Sri Lanka braces for Brexit fallout as the Sterling plunges

ECONOMYNEXT – Sri Lanka’s is bracing for the fallout of of Brexit as Britain voted to leave the European Union, a top export destination and the third country’s third largest source generation market for tourists.

The Sterling Pound plunged 21 rupees against the Sri Lanka rupee, which is soft-pegged to the US dollar, while global markets were volatile.

"If there is a lot of volatility and global market go to risk-off mode, then dollars bond sales to bridge Sri Lanka external financing requirements will be difficult," says Shiran Fernando, Lead Economist at Frontier Research, Colombo-based economic consultancy,

"In trade it will be more of a demand impact, because forecasters expect growth and consumption weaken. But it is too early to say."

The Sterling pound fell 21 rupees to 196 rupee down from around 217 rupees over the week, while the Euro was down 5 rupees to around 160 from 165 levels. It is not clear whether the fall in the Sterling will be permanent, since currencies are driven by monetary policy not trade.

A weak pound could hurt Sri Lanka’s exports to the Britain, which imports about a billion dollars of goods each year. Britain accounts for 40 percent of total exports to the EU.

Deputy Foreign Minister Harsha de Silva, who campaigned among Britons of Sri Lankan origin to remain, says Sri Lanka’s gains from GSP+ free trade concessions could reduce if Britain breaks away as trade concessions now will have to be separately negotiated.

Britain is also Sri Lanka’s third largest source of tourism arrivals.

But an analysis by JB Securities, a Colombo based brokerage shows that in terms of guest nights, Britain remains on top with China accounting for 11 percent of the total.

A weak pound makes foreign travel more expensive. British Prime Minister David Cameron, whose fate now hangs in the balance had warned that the country could be driven into a recession if it exited the EU.

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"In the medium-term, the impact on economic activity and dynamism in Britain and Europe would impact on the markets for our exports there," the Ceylon Chamber of Commerce, Sri Lanka’s largest trade chamber said in a statement.

"Britain is a substantial market for other EU countries, and any reduction in their export earnings and overall incomes would affect their demand for imports."

It is not clear what exactly happens when a country breaks away from the EU, with immigration being one of the most prominent issues in the campaign. Negotiations on how to part ways may take at least two years.

Britain pioneered global free trade from the middle of the 18t century with ending of Corn Laws (farming protectionism) propelling it into a global economic power house overtaking a world that was still gripped in Mercantilism.

Britain in the 18th and 19 centuries was driven by liberal philosophers and activists who pushed its parliament to end slavery and free trade, despite democracy (the popular vote) driving most of Europe – especially Eastern Europe – in to fascist nationalism. (Colombo/June24/2016).

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