Anger and incredulity. These were the dominant sentiments when Sri Lankans woke up on April 3 to the news of US President Donald Trump imposing a steep 44 percent reciprocal tariff on goods imported from the tiny island nation. 

Sure, they had expected some tariffs from Washington, but nobody was prepared for the high rate that was ceremoniously slapped on the Indian Ocean island of 22 million. 

As markets roiled and the Dow Jones tumbled, Trump had to walk back his tariffs for much of the world – sans China, of course –  for 90 days, shaving off a bulk of the rates to maintain a baseline rate of 10 percent. 

The “Liberation Day” tariffs are anything but for the developing world, which, in addition to IMF bailouts, now has to contend with economic uncertainty as Washington decides just how much they want to make other economies collateral in its rivalry with China. 

Trump and his team have stressed that the tariffs are “reciprocal”, but they are in reality calculated in a manner that belies this – by dividing the trade deficit for the US with a country with the value of the total imported goods from that country, multiplying by 100 and then dividing by 2. 

For Sri Lanka, in particular, which was staring economic collapse right in its face just three years ago before it clawed its way out with the help of an IMF bailout, the tariffs signal a fresh chapter of uncertainty. 

Sri Lankan President Anura Kumara Dissanayake's office has now convened a panel of government officials and apparel companies to study "potential issues" that could arise from the new tariffs.

The Sri Lankan President's office is yet to respond to a request for comments from TRT World on the issue. 

An economic roller coaster

In 2022, Sri Lanka’s economy went into freefall when it underwent an extreme shortage of dollars as deadlines to repay debts approached. 

The economy contracted 7.3 percent as the government struggled to contain inflation, an extremely weak currency and a default on foreign debt. The economy shrank 2.3 percent in 2023, the year the government secured a $2.9 billion four-year IMF bailout deal in March 2023.

It made a stronger-than-expected recovery in 2024, but Trump’s tariffs has threatened to upend the good work. 

After all, the US is the country’s top importer, having received $3.4 billion worth of Sri Lankan goods in 2024, out of the island nation’s total export earnings of $16.17 billion. 

Like Bangladesh, Sri Lanka is heavily dependent on its garment industry, with 40 percent of the country’s apparel exports bound for the US. This raked in $1.9 billion in 2024. In addition, Sri Lanka exports tea, rubber, activated carbon and automobile parts. 

Now, Sri Lanka may have to contend with that loss. 

“So it could have devastated the country, and I think it still will, because we have no guarantee that the 44 percent will not come back,” Dr Rohan Samarajiva, the founding Chair and CEO of thinktank LIRNEasia, tells TRT World. 

“And even if it is 10 percent, it's probably on top of the earlier 12.5 that we were subject to. So, you know, it could be—it still is a large, large tariff increase,” he adds. 

Dr Samarajiva outlines that Sri Lanka settles its debts by using money in government accounts to purchase dollars from private and state banks, which do have dollars from export revenues.

“Now,” Dr Samarajiva says, “if exports go down, the banks will have less dollars. When the banks have less dollars and the demand for dollars is high because we have to buy dollars in order to repay the debt, what will happen to our exchange rate? That means we will have to generate more rupees to get the dollars that we need to repay.” 

“So that's where our IMF model assumptions will come under stress.” 

The International Monetary Fund has said that the South Asian nation must now boost tax compliance, and implement other measures to support public finances and achieve a 2.3 percent primary surplus target, predicting a growth rate of 3 percent in 2025 and 2026.

‘Breathing space’

Yet, it’s not all doom and gloom. 

“Sri Lanka has been well on track and, in fact, surpassed most of its IMF targets over the past year,” Raynal Wickremeratne, co-head of research at Softlogic Stockbrokers, tells TRT World. 

“If you look at the inflation targets, we have surpassed it. If you look at GDP growth targets, we have far surpassed the IMF, ADB, World Bank targets. Even our reserves are growing at a much faster pace than initially anticipated,” Wickremeratne says. 

He adds that Sri Lanka’s extraordinary growth has given it “a bit of breathing space” during the imposition of Trump’s tariffs, but outlines a caveat – the impact on Sri Lanka will also depend on the tariffs imposed on its competitors, like fellow apparel producer Bangladesh, which was initially handed a rate of 37 percent. 

“It's also about how much Vietnam is taxed, Bangladesh is taxed, even China to a certain extent. That all impacts how the net favourability of Sri Lankan exports are going to be.”

What this means for Sri Lanka is that its economic future is not only contingent on how the China-US trade war, which appears to be ramping up, pans out but also what happens at the end of Trump’s 90 days, when he is to reassess tariff rates. 

But with billionaires losing billions, panic in Wall Street, and China striking back hard, Trump may soon have bigger problems on his plate.