Global Trade Slowdown:
Implications for Sri Lanka’s Trade Outlook

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In the face of a series of global economic crises and shifts, Sri Lanka (SL) faces an uphill battle in maintaining its economic growth and export competitiveness. The lingering effects of COVID-19 and geopolitical tensions, such as the ongoing war in Ukraine, are disrupting global supply chains and rolling back the progress made in poverty reduction. Furthermore, predictions of a deceleration in global economic growth to 1.7% in 2023 and 2.7% in 2024, compounded by a slowdown in global trade growth to 1.6% in 2023 and 3.4% in 2024, paint a stark picture of SL’s future. The global trade slowdown and the implications for Sri Lanka was the topic of discussion at the webinar hosted by USAID PARTNER Activity in collaboration with the Ceylon Chamber of Commerce. This article will explore some of the key insights from the webinar.

 

Contextualizing the Economic Challenges

Before the pandemic, a significant global slowdown in productivity and trade growth had been brewing, notably highlighted by a decade-long slump. Current trade growth is only a fifth of its 2021 level, and investment is less than half of the previous 20-year average. Global integration is further challenged by increased fragmentation of global supply chains, climate change, a growing digital divide, rising food insecurity, de-dollarization, and slowing investment flows.

Fragmentation is particularly noticeable within regions and geopolitical blocs. According to a DHL report, while connectivity is deepening, it remains relatively low and stagnant in terms of breadth. The most significant threats to long-term growth for Emerging Market and Developing Economies (EMDEs) lie in how fragmentation affects investment flows. Countries outside geopolitical alignments are projected to see a significant decrease in Foreign Direct Investment (FDI).

The Sri Lankan Context

Mirroring global trends, SL’s trade growth is also slowing down. This slowdown, when juxtaposed against its competitors, indicates potential losses in volume and market shares. Notably, Sri Lanka is falling behind its regional peers in attracting FDI, with inward FDI as a share of GDP standing at only half of South Asia as a whole and a fraction of its competitors. This poses greater challenges for Sri Lanka during a global recession compared to well-connected countries with strong export markets, global value chains, and investments.

However, amidst this grim outlook, certain opportunities are emerging. There is a growing demand in EMDEs (Emerging Market and Developing Economies) for products and services where SL has a comparative advantage. Moreover, companies incorporating social and environmental impact into their core strategies are seeing improved access to investment, lower capital costs, and higher returns on investment. Thus, for the Sri Lankan business community, the key to stable and sustainable long-term growth lies in diversification and deepening links to identify new markets for existing products.

Government's Role in Mitigating the Impact

The Sri Lankan government can play a crucial role in mitigating these challenges. In the short term, partnering with the Export Development Board (EDB) on proactive trade promotion and advocating for rapid regulatory reforms are crucial steps. In the medium term, private sector partnerships with the Board of Investment (BOI) to identify strategic investments are essential. Moreover, businesses, in collaboration with the government, need to identify priority markets to secure and expand market access and advocate for deeper regulatory reforms.

Asia: A Silver Lining for Sri Lanka

Despite the global slowdown, Asia offers unique opportunities for Sri Lanka, largely driven by China’s recovery from COVID-19. Import demand in Asia is positive, contrasting with negative trends in the West. Sri Lanka, with its strategic geographical location, efficient port facilities, and being in the Indian time zone, can exploit the booming Asian growth. Trade between South Asia and East Asia has been consistently growing from 1990 through 2018 and is projected to approach a significant milestone of USD 500 billion in the ensuing years, with India acting as a pivotal participant. This represents a substantial yearly growth in trade relations between the two regions.

However, Sri Lanka must tread carefully. Uncertainties over China’s growth, US-China trade conflicts, and Sri Lanka’s domestic issues, including debt restructuring, privatization, and unpredictable politics, cast a shadow over this silver lining. It is crucial for Sri Lanka to maintain a customer-led approach, sustainability, and Environmental, Social, and Governance (ESG) practices to attract more business.

Navigating Through the Slowdown

The impact of the global trade slowdown on Sri Lanka’s economy is potentially reducing export demand, increasing import lead inflation, and impacting logistic services, and investment inflow. The logistics industry is facing significant challenges due to the limited availability of large-scale projects and factories, which is impeding the smooth transportation of building materials and raw materials. Furthermore, Sri Lanka’s remittance dependency adds vulnerability. A significant contributor to the Sri Lankan economy is its agriculture and apparel industries. The global trade slowdown has the potential to impact these key sectors negatively. With demand for exports potentially decreasing and import inflation rising, these industries could face challenges in terms of raw materials availability and cost-effective production. However, the situation also presents an opportunity for these industries to diversify their markets, particularly focusing on the growing demand in emerging markets.

To mitigate the effects of the global slowdown and seize new opportunities, Free Trade Agreements (FTAs) are another important tool. These agreements could help Sri Lanka tap into flourishing markets in Asia, particularly India, and compete more effectively with neighbouring countries. Furthermore, FTAs could be instrumental in bolstering the agriculture and apparel industries by reducing trade barriers and fostering increased access to larger consumer markets. Furthermore, Sri Lanka’s strategic location offers unique opportunities for port activities, such as transhipment and logistical services that can be rerouted to dual shipping activities. Moreover, emerging markets present opportunities for logisticians to shift focus from big volume products to niche items.

Learning from Regional Competitors

Sri Lanka can also learn valuable lessons from regional competitors like Bangladesh and Thailand. While Bangladesh enjoys preferential market access due to its Least Developed Country (LDC) status, it is also focusing on land connectivity and leveraging its abundant non-unionized labor, particularly female workers, providing significant advantages for firms. Thailand, on the other hand, is concentrating on agro-processing and maintaining quality standards, presenting potential investment opportunities for Sri Lanka.

Recommendations for Way Forward

In conclusion, Sri Lanka’s path out of this crisis requires a concerted effort from both the business community and the government. A focus on exporting to Asian markets, attracting export oriented FDI, digitizing bureaucratic processes, cutting red tape, and overcoming barriers to ensure energy security through a push on renewables are just a few of the key steps that need to be taken. There is also a critical need to address the skill gap, invest in STEM (Science, Technology, Engineering, and Mathematics) education and business training, and maintain a neutral foreign policy for trade balance. Exploring niche markets, particularly in the areas of Ayurveda and herbal products, offers a unique opportunity. More than anything, Sri Lanka must work towards implementing Free Trade Agreements to tap into thriving Asian markets, particularly India, and compete effectively with neighbouring countries.

This article is a part of the Business Tips for Trading Across Borders series — A collaborative effort of 
The Ceylon Chamber of Commerce and United States Agency for International Development (UASID) Partnership for
Accelerating Results in Trade, National Expenditure and Revenue (PARTNER) Activity

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