Sri Lanka GDP could lose 1.5-pct of GDP on a high Trump tariff: IMF
A high Trump tariff relative to competitors could shrink exports and reduce GDP by up to 1.5 percent below baseline projections and spillovers to other sectors, an International Monetary Fund report said.
Sri Lanka is currently on a 10 percent export tax to the US with a 44 percent Trump tariff suspended till July 09.
Reinstatement of the tariff would erode Sri Lanka’s export competitiveness, especially on apparels where margins were thin, the IMF report said.
“Exports could decline by as much as 3 percentage points of GDP due to lower external demand and diversion of trade, a staff report released after the completion of a fourth review of the IMF program said.
“There is also a risk that exporters could relocate or expand their existing foreign operations.
A wide gap between Sri Lanka and competitors like Vietnam, India or Bangladesh would hit exports, while a broadly the same rate would maintain competitiveness and prevent a shift of trade.
Vietnam, direct competitor to Sri Lanka’s apparel and some other products, has negotiated a 20 percent tax for its exports to the US against zero for imports, Trump said while ‘transshipments’ would be taxed at 40 percent.
It is not clear what ‘transshipments’ were and no domestic value addition criteria were mentioned.
“Lower exports would partially be offset by the lower need for imported inputs, lower global commodity prices, and exchange rate depreciation.
“With a narrowing of net exports, and spillovers to other economic sectors, the level of real GDP would decline by ¼ to 1½ percent relative to the baseline.
The IMF is generally projecting a 3.1 percent growth after restructure and 3.5 percent this year, though actual growth is higher.
“The reduction in Sri Lanka’s competitiveness and heightened uncertainty would discourage business investment, contributing to a loss in GDP,” the IMF report said.
“Unemployment would surge. Public pressure on the government to deliver support may slow down reform implementation and increase the risk of program underperformance.”
Elevated uncertainty and downside risks linked to significant global trade shocks also pose risks to the program making it difficult to achieve program targets.
“The loss in merchandise export receipts would slow the accumulation of reserves and may lead to external financing gaps,” the IMF report said.
“Slower global growth would compound these effects through lower remittances and tourism revenue.
“Fiscal revenues would be lower directly from a loss in corporate income tax revenue from exporters and indirectly as weak growth would affect the buoyancy of revenues.
“At the same time, spending pressures to support affected workers and the economy more broadly would increase.
“A persistent and significant widening of the primary balance could lead to unsustainable debt. Increased global risk aversion may substantially increase financing costs, halt foreign inflows, and delay Sri Lanka’s return to markets and debt sustainability risks would rise further.”
President Trump has said that he will send out ‘take it or leave it’ letters to trade partners and said he is not going to extend his July 09 deadline, though there are some expectations that the US may do so.
