International Environment and Impacts on Sri Lanka

Abstract

Global economic activity slowed over the course of the year in 2018, with the sluggish momentum continuing through to 2019. Escalating trade tensions between the US and China, coupled with President Trump’s protectionist stance have been the biggest contributor to the dip in economic sentiment, globally. To add to concerns, China’s economic growth rate is slowing due to regulatory tightening and trade tensions with the US, while the Euro area faces more challenges than expected. In addition, the unclear terms of exit of the UK from the European Union (EU) has heightened uncertainty in the global economic environment. Under such toxic external conditions, Sri Lanka’s external sector faces a multitude of challenges, including the spillover impacts of the ongoing trade wars, as it seeks to increase exports via several reform packages. A largely stagnant export basket, as well as overreliance on markets in the US and EU for exports do not help, as demand from these destinations could slow due to unfavorable external conditions. Other key revenue generating sources such as remittance earnings are also slowing down; the April 2019 terror attacks derailed what was otherwise a promising performance in tourism earnings. Thus, while the country’s external sector resilience has marginally improved by mid-2019, much remains to be done to strengthen Sri Lanka’s position, to effectively cushion against external shocks.