ECONOMYNEXT – Sri Lanka’s ability to repay foreign debt could be undermined if the European Union’s Generalised Scheme of Preference Plus is revoked, Rohan Samarajiva, Chairman of LIRNEasia, a regional policy research body said.
The uncertainty over GSP+ is coming as Sri Lanka also faces the prospect of higher US tariffs.
The European Union’s Generalised Scheme of Preference Plus gives exports from developing nations preferential access t EU markets.
To maintain the GSP+ status, countries should ratify 27 international conventions on human rights, labour rights, environmental protection and climate change, and good governance.
The country’s use of the Prevention of Terrorism Act and the Online Safety Act have been sticking points in extending the GSP+ scheme.
The European Union is the second largest export market for Sri Lanka, generating over 1,523.13 million US dollars annually.
The apparel industry works on small margins, and a hit on tariffs could have a bigger impact on the sustainability of companies than the revenue indicates.
Sri Lanka rupee could also depreciate, pushing up the cost of debt service and government expenditure.
“So, the government will need more rupees to buy the required dollars because by 2027, we need to be paying the debt,” Samarajiva said.
Sri Lanka central bank has a flawed operating system called a ‘flexible exchange rate’ found in countries that go to the IMF often, with severe anchor conflicts where there is zero credibility on the exchange rate.
Due to the flaw in the operating framework, the exchange rate is subject to confidence shocks and automatic money printing to maintain a policy rate, when the economy recovers, analysts have said.
The Sri Lanka rupee depreciated suddenly in the first week of April 2025, as Trump tariffs of 44 percent was announced, giving a sign of what may come.
Hong Kong on which over 100 percent was announced, did not budge, as there was no policy rate.
The exchange rate has no budged since 1981 and speculators who tried to hit the peg in the Asian Financial Crises, went away with severe losses as interest rates went up, hitting their swaps.
The Hong Kong dollar last fell in the late 1970s when a hand-over to China was announced, and it was converted to a fixed exchange without a policy rate where macro-economists could no longer print money and create inflation higher than the US to trigger monetary instability and social unrest.
In Sri Lanka as the flexible exchange falls steeply due to some external or domestic shock the flawed operating framework, rating agencies downgraded in the past.
Analysts say the fall of the currency, even briefly, due to the flawed operating framework, had led to downgrades in the past.
In April 2020 Fitch downgraded Sri Lanka’s rating to ‘B-‘ as the exchange rate fell, though the exchange rate recovered as lockdowns killed private credit and demand and the central bank bought dollars for a period.
Meanwhile, Samarajiva said Sri Lanka can diversify exports, to reduce risks.
Market diversification can lower the risk of instability in Sri Lankan exports, Samarajiva said.
“Gravity model means the natural thing is that nearby, most of your goods trade should be with nearby countries. We have been defying gravity all this time because most of our goods trade, at least exports, is with far away places,” he said.
Sri Lanka’s trade happens mostly with western nations, often overlooking opportunities in nearby states. Western nations so far have had lower import duties, and exporters say the US in particular has better margins.
“We shouldn’t get confused by the 1.3 billion people who are in India. We should think of the top 10% of that 1.3 who are capable of buying anything you can imagine.”
Amanté, now owned by Reliance Retail Ventures Ltd, an Ambani owned entity made its way to the Indian market under MAS embracing south-south trade, Samarajiva said.
Established in India in 2007, Amanté sold lingerie and nightwear in many Indian cities maintaining a strong online presence.
However, some Sri Lanka firms also had units in other countries, like India and Vietnam which may allow them to maintain markets, he said. (Colombo/Jun4/2025)