Columns

The prospect of the US-Iran war—going on for more than 60 days—coming to an end still remains elusive. The high expectations of a negotiated settlement in recent weeks have been dashed to the ground even before the ink could dry on the paper, if there was one.

Strait of Hormuz

The failure of peace talks between the US and Iran in Islamabad has resulted in the continuing blockade of the Strait of Hormuz and an escalation of the situation. The US has seized Iranian oil tankers and taken into custody their crews. It is not clear how the closure of the shipping lanes in the Strait of Hormuz by both belligerents will end.

Widened blockade

The blockade of the Strait of Hormuz has widened the war. The repercussions of the blockade have increased and a global recession accentuated. Even ships of Iran’s friendly countries which enjoyed free passage have been attacked, and one could say the Strait of Hormuz is more closed now than before the ceasefire.

It is, however, difficult to predict what may happen in the days between when this column is written and when it is read. There are contradictory signals on the prospect of an end to hostilities at the time of writing this. However, there is a prospect of both Russia and China and even Japan being drawn into the conflict.

Plain truth

The plain truth is that Iran needs to have control of the strait, as it is its main trump card. This is the international dilemma. The global economic crisis threatens the trade- and tourism-dependent Sri Lankan economy in several ways, as was discussed in last Sunday’s column.

Global recession

The IMF has predicted a global economic recession if the current international conditions continue. The economies of trade-dependent nations like Sri Lanka will be the worst-affected by a prolonged economic recession.

Sri Lankan economy

Sri Lanka’s import-export, tourism and remittance-dependent economy too would be seriously affected. In an assessment of the Sri Lankan economy, the IMF is projecting a 0.6 per cent fall in economic growth. The Central Bank of Sri Lanka expects the economy to grow by about 4 per cent this year.

However, the prolonged unavailability of fuel, fertiliser, food and other essential imports, along with a prolonged drought, could depress growth much more. The country’s economic growth is likely to drop below 4 per cent. Even more relevant are the shortages of essentials that people would have to endure.

Food

Decreased food production, lower exports of garments and tea and a drop in tourism earnings are likely to depress growth by more than 1 per cent this year. Furthermore, the economic hardships could be severe.

External finances

Even more serious than the impact of the global conditions on economic growth is the likelihood of an erosion of our external reserves caused by the external shocks.

Foreign reserves

The Central Bank is of the view that our foreign reserves that are slightly over US$7 billion are adequate to weather the storm. However, that depends on the severity of the storm and its duration. These are highly uncertain in mid April. What is certain is that if global prices of our essential imports of fuel (petroleum, diesel and kerosene), fertiliser, food and raw materials escalate and earnings from tourism, tea and garment exports decrease, our foreign reserves could decline to crisis proportions.

Furthermore, the cost of essential imports, the disruption in merchandise exports, and decreased earnings from tourism are likely to cause a serious dent in our balance of payments.

Conservation

The country must face these difficulties by conserving their use, as well as by turning to substitutes, as the end to the hostilities is uncertain and perhaps distant.

A prolonged closure of the Strait of Hormuz and high prices for oil would deplete our foreign reserves and once again create a foreign exchange crisis. In addition, the impact of the warm weather and drought or low rainfall would threaten food security and hydropower generation and strain our foreign reserves.

Popular discontent

Unfortunately, popular discontent is growing, and political parties are likely to organise protests after the new year.

There is either a lack of understanding that the escalation of prices and shortages of fuel and fertiliser are due to the war in West Asia and other global conditions.

In fact, opposition political parties are exploiting this popular discontent to garner support for themselves. This political culture is inimical to the country’s development.

Concluding reflection

The continuation of the war in West Asia and especially the closure of the Strait of Hormuz are causing severe hardships to the country and threaten the economy. High prices for our essential imports and threats to our exports are severe setbacks to our external finances. The economic growth of 5 per cent achieved last year as well as price stability are likely to be affected adversely.

Furthermore, remittances from our workers in West Asia—which constitute about one half of total remittances and are the biggest strength to our balance of payments and external reserves—would be adversely affected. The insecurity in the region, which is an important transit point from Europe and North America, could reduce tourism earnings. Our exports of tea to West Asia, which is our largest market for our tea, have been disrupted. Our merchandise exports to Europe and North America would also be affected adversely by the closure of the sea route.

We have to find ways and means of coping with these economic difficulties. We have to find ways of curtailing our consumption of imports by using substitutes.