IMF warns of export-driven 3% GDP drop ahead of US tariff deadline

• Describes global trade policy uncertainties as significant risks to Sri Lanka’s macroeconomic and social stability
• Asserts any re-escalation of trade shocks poses downside risks to the economy
• Says if the shocks materialise, the authorities will work closely with staff to assess the impact and formulate policy responses within the contours of the programme

As Sri Lanka’s export sector holds its breath ahead of the 9 July deadline for the 44 percent US reciprocal tariff to take effect, the International Monetary Fund (IMF) yesterday expressed serious concerns about the potential impact on the country’s fragile economic recovery.

In a report released yesterday following the approval of the fourth review of Sri Lanka’s reform programme, the IMF described global trade policy uncertainties as “significant risks to Sri Lanka’s macroeconomic and social stability.”

It cautioned that ‘any re-escalation of trade shocks poses downside risks to the economy,’ while highlighting that the reinstatement of the 44 percent tariff on exports to the US, along with comparatively lower tariffs on competitor countries, would erode Sri Lanka’s export competitiveness. The US is Sri Lanka’s largest trading partner.

The Fund’s analysis pointed out a sharp potential impact on Sri Lanka’s export sector, especially in the garment industry, where profit margins are thin and companies have limited capacity to absorb higher tariffs. 

“Exports could decline by as much as 3 percentage points of GDP due to lower external demand and diversion of trade. There is also a risk that exporters could relocate or expand their existing foreign operations,” the IMF said.

The broader economic consequences include a projected real GDP decline ranging between 0.25 percent and 1.5 percent relative to baseline forecasts, driven by narrowing net exports and spillover effects into other sectors. 

The IMF also cautioned that the reduction in Sri Lanka’s competitiveness and heightened uncertainty would discourage business investment, raising risks of higher unemployment and slowing reform efforts.
The Fund noted that if the shocks materialise, the authorities will work closely with staff to assess the impact and formulate policy responses within the contours of the program.

However, the government remains optimistic about securing a favourable resolution with the US. Cabinet Spokesman Dr. Nalinda Jayatissa said this week there is hope that by 8 July the US will be able to adjust its tariff policies in a way that does not harm Sri Lanka’s exporters or severely impact the island nation’s economy.

Meawnhile, President Donald Trump yesterday said that the US will charge 20 percent tariffs on imports from Vietnam under a new trade deal reached during last-minute negotiations.

Products sent from Vietnam to the US had faced a 46 percent levy, which was set to go into effect next week as part of Trump’s “reciprocal” tariffs announced in April.

Several of other economies, including the European Union and Japan, are still scrambling to make their own deals with the US before the planned increases.

Under the agreement, Vietnam will charge no tariffs on US products.