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The cost of the country’s essential imports could rise steeply, merchandise exports could fall drastically, inward remittances from West Asian countries could decrease substantially and earnings from tourism from Western countries in particular could be adversely affected if the conflict between Israel and Iran escalates.

Food security

Food security could be adversely affected by the higher costs and disruptions in shipping as the country imports a large variety of essential foods. The higher import prices of food would be a strain on the trade balance and the balance of payments.

Exports

The country’s exports, which are already facing severe threats owing to US tariffs, could be adversely affected by higher transport costs and shipping difficulties as well.

Tea exports

Tea exports to West Asia, which constitutes a large proportion of our tea exports, could be adversely affected by the unsettled conditions in the region. However, tea is such a basic need of West Asian countries that it is difficult to imagine a reduced consumption of the beverage.

Mutual benefit

Ensuring tea shipments to West Asia would be in the mutual interest of tea-consuming West Asian countries and Sri Lanka’s economy.

Remittances

The most serious impact of the current West Asian conflict could be its impact on inward remittances—the strength of our external finances.

About one half of our remittances comes from West Asian countries. A drastic reduction of these owing to our West Asian workers returning could erode our external finances significantly.

Solution

We have to explore ways of finding other countries to send our workers to enhance our remittances. The threat to inward remittances could be reduced by workers seeking employment in countries such as South Korea, Malaysia, Hong Kong, Singapore, Australia, New Zealand and Britain. Acquiring the needed skills and language fluency are prerequisites for such employment.

Tourism

Tourism, the other main strength in our external finances, too, is likely to be affected adversely. Safety concerns and higher costs of air travel are likely to discourage tourists from Western countries. Fortuitously, most tourists are from India and China. Tourists from these Asian countries are likely to increase owing to the insecurity of travel to Western countries and higher airfares.

Another threat

The spread of chikungunya and other infectious diseases is another threat to our tourism. This could be an intractable problem. There is an expectation that the currently prevalent diseases would diminish by September this year.

Prospect of peace

The current war between Israel and Iran has reached a height where there is an imminent danger of a nuclear explosion. This would be a severe threat to the entire world and needs to be contained by strong international actions.

Ceasefire

A ceasefire would be of immense benefit to the Sri Lankan economy, which could be seriously hampered by an expansion of the war. However, it would be prudent to take measures that would erode the external finances as well as threaten the country’s food security.

Summary and conclusion

The continuation of the war in West Asia would have serious adverse impacts on the economy. The nation’s external finances are likely to be eroded by lower export earnings, higher costs of imports, lower inward remittances and earnings from tourism.  The emerging conditions are also a threat to the country’s food security. Affirmative actions, as discussed, need to be taken to minimise the impacts of the West Asian war.

Our external finances could be severely eroded if the war between Israel and Iran escalates further. However, it is most likely that the US would intervene to bring about a cessation of the current hostilities between these countries.

Postscript: An update

US intervention

At the time of writing, there were strong indications that the US would intervene to defuse tensions and prevent an escalation. But on Thursday, the White House announced that President Donald Trump would decide whether or not the US gets directly involved in the Iran-Israel conflict within the next two weeks.

If the US joins the war, the adverse impacts of the war on Sri Lanka, as discussed, would be even more severe and prolonged.