US tariffs threaten troubled Sri Lanka’s recovery: IMF

COLOMBO: Sri Lanka’s recovery from its worst economic meltdown, which forced a sovereign default and toppled a president, will be undermined if punishing US tariffs resume, the IMF warned on Friday.

The US is Sri Lanka’s largest single market, accounting for almost a quarter of its $12 billion in merchandise exports. The trade balance is heavily in favour of the small South Asian nation.

Washington imposed a 44 per cent “reciprocal tariff” on the island nation before putting it on hold for 90 days on Thursday.Sri Lanka has not retaliated but instead appealed for negotiations with Washington.

“The recent external shock and evolving developments are creating uncertainty for the Sri Lankan economy, which is still recovering from its own economic crisis,” the IMF said following talks with local officials.

It noted that more time was needed to assess the full impact on the IMF-supported bailout programme Sri Lanka entered into in early 2023.Sri Lanka secured a $2.9 billion, four-year loan from the IMF after running out of foreign exchange to finance even the most essential imports, such as food, fuel and medicines.

“Against ongoing global uncertainty, it remains important to continue rebuilding external buffers through reserves accumulation,” the IMF said.Sri Lanka had reported its first full year of economic expansion since its unprecedented crisis in 2022 when the US tariff announcement was made.The final quarter of 2024 saw the economy expand by 5.4 per cent, bringing the full calendar year’s GDP growth to 5.0 per cent, compared to a contraction of 2.3 per cent in 2023.

The island’s worst economic performance came in 2022, when GDP shrank by 7.3 per cent.Months of shortages in early 2022 led to street protests that eventually toppled then-president Gotabaya Rajapaksa.

His successor, Ranil Wickremesinghe, doubled taxes, cut subsidies, raised prices and went on to lose his re-election bid in September.The leftist administration led by President Anura Kumara Dissanayake has maintained many of the austerity measures and has urged all parties to work out a negotiating strategy with Washington together.

The Colombo-based private economic policy think tank Verite Research urged Colombo to join others hard-hit nations “under the aegis of the WTO (World Trade Organisation) and agree on a common response”, its head Nishan de Mel told AFP.