Sri Lanka’s Need for Economic Diplomacy

Sri Lanka has gone through great changes both economically and politically over the past decade. With the successful defeat of terrorism in the country, the economy has grown at an average of 7% since. The political changes in 2015 have its own implications for the country’s economy. If we take a minute to think why we were not affected by the global financial crisis of 2008, the most accurate answer would be; “because we are not deeply integrated to the global economy”. It’s important that this government takes steps to change that in the near future. This article aims to act as a comparatively short text which would inform of the country’s economic activity in relation to the global changes.

Today Sri Lanka has the task of “rebalancing” the status quo in the South Asian region between China and India. Both these global powers showing particular interest in the country. Relationships with India were not the strongest in the past few years especially after India voting against Sri Lanka in UN Human Rights Council vote in 2012 and 2013. In contrast ties with China have been significantly strong with the global power fueling most of the infrastructure development projects in Sri Lanka. The development of the country was highly dependent on these infrastructure projects since 2010 with the conclusion of the war. However the preferences are seemed to have shifted with the new government showing particular interest in reshaping ties with India and pushing China to the side ropes. Despite giving this impression earlier on, the government of Sri Lanka requested financial assistance from China for the development of the Central Highway signifying its inability to disregard the Chinese influence for the economy.

The world experienced a devastating financial crisis in 2008 which determined the fates of many developed economies. Greece a part of the elite club became a victim of this economic downturn with it defaulting on its debts in 2015. The global economy led by the United States seems to be gaining pace after a period of dire consequences to many economies. The strongest growth in the European Union in any quarter over the past 2 years has been 0.3%. The Chinese economy has slowed down and moving towards a more sustained and timid growth trajectory fueled by domestic consumption. With the transitions still happening, we are yet to see how it affects the long term processes of china. India is expected to outperform China in the near future with 12 million individuals entering the Indian labor force every year.

The IMF projects a 3% growth in the U.S. economy after 2.2% and 2.4% in 2013 and 2014 respectively. Apart from the global financial crisis other factors such as geopolitics too have played a crucial role in determining the economic status of countries like Russia and Iran. Russia faces sanctions over its actions in Crimea, Ukraine.  This has a negative causal effect on exporters to Russia, including Sri Lanka. On the other hand, we can expect an economic revival in Iran following the removal of sanctions after the nuclear deal was finalized in 2015. How do these global shifts affect our small country?

Sri Lanka has lots to do in terms of strengthening its export ties. Exports accounted for just above US$ 11 billion in 2014 and comparatively to countries like Vietnam and Bangladesh it’s far behind. In 1990 Bangladesh exported US$ 1.6 billion worth of commodities as oppose to US$ 1.9 billion of Sri Lanka. In 2013 Bangladesh has been able to push its exports to a staggering US$ 30 billion as oppose to only US$ 10 billion by Sri Lanka.  This signifies that Sri Lanka has been losing its global market over the years to its competitors. Even commodities such as Tea is not giving Sri Lanka the comparative advantage it once held, losing its markets in Russia and Turkey t0 countries like Kenya. Economic and political situation in the Middle East too has its negative effects on the Sri Lankan tea market. As a result the value for tea has depreciated and we see the implications domestically.

The European Union is Sri Lankan biggest export market accounting for 46% of the textile and garment exports, 30% rubber exports and 40% of the fish and crustacean exports of Sri Lanka. Middle East, North Africa, Russia, and the Commonwealth countries are Sri Lanka’s biggest tea markets. Exports to the U.S. have decreased over the past years. Despite growths in exports to the EU, Sri Lanka lost its privileges under EU’s Generalized System of Preferences (GSP plus) trade concessions due to politically driven reasons behind claimed human rights violations from the final stages of the war. The new government is seen to have taken steps to reinitiate GSP plus. In March 2015 an EU delegation visited Sri Lanka to re-evaluate the situation.

Remittances from Sri Lankan workers abroad continue to be a main part of the GDP, as it the biggest source of foreign exchange for the country. Remittances accounted for US$ 7 billion in 2014. Tourism also showed growth with over 1.5 million tourists visiting the country in 2014. High number of Chinese and Indian tourists continues to visit the country. This will open up investment and employment opportunities in the hospitality industry and support to this claim can be seen by the many hotels and resorts that are being constructed by international firms.

Sri Lanka’s exports are dependent on unstable economies, which include the financial crisis affected EU, turbulent Middle East and the sanction facing Russia. These economies will not be able to provide the boost the country needs hence creating the need for the government to indulge in effective economic diplomacy with other potential markets. Simultaneously the country’s labor force should be able to absorb the opportunities that will come our way especially through provision of technical skills, diversifying education opportunities and incorporating technology to the education process and empowering female employment. Diplomacy should be used as a tool to learn from the good examples in the region and domestic stakeholders should be educated of the realities of economics and both the public and private sectors should work towards harnessing the global economic potential.


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