapped market 
• Emphasises diversification and digitisation as Asia homes over 54% of global middle class, offering long-term promise for SL
• Insists on strengthening SL’s trade infrastructure, access to finance; integrating MSMEs into global value chains
• Says digitisation remains a hurdle, while political will has often fallen short—but now the urgency is too great to ignore 

By Janani Kandaramage 

Sri Lanka finds itself at a critical economic crossroad, with apparel exports—the country’s largest foreign exchange earner—caught in the crossfire due to the imposition of a 44% reciprocal tariff, threatening to tip the precarious post-crisis economy into further policy inconsistency.

Economist Rehana Thowfeek, addressing a symposium on ‘US Tariffs, GSP+ Status and Strategic Policy Responses’ hosted by the National Movement for Social Justice (NMSJ) last week, issued a stark warning that Sri Lanka’s overdependence on the US market and its stagnant export strategy could spell serious trouble unless urgent structural reforms are made.

“The Trump-era tariffs have exposed our vulnerability, but they also shine a light on our untapped potential. While the US recently rolled back the retaliatory tariff to a baseline of 10%, the absence of a binding agreement following high-level discussions in Washington has left Sri Lankan industries in limbo.” 

“Both sides have only agreed to continue talks. That’s not a plan, it’s a pause,” she added.

Currently, nearly 25% of Sri Lanka’s total merchandise exports and a staggering 40% of apparel exports are destined for the US market. 

Thowfeek cautioned that with the 90-day tariff pause nearing its end, the country faces more than just a potential decline in orders—it risks a shock to its already fragile economic recovery.

“If orders drop, imports linked to raw materials will fall, but not proportionately. The real danger lies in the imbalance. Fewer exports mean reduced foreign exchange, but our debt obligations stay the same. That’s a recipe for pressure on the balance of payments,” she noted.

The apparel sector, often hailed as Sri Lanka’s economic backbone, may become a casualty of global trade shifts unless decisive action is taken. 

Thowfeek believes the solution doesn’t lie solely in diplomacy with Washington, but in a bold domestic transformation. “We must act on long-overdue trade reforms,” she urged, noting that Sri Lanka’s export basket has barely changed in decades. “We’ve missed wave after wave of global trends,” she added.

As per Thowfeek, a significant opportunity lies next door. “India, with 1.5 billion people and a booming middle class, is a huge untapped market. We are geographically and diplomatically well-positioned—if we get our policies right,” she pointed out.

Thowfeek floated the idea of rerouting exports through low-tariff countries such as India. But she quickly acknowledged that Trump-era rules of origin could block such tactics. Instead, she emphasised diversification and digitisation, arguing that Asia—home to more than 54% of the global middle class—offers long-term promise. 

“There’s growing demand for ethical, wellness-oriented goods—categories where Sri Lanka already has a niche, like Ceylon Cinnamon, single-origin tea, and sustainable apparel,” she stated.

But for that potential to materialise, she insisted the country must strengthen its trade infrastructure, improve access to finance, and integrate Micro, Small, and Medium Enterprises (MSMEs) into global value chains. “This isn’t just about trade—it’s about inclusive growth. If we link MSMEs to global markets, we don’t just grow exports, we reduce poverty,” she stressed.

She acknowledged that digitisation remains a hurdle, and political will has often fallen short. “But now, the urgency is too great to ignore. Investor sentiment is already shaky, with capital flowing into gold and other safe havens. The rupee may seem stable today due to a weak dollar. But with remittances declining and tourism uncertain, long-term risks remain high,” Thowfeek warned.

Stating that the clock was ticking, she opined that without a clear deal from the US, Sri Lanka faces a dangerous squeeze on exports, foreign exchange, and investor confidence. “This crisis could still be our catalyst—if we choose to act,” she stressed.