What now for Sri Lankan firms?
Action points for exporters, importers, and investors within a world in transition
Trump’s tariffs on Sri Lanka were clearly more than expected. Big impacts on Sri Lanka are likely in the short-term, especially on the export sector. However, we feel these are not straightforward, and the fundamental changes in the world might even overpower direct changes through the tariffs.
On top of this, it’s increasingly clear that the economic rules of the past are no longer working in the same way. This creates a lot of uncertainty and a lot of impacts that can whiplash back onto the Sri Lankan economy as well.
In this context, what does a Sri Lankan firm do? How do you act to protect yourself, to take advantage, and to stay ahead of the curve? In this report, we’re setting out a few key points we think will help clients. We have structured these where the first few questions look at the background, and the latter questions look at specific action points.
The full note sent to clients includes a more detailed exploration of these questions. A few limited extracts of these are given below -
1. What are the immediate impacts a Sri Lankan firm has to prepare for?
We see two immediate impacts a Sri Lankan firm in particular should be looking at
The direct decisions of US and other buyers of Sri Lankan exports
Uncertainty about whether the specific tariffs will continue will also affect the market at this stage, but we are of the view that even if the specifics of these reciprocal tariffs change, it seems increasingly likely that most exporters will face higher US tariffs going forward than what has been the norm over the previous decades.
The cost of volatile markets affecting financial costs
Rapidly moving markets across the world have been another visible impact of the tariffs. Particularly for hedged instruments, currency forwards, and any short-term finance requirements, this then can become a critical point to watch out for. We are of the view that these volatilities, punctuated by moments of hope and calm, will be a feature of at least the next few months
2. What are the less immediate impacts a Sri Lankan firm has to prepare for?
Outside of the immediate impacts, we think other secondary impacts can be there on the global economy that can directly affect the Sri Lankan economy.
Rising likelihood of global slowdown and even recession
Compared to Sri Lanka’s exports to the US being affected, a general global recession can mean that all of Sri Lanka’s exports can be affected negatively. This would affect any exporter regardless of their current exposure to the US and could be much larger of an impact than the direct impact of tariffs alone.
Rapidly changing global import prices and shifting supply chains
Some countries have higher tariffs than Sri Lanka as a percentage, but even countries with lower tariffs have a much higher proportion of trade with the US than Sri Lanka does. Depending on how those countries react, there could be volatilities in import costs at varied points across the supply chain but also critical bottlenecks that can affect availability of supply.
Changes in global commodity prices
Shifting capital flows that can affect financing flows
3. What does this mean for exchange rates?
The overall impact on Sri Lanka’s exchange rate across 2025 is unlikely to be very dramatic in our expectation, with the depreciation pressures which we had spoken of earlier increasing only moderately. For this, our main reason is that falling FX inflows will be largely countered by falling FX outflows (lower oil prices, lower textile imports etc.). However, sentiment shifts can result in volatile movements across those points that can affect FX forwards.
4. What does this mean for interest rates?
We think Sri Lankan interest rates can be a bit volatile, but fundamentally not move too much from current levels by end-2025. Any movement in interest rates in Sri Lanka are far more likely to be driven by sentiment shifts in local government securities markets in our view, especially on future inflation and depreciation expectations, than directly as a result of global factors. Since there is not a lot of immediate influence of global capital in Sri Lanka’s interest rate markets right now, direct impacts are unlikely.
5. What should an exporter do in the short-term?
In the short-term, we think the obvious decision for exporters is that they should act defensively in the face of potential tariffs directly, but arguably more importantly against the increasing likelihood of a significant global slowdown.
Part of this could be looking out for specific input costs that can fall for them across the supply chain, identifying specific bottlenecks that can occur due to the different ways individual countries are affected by tariffs directly and indirectly, and keeping an eye out for specific policy measures that input sources might be taking.
6. What should an importer do in the short-term?
In the short-term, we think importers should be looking at the policy measures their source markets are taking in response to the global tariff increases. Importers might have the advantage of benefitting from falling import prices amidst lower global demand conditions in the coming months.
However, the costs for importers can also be specific from sector to sector. This can be in terms of how volatile specific supply chains can be, how financing costs can rise for hedging needs, how volume reductions can affect margin decisions, and specific purchasing windows.
7. What should an investor do in the short-term?
For a Sri Lanka based investor, we think the current context is one that calls for conservative diversification on one end, and the ability to move rapidly into aggressive bold investments as those opportunities become available.
However, the high-risk nature of this moment is one that we would still caution investors about. While we think high-reward is possible, it is very much down to specific risk-sentiment that an investor would hold. Even high-reward options, can include significant losses in the interim, so the ability to hold onto such losses until you see the medium- to long-term benefit is then part of the requirement.
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For limited time access to the full note, please reach out to us on research@frontiergroup.info. Clients who have access to Frontier Athena can visit athena.frontiergroup.info
(Frontier Research is a Colombo-based firm that engages in macroeconomic research and advisory for corporate and investment clients on Sri Lanka, South Asia, and South East Asia.)