Brexit and Sri Lanka

The United Kingdom European Union membership referendum, known within the United Kingdom (UK) as the European Union (EU) referendum was held on the 23rd of June 2018 to choose whether the UK is going to remain within the EU or leave the EU. The UK is due to leave the European Union on the 29th of March 2019 when the period for negotiating a withdrawal agreement (2 years) will end unless an extension is agreed. The right to withdraw from the European Union was allowed for its member states in 2007 under Article 50 of the Treaty of the European Union.

The conclusion of the referendum flabbergasted many markets as they voted for the UK to remain in the EU. And as a result this led to a disaster in the financial markets around the world. The GBP (British Pound) lost a percentage of its value against the USD (US dollar) on the first trading day. A similar-sized drop of the Euro is now expected as well.

But what is the effect of Brexit on Sri Lanka? Will it be beneficial or will it be a disaster for the Sri Lankan Economy?

When the referendum was for the UK leaving the EU, members of the government of Sri Lanka thought it will be beneficial if the UK remained in the European Union as it has a sturdy Economy. Both parties contributed in educating Sri Lankans in the UK on the implications of Brexit on the Sri Lankan economy and requested them to support for remaining in the EU.

UK and EU are important trading partners of the country. Sri Lanka’s exports to EU account for about 30 percent of the country’s total exports and the UK accounts for about 10% of total exports. Therefore a depreciation in the Euro and the British Pound reduces their purchasing power drastically. Hence it is anticipated that this will diminish the demand for Sri Lanka’s exports.

Generalised Scheme of Preferences (GSP) will be offered as a part of the EU policy. GSP allows countries to pay fewer or no duties on exports to the EU giving them access to the UK market and contributing to their growth. Sri Lanka wants to recover the GSP plus concessionary access to the EU region. No longer will Sri Lanka be able to claim benefits from the UK in the event of successful renegotiation of the GSP Plus. This will lower the significance of the benefits of regaining GSP Plus access.

However there are rumors to say that with the UK out of the EU, Britain will focus more on the Commonwealth. This might give trade concessions to commonwealth members as they are more diverse. Therefore it will give an opportunity for the British to invest in developing countries like Sri Lanka. Since we are diverse in terms of our markets and economies compared to European countries, it will bring about a lot more prospects to us and the British.

Western Europe and the UK have been traditional markets for the inward tourists in Sri Lanka. The UK has sent 161,845 travellers to Sri Lanka in 2015 contributing to 9% of total tourist arrivals. The UK is the number one market in terms of guest nights, contributing to 1.9 million guest nights or 12% of total guest nights in Sri Lanka. Therefore the UK’s contribution to the tourism industry is very significant. As we mentioned before, the British Pound crashed to its lowest levels compared to the US Dollar therefore Sri Lanka will be more expensive for the British Tourists to travel. They will find cheaper destinations in Asia and Eastern Europe will be a closer alternative for them to travel to. On the other hand 30% percent of Tourists are coming from the Western Europe region. The depreciation of their currency makes traveling for Europeans more expensive and therefore we will lose tourists from Europe as well.

However on the contrary this will make it cheaper for Sri Lankans to travel to Europe. It has also come to light that Sri Lanka has been ranked top country for travel destinations in 2019 by “Lonely Planet” almost 10 years after the Civil war. Therefore, Tourism Industry in Sri Lanka might not suffer drastically as mentioned above.

As for now, since the UK has not officially left the EU yet, we cannot predict the outcome. There will be certain agreements signed between the European Union and the UK in the future which will make the situation much better. Therefore it is advised to adopt a watch and wait approach until the UK leaves the EU on the 29th of March 2019.

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