Prolonged West Asian conflict will deal a severe blow to Lankan economy

The continuation of the war in West Asia would undermine the Sri Lankan economy severely. We would face an economic crisis more severe than the previous one.

People would suffer immense difficulties and hardships.

No peace

After three weeks of war in West Asia and over a year of the Russian-Ukrainian war, there are no signs of peace on either front. The continuation and escalation of these wars would destabilise the global economy and plunge the Sri Lankan economy into a severe crisis once again.

Global economic impacts

The global economy would be adversely affected by rising prices of fuel, fertiliser, and food, disruption of supply chains, and depressed demand. If the two wars continue, there will be a sharp increase in fuel, fertiliser, and food prices and shortages of these. A severe global recession is inevitable.

Economic hardships

As much as the human tragedies of the wars are horrendous, the economic difficulties and hardships for people the world over would be severe. The ongoing Russian-Ukrainian war of well over a year and the hostilities that broke out between Israel and Palestinian Hamas have thrown a dark cloud over the global economy.

Impact on Sri Lanka

The economic consequences of the two wars on Sri Lanka's trade, tourism, and remittancedependent economy are pervasive.

The adverse global economic developments would cause immense hardships, especially for the poor. Increasing unemployment, poverty, hunger, and malnutrition are inevitable.

International prices

Increases in fuel, food, and fertiliser prices, widespread inflation, and disruption of supply chains would retard economic growth, increase unemployment, poverty, hunger, and malnutrition in many parts of the world. Sri Lanka, too, would experience these in the months ahead.

Global impact

The global economy would be in severe turmoil if the two wars continue. The sharp increase in fuel, fertiliser, and food prices and shortages of these, if the wars drag on, would lead to a global recession.

Oil prices

Oil prices that were increasing after the outbreak of the Russian invasion of Ukraine have accelerated since the West Asia conflict. Oil prices that have risen to around US$ 100 per barrel could soar soon.

Impact on Sri Lanka

These global developments will affect the Sri Lankan economy adversely in many ways. This is especially so as the country is an export-import economy that is also heavily dependent on inward remittances and tourism.

Impact on trade

Sri Lanka’s heavily trade-dependent economy would be adversely affected by increased expenditure on imports and lesser demand for exports.

Imports

Import expenditures would balloon, with oil prices escalating to record highs. Increases in fertiliser and food prices would also significantly increase import expenditure.

Oil imports

Oil imports, which are on average about a third of total import expenditure, would rise sharply. The hike in fuel prices would lead to a severe drain on foreign reserves together with higher prices for fertiliser, food, and raw materials.

Shortages

While oil prices are likely to rise sharply, the disruption to transport may also result in a shortage of essential items. The increase in prices and shortages of fertiliser and food would have an adverse impact on Sri Lanka. The country’s production capacity, as well as employment and livelihoods, would be adversely affected.

Exports

Sri Lankan exports of manufactured goods have been declining owing to the recessionary conditions in Western countries. In the first eight months of this year, exports were 20 percent less than what they were in the same period last year.

The demand for our manufactured goods, such as garments, ceramics and rubber goods has been depressed. The demand for our manufactured exports is likely to be depressed with the global recession worsening.

Trade deficit

In the first eight months, the trade deficit had widened to nearly US$ 3 billion. The lower export earn-ings of US$ 8 billion and higher import expenditure of almost US$ 11 billion widened the trade deficit to US$ 3 billion in the eight months.

This trend in the trade deficit is likely to widen owing to higher imports and lower exports. The higher trade deficit will, in turn, strain the balance of payments, whose strengths—remittances and earnings from tourism—could also weaken.

Remittances

The insecure conditions in West Asia may result in the repatriation of Sri Lankan workers and lower worker migration. Initially, remittances may increase, if returning workers bring their savings. in addi-tion to what they remit monthly. Therefore, remittanes may reach the expected US$ 6 billion this year. They may decrease sharply with the deterioration of conditions in West Asia.

Repatriation

The unsafe situation in West Asia is likely to escalate, and large numbers of workers from several West Asian countries are likely to be repatriated. The migration of workers, too, will dry up until peace re-turns. Consequently, next year’s remittances could dip sharply to around US$ 3 billion or less. This is a serious concern for the balance of payments, which is heavily dependent on remittances.

Tourist earnings

There is also a cloud of uncertainty over the country’s earnings from tourism. International travel, too, could be affected by the war in West Asia. The region could be deemed unsafe for civilian travel; air-lines may curtail flights; costs of travel would increase; and travel advisories may warn of risks in air travel. Consequently, tourist traffic from the West could decrease.

The continuation and escalation of the West Asian conflict will not be conducive to tourism. Tourists from Western countries could decline sharply. However, Chinese and Indian tourists may continue to be attracted to the island. Their travel may reduce the adverse impact of a drop in European and North American tourists.

Balance of payments

In spite of the widening trade deficit, the balance of payments had a surplus of US$ 3.5 billion in the first eight months, owing to increased inward remittances and higher earnings from tourism. Both these foreign earnings that were expected to increase in the last quarter of the year may face a reversal. Consequently, foreign reserves that were expected to increase to above US$ 6 billion are at risk.

In conclusion

The cessation of the war in West Asia is critically important for the Sri Lankan economy. The expansion of this conflict will undermine the country’s economy severely.

Sri Lanka’s economy, which is dependent on trade, tourism, and remittances could be devastated. An early resolution of the conflict is imperative to avoid a severe economic crisis.