Sri Lanka’s apparel industry, a cornerstone of its economy, is grappling with a confluence of global and domestic challenges that threaten its stability and growth. Recent U.S. tariff hikes, escalating production costs, and a shifting global financial landscape are converging to create a precarious situation for the sector.
The United States’ imposition of a 44% tariff on Sri Lankan apparel imports marks a significant departure from previous trade policies that favored developing nations. This move jeopardizes a sector that earned nearly $6 billion in 2022, accounting for a substantial portion of Sri Lanka’s export revenue. In the first quarter of 2023, apparel exports to the U.S. plummeted by 22%, with overall exports dropping by 13.8% to $1.3 billion. Industry experts predict a potential $1 billion reduction in exports for the year, underscoring the severity of the situation .
Rising Production Costs and Domestic Economic Pressures
Compounding the impact of U.S. tariffs are domestic economic challenges. A steep 66% increase in electricity tariffs in February has significantly raised production costs, eroding the competitiveness of Sri Lankan apparel in global markets. The Central Bank’s decision to set a new benchmark interest rate at 8% aims to support economic recovery, but the high cost of borrowing continues to strain businesses.
Global Financial Shifts: The Rise of Digital RMB
Amid these challenges, a significant transformation in global finance is underway. The People’s Bank of China has announced the full integration of the digital RMB cross-border settlement system with ten ASEAN countries and six Middle Eastern nations. This development enables approximately 38% of global trade to bypass the SWIFT system, traditionally dominated by the U.S. dollar, and settle transactions using China’s digital currency. The digital RMB offers rapid settlement times and reduced transaction costs, with some cross-border payments completing in as little as 7 seconds and fees dropping by 98%.
This shift poses a systemic threat to U.S. dollar hegemony and signals a move towards de-dollarization in global trade. For countries like Sri Lanka, which have historically relied on dollar-dominated trade systems, this transition presents both challenges and opportunities.
The Need for Strategic Adaptation
Sri Lanka’s apparel sector must navigate this complex landscape by diversifying export markets, enhancing production efficiency, and engaging in strategic trade agreements. Embracing emerging financial technologies and exploring alternative settlement systems, such as the digital RMB, could offer new avenues for trade and economic resilience.
In conclusion, the convergence of U.S. tariff policies, domestic economic pressures, and global financial shifts necessitates a proactive and strategic response from Sri Lanka. Failure to adapt could result in significant economic setbacks, while timely and informed actions may position the country to capitalize on emerging opportunities in the evolving global trade environment.
