Brexit Asia | Brexit and its Impact on the Sri Lankan Economy

Before we talk about what impact Brexit will have on the Asian region (Brexit Asia), namely its impact on the Sri Lankan economy, let us look first try to understand what Brexit is all about. On 23 June 2016, a referendum was held within the United Kingdom to decide whether the United Kingdom would leave or stay in the European Union. The European Union is the political and economic union of 28 states all of which have a common currency, the Euro, and have established an internal market through a system of regulations that apply to all states. Under a 2007 Article 50 of the Treaty on the European Union member countries can choose to withdraw. A majority of UK citizens, which amounted to 51.9% or 17.4 million people voted to leave the European Union while 48.1% or 16.1 million voters voted that the United Kingdom remain in the European Union. The referendum hence resulted in Brexit; this news had major repercussions in the UK and world financial markets and is expected to alter global economic relations permanently.

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In the aftermath of the Brexit vote, financial markets around the world suffered. Currency in the UK also experienced a shock as the British Pound hit a decades low and lost over 10% of its value against the US Dollar. With talks of an imminent recession floating around, the Bank of England proposed slashing interest rates and even suggested bringing back its program of quantitative easing to boost the economy. But what effect does a decision made by British citizens have on Sri Lanka and its economy?

Brexit Asia – From Sri Lanka’s Perspective

The UK is a major trade partner of Sri Lanka’s, hence its economy has an indirect impact on the economy of Sri Lanka. Therefore, the government supported the UK remaining in the EU since the EU provides major trade advantages. Hence, the government advocated to Sri Lankans living in Britain the importance and benefits of the UK remaining a part of the EU. Numerous government officials including the Deputy Foreign Affairs Minister travelled to the UK in order to spread awareness about the vote and its repercussions and consequences. The situation of both the UK and the EU affects Sri Lanka since both are important trading partners. The European Union is Sri Lanka’s second largest export market and purchased almost 29% of all exports from Sri Lanka in 2015.

The impact of Brexit on the Sri Lankan is too early to determine and there are numerous variables to consider. The initial reaction of the financial markets was too severe and responded to an unexpected outcome, it is possible that the same pattern does not follow once Brexit is implemented. However, the overall impact on the economies of both the UK and the EU will be negative, at least initially. Currency depreciation would have the largest impact on Sri Lanka’s economy. With the depreciation of the British Pound the tourism sector in Sri Lanka would suffer, since British citizens are the largest group of tourists in the country, by make travel more expensive and affecting savings due to inflation and other factors within the UK as well as the EU. Trade with the UK may also be affected in the aftermath of Brexit as spending, and hence purchase of Sri Lankan products decreases. There would also be the impact of losing trade concessions that came as part of trading with the EU, such as the GSP Plus. With the UK no longer a part of the EU, there will no longer a single trade market and Sri Lanka would lose benefits upon renegotiating the GSP Plus.

Sri Lanka should start preparing for Brexit Asia by strengthening economic ties with the EU and other countries to protect its economy.

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