Deutsche Bank-Asia Economic Notes Sri Lanka Outlook post tariff-114993376

28 April 2025Dealing with the tariff shocknThe US administration has imposed a 44% tariff on Sri Lanka's exports, which though has been paused for a 90-day period, remains a big threat for Sri Lanka's near-and medium-term growth and recovery prospects.nGiven the tariff threat, we revise down Sri Lanka's 2025 growth by 50bps to 3.0%yoy, though the risks are significantly more to the downside as far as growth is concerned.nUnfortunately, given the recent debt-default crisis, Sri Lanka does not have much fiscal space to support growth.nUltimately, monetary policy will likely have to do the heavy lifting as far as supporting growth is concerned. While earlier we felt that the CBSL will likely stay on an extended pause, having cut the policy rate significantly, we now think the central bank will cut rates by at least another 50bps to 7.50% in 2025 to support growth. We are forecasting LKR to rise above 300 once again and end 2025 at about 305 vs. the USD.Tariff shock another big threat to growth & macro stabilityThe US administration has imposed a 44% tariff on Sri Lanka's exports, which though has been paused for a 90-day period, remains a big threat for Sri Lanka's near-and medium-term growth and recovery prospects, particularly given the challenges that the economy has been facing since its debt-default in 2022. Indeed, the USA is the most important destination for Sri Lanka's exports, with a quarter of Sri Lanka's exports, amounting to USD 3 bn of its USD 18 bn total annual export income, finding its way to the US. Meanwhile, US exports to Sri Lanka amounted to only USD 356 mn in 2024.Sri Lanka earns USD 1.5 bn annually from garment exports to the US, with the garment industry estimating that it would lose more than USD 600 mn annually if the US tariff rises to 44%. The industry employs 350,000 workers, with about 600,000 indirectly employed. A persistent higher tariff could raise the risk of job losses, thereby complicating the fragile nature of the growth recovery. Sri Lanka also exports plastic and rubber products, food, jewellery and precious metals to the US, which are also under review. President AKD has appointed an expert committee to investigate the repercussions of the tariff hike and make proposals.Kaushik DasChief Economist+91-22-7180 4909Deutsche Bank AG/Hong KongIMPORTANT RESEARCH DISCLOSURES AND ANALYST CERTIFICATIONS LOCATED IN APPENDIX 1. UNTIL 19th MARCH 2021 INCOMPLETE DISCLOSURE INFORMATION MAY HAVE BEEN DISPLAYED, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS.Deutsche BankResearch Asia Sri Lanka Economics Asia Economic Notes Date Sri Lanka: Outlook post tariffDistributed on: 28/04/2025 09:27:08 GMT7T2se3r0Ot6kwoPa28 April 2025Asia Economic NotesPage 2Deutsche Bank AG/Hong KongThe Sri Lankan economy grew 5.4%yoy in 4Q'24, which resulted in real GDP growth of 5.0%yoy for 2024 (vs. -2.3%yoy in 2023). Sri Lanka's downward spiral of growth had stabilized in 2024, aided by monetary policy support, political stability and, mo