Impact Of Internal And External Shocks On Sri Lanka's Foreign Exchange Earnings

Sri Lanka, as a developing country, is highly sensitive to both internal and external shocks. Today, Sri Lanka is facing a big challenge of controlling the spread of COVID-19, which is a global pandemic. Even though Sri Lanka is far better than other developed countries in terms of controlling the spread of this decease, the Government Medical Officers’ Association (GMOA) warns that the situation will worsen in the month of April.

- Dr. Roshini Jayaweera And Dr. Dammika Padmakanthi

If we fail to control this pandemic as a nation, not only a large number of people will be victimised but also it will create a huge negative impact on the economy. Exactly around one year ago, in April in 2019, the Sri Lankan economy faced a negative internal shock: the Easter attack on April 21, 2019, which created bad impacts on the economy. This internal shock led to create a negative impact on the foreign exchange earnings, mainly through adverse effect on the tourism sector.

Irrespective of the fact that the shock is internal or external, the Sri Lankan foreign exchange sources are adversely affected. Although it is too early to estimate the impact of COVID-19 at this stage, it is safer to be aware of the possible impact of external and internal shocks on foreign exchange earnings.

Major foreign exchange sources in Sri Lanka are export of goods and services, tourism and remittances. In 2018, Sri Lanka’s export of goods and services as a percentage of GDP was 22.79 percent and import of goods and services as a percentage of GDP was 30.13 percent (World Bank, 2018). The direct contribution of tourism to GDP was 4.9 percent in 2018 (Sri Lanka Tourism Development Authority, 2018). Personal remittances received by Sri Lanka in 2018 was equal to 7.9 percent of GDP.

The objective of this article is to show the impact of internal and external shocks on the foreign exchange earnings in Sri Lanka with special reference to imports, exports, tourism, and international remittances.

Export and import of goods and services

The external shocks affect the domestic economy in direct as well as indirect ways. Among many ways, the effect on the supply chain is important as it will lead to many other consequences. Any change in the supply change will affect both imports and exports.