Brexit Post: Readers’ Views

After my recent post setting out the possible channels of impact of Brexit for the Sri Lankan economy, I had some really excellent and insightful comments from readers who wrote back to me. I thought of sharing some of them here.

(If you need a quick ‘get me smart’ guide to the Brexit and what happened, this post from NYT is great)

On the impact through the exports channel, a friend studying in the UK wrote back,

It would be useful to see what percent of the UK’s overall imports are made up by that 10% of Sri Lanka’s to them (industrywise), and what our industries should be focusing on doing to ensure they retain that hold in order to benefit and grow immediately after the 2 year divorce case the UK is supposed begin after invoking Article 50? To me that seems the only thing we can do now, depending on the terms of exit negotiated by the UK-EU?

He also noted the polarisation of views across the country, particularly ‘London versus the rest’,

“…the overall sentiment in this part of the country (South West of England) was pretty interesting over the last few weeks. Particularly an anti-London/anti-expert bent among small business owners, which is the polar opposite of those who have/are working in or with the City. Interesting too were the dynamics among age groups that I noted here. I can’t speak for the rest of the country, but the (admittedly small) sample group I had access to surprisingly did not seem to consider immigration their number one concern (perhaps because those older folks in the immediate area here are generally of the upper income bracket, whilst the small business owners that I spoke to such as plumbing shops, some builders, real estate companies etc. don’t directly employ much EU labour). The farmers will be hit by a potential pull out of EU subsidies, unless a post-Brexit govt continues it, so they almost certainly voted to remain. In some ways, it just seemed those around here voting out wanted to say a big F U to Cameron, to the City bankers telling them what to do, and the perceived oligarchy – although not the ideal way to set about these things. Today, the sentiment seems to be one of disbelief – among the Brexiters just as much as the Remainers. 

Another reader (an economist in an international lender) wrote back with a substantial set of new questions that arise from all this,

I agree with the views expressed by you. Given that all countries now need to negotiate trade agreements with Britain where would we stand?  How would the priorities assigned by the British government.  Would Sri Lankan ministers role publicized role in the Referendum have any adverse impact on the negotiations.  Should Sri Lanka given so much publicity to Sri Lanka’s role? ……This might be something the Government needs to look into in their future strategy.  Looks like there will be other referendums in the future in other countries such as the Netherlands, France etc. Are all exports to EU (especially to Britain) under GSP plus? In any case the GSP plus is still not in operation, isn’t it? Probably the fish exports will have a more serious impact but given its early stages may need to take immediate action  and the GOSL can immediately negotiate with Britain on the  concessions. Immediately with the collapse in the Sterling pound the imports will be cheaper in UK and the demand might be more to offset the concessions. That might give the GOSL time to negotiate.  However as you pointed out raising funds for the Government in the short term would be a problem. BREXIT might have a ripple effect in EU countries and therefore it might be better for the Government to strat preparing for it if certain countries are major trading partners.

In my original post, I had not highlighted the impact of Brexit (and a sharp fall in the Sterling) on remittances to Sri Lanka, as another reader (an economist at a local think tank) pointed out,

Another way Sri Lanka will be affected by the Brexit is through our expatriates in England. If the pound remains weak the remittances they send will be low.  A large number of Sri Lankan expatriates also visit the country yearly as tourists. These flows will also get affected.

Another reader’s comments (an apparel exporter) really captured the continued uncertainty of it all and the need for Sri Lanka to brace itself,

I guess the problem is the great unknown. By most reckoning it will take the full 2 years for the UK to negotiate the exit, and given that they don’t look like invoking the infamous Article 50 until Cameron’s successor is appointed in October, we should be able to continue on the status quo until then? 2 key things to push would be a) to independently negotiate a trade agreement with the UK – this should be “relatively” easy as the current political relationship is good, and b) as you say aggressively pursue new markets. That unfortunately has been a call for some time now, but there doesn’t really seem to be much progress there. Overall 2016 will be extremely challenging from an apparel perspective. Both the EU and the US markets are down and the uncertainty over the process and implications of Brexit together with the upcoming US elections and all that chaos will continue to restrict demand for our product.

Meanwhile, renown economics Professor at ANU, Premachandra Athukorala, wrote back with a different perspective to mine on the potential trade impacts,

I am not sure that trade impact of  Brexit  (on Britain and her trading partners)  is going to be that significant.  The bulk of trade (over 70%) between Britain and the EU countries takes place within global production networks.  Tariff rate differentials are not a sigficant determinant of locational decisions of firms within production networks (such as Japanese automakers assembling cars in England for the other European countries). 

Another relevant point is that Britain’s bilateral trade with some major non-EU countries has been glowing at comparable or at even higher rates in rent year.   (The role of tariff (and tariff reductions under FTAs has been vastly exaggerated in the recent trade policy debate in Sri Lanka. Frankly I do not any reason for any hasty response on our part to diversify export market or to get into the costly business of signing FTA with other countries.

He also shared this paper that looks at ‘Global production sharing and the measurement of price elasticity in international trade’

I will keep updating this post as new views come in.

Brexit it is then.

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Please note that the contents of this post are my personal observations and not to be published and attributed to the Ceylon Chamber of Commerce (CCC). The CCC will be releasing a statement within the course of the day, in response to numerous requests from the media.
Here are some of the early impacts in global markets:
  • The GBP has fallen by sharply, not seen since the financial crash of 2008/9. The GBP is at levels not seen since 1985. Currency markets are seeing sharp volatility. Global risk sentiment will be substantially negatively affected.
  • At the time of writing, GBP to USD is down a sharp 10.5%; GBP to EURO is down a sharp 6.8%; and EURO to USD is down over 4%. 
  • Update: FTSE opened 7% down; bank stocks have taken a sharp beating (around 30%); investors are flocking to ‘safe haven’ assets like gold, US treasuries, and USD
We are likely to see substantial market volatility in the coming days as the shock effect of the results pan out and markets take into account the impacts, with substantial dampeners on international currency and capital markets. Of course, with it bottoming out and stabilising over time as markets begin to price in the results.
Some likely  impacts for Sri Lanka are from the following channels:
  • The impact on international capital markets as volatility affects borrowing costs for countries like Sri Lanka. This is a spanner in the already edgy financial markets. Generally, in times of volatility, investors tend to stay out of frontier and emerging markets like Sri Lanka and go to safer assets like Dollar and Gold.
  • The impact on economic activity and dynamism in Europe and the impact on the markets for our exports there. Britain being in the EU helps the EU economy as a whole. Britain buys a lot from the Rest of Europe (ROE), encouraged by the free trade area and customs union. So the ROE’s exports will no doubt be impact.
  • SL having to do possibly do a bilateral deal with Britain, as regaining GSP plus won’t help in our market access to Britain. We will certainly not be the first in line for the bilatarels – estimates suggest Britain will have to do over 100 bilateral trade deals, which would take years
  • In the longer-term, if Brexit triggers other exits by other member countries (and there is no reason to believe this is immediately likely), this will affect the Euro and increase trade costs in Europe, which of course affects market access and competitiveness of Sri Lankan exports to Europe
  • Sri Lanka could also be impacted by a wider slowdown in the global economy – economists have estimated that Brexit could cause global growth to dip below 3% which is tricky territory.
  • Protracted political gridlock in the EU as a result of Brexit and the resultant negotiations for a post-Brexit deal can hurt policy coordination on economic issues, impacting business, trade and finance.
Now the severity of each of these impact channels on Sri Lanka won’t be known for sometime and we are not able to quantify the impact at this stage. These are the indicative channels of impact we should continue to look at.
As background information, 10% of Sri Lanka’s exports go to the UK (USD 1 billion; approx. LKR 139 billion) and 28.8% of exports go to the EU as a whole (USD 3 billion; approx. LKR 411 billion). Close to 56% exports go to the USA and EU together.
On the global implications, Standard Chartered Bank set out these in a Research Note circulated today, after the final results were announced:


The vote has hit global risk sentiment, with the USD and JPY rallying and Asia- Pacific equity markets selling off sharply. We expect more pronounced risk aversion in the coming days, with GBP assets at the heart of this negative dynamic. The euro area is also at the forefront, with bank equities likely to come under pressure and peripheral sovereign yields likely widening versus Germany. We expect GBP-USD to echo the c.15% fall following ‘Black Wednesday’; GBP-USD could fall to around 1.20- 1.25. We expect safe-haven flows into USD and JPY assets, with EUR-USD at 1.03, AUD-USD at 0.65, NZD-USD at 0.63, USD-CAD at 1.40 and USD-JPY at 95. The coming days will test central banks’ ability to support market sentiment, as well as the Bank of Japan’s willingness to allow broad-based JPY strength.


In an earlier post this week, I recapped what experts are indicating as the possible impacts of a Brexit on the Brtish economy, including the loss of GDP, impact on trade, and impact on jobs. This side by side comparison by the FT nicely shows how the EU membership has helped the British economy. While it isn’t certainly the only factor, it has contributed.
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The article by FT also summarises the forecasts by a bunch of economists and think tanks on the likely sustained growth impacts of Brexit.
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GBP v USD at 9.30am LK time
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GBP v EUR at 9.30am LK time
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Updated: 6.55pm LK time.
Cover image from BBC News

Britain’s EU Vote: Will Facts Win Over Fear?


This article originally appeared in the Sunday Observer of Sunday 19th June 

I could clearly see the transformation of London; returning after seven years, the evidence was everywhere. High-rise high-end apartment buildings dotting a new Docklands skyline; construction cranes across Zone 1 peering over the old city and shaping a new one; a new tech city with a clustering of ‘new economy’ businesses alongside the established ‘city’ financial district; digital and creative-types drinking flat white coffees amongst city workers – London had clearly continued to transform itself and become one of the fastest growing cities in Europe. And a magnet for people from across Europe seeking a piece of that success, as much of the rest of Europe languishes with tepid growth. My Uber driver on the ride from the airport, a Somalian immigrant and British citizen of twenty years, was rather enlightened. “They are taking a lot of jobs as Uber drivers, tube workers, plumbers and builders. It is even hard for people like us who aren’t from the EU – they get first preference. But without European migrants most places here wouldn’t be able to function. We all would be worse off”, he remarked. In a way, London is a victim of its own success. It wasn’t surprising that immigration had become such a top issue in the referendum debate.

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Is the private sector interested in SDGs? (especially Goal 16)

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It’s not often that we in Sri Lanka reflect on the role of the private sector in international development. At a recent seminar that I was speaking at, I was pushed to think about this in a way that made sense to an international audience.

It was the seminar on ‘Advancing Good Governance in International Development’ held in Oxford, United Kingdom, organized annually by Linklaters LLP law firm, Camfed International, Oxford University Saïd Business School, and the Skoll Centre for Social Entrepreneurship. The seminar, held at the prestigious Rhodes House, brings together thought leaders and practitioners from the academic, donor, microfinance, NGO, social entrepreneurial, government and private sector communities.

I made three points during my talk in the opening plenary session.

1.Private sector and SDGs

The first was that the private sector in the global south can play a key role in achieving the new global development goals, and there is opportunity for increased private sector engagement with the SDGs as part of a broader move towards inclusive business. I observed that, across the Asian region, the private sector appears to be much more interested in the Sustainable Development Goals (SDGs) agenda than the earlier Millennium Development Goals (MDGs) agenda, recognizing that dealing with SDG issues matter for business now more then ever before. He argued that savvy businesses are recognising that they have a key role to play – not just for feel good, cosmetic, CSR reasons – but because it matters for the economy and prosperity as a whole, and that has an impact on business. The strong interest among the Sri Lankan corporates at UNDP’s Foresight and Innovation for SDGs (‘2030Now’) held in Colombo last month was evidence of this shift here at home.

2. Heightened interest in good quality institutions

The second point was specifically on SDG Goal 16 (which was the session’s focus) on governance and institutions for development. I argued that, increasingly the private sector in Sri Lanka has begun to care about institutional quality and governance, recognizing that without these growth won’t be sustainable or of good quality.

The role of institutional quality in economic growth – in good economic growth – is now more widely acknowledged than before. Especially for countries like ours in the middle income transition, we need better quality institutions for better quality growth (as put forward by economist Dani Rodrik). Poor governance and extractive, low trust institutions (as also argued by my former macro Professor Wendy Carlin) and are no longer fit for purpose. That’s why many of our business and businesses leaders are interested in this. But often we find that businesses are unsure of how to tackle this alone, but are keen to work with others and be part of coalitions and collaborations.

Corruption, bribery, leaks, tax evasion – all these are a loss of resources – and in countries that have tight fiscal space as well as declining aid, these matter more than ever before. The leakages of resources hurts state capacity to deliver public services, and this ultimately affects business.

Getting the private sector involved is key. Imagine if the ideals of good governance in society can be propagated via businesses? Imagine the catalytic impact. It’ll do what governments or donors would takes years to do; businesses can get it out there quicker and wider.

3. The need for ‘agile institutions’

The third point I made was that while Goal 16 mentions ‘transparent’, ‘strong’ and ‘inclusive’ institutions, there is a need to build agile institutions; institutions that remain relevant. Often institutional quality, institutional strengthening is seen at a conceptual macro level. But institutions need to relevant. I argued that the requirements around institutions are constantly evolving – the ability of public services and governments to deliver is changing, trust in institutions may change, the structure of the economy and the nature of economic activities is changing. So how can we create mechanisms to keep institutions agile? Are the mechanisms for refining – continuously – the institutions in place? Are we listening to what people and businesses need of institutions and want them to be and do? And if we are listening, what are we doing with what we hear? How are we using that information to keep enhancing institutional quality through feedback loops? For institutions to be robust, we need them to stay continually relevant, reforming and refining along with societal and economic changes and along with what people and businesses want of them.

In all of this, one of the key challenges developing countries face is that with so much pressure to deliver development, how do we make people care about institutions? They can’t eat good quality institutions, can they? So how do we make people, and indeed businesses, care? I think that’s a fundamental problem. How do we help them see the connection between good institutions, good governance, and sustained prosperity and inclusive growth? How do we make it relevant to them?

More summary notes of our session are available here, and it draws out key areas relevant to the private sector, including:

It was noted that Goal 16 issues – such as rule of law, anti- corruption, and peace – underpin the basic business model of any private company. Thus, prioritizing progress with Goal 16 issues will allow private companies to thrive financially, become more inclusive, and contribute to broader economic development. Businesses should seek partnerships in implementing Goal 16.

The universality of Goal 16 requires different ways of thinking. Unlike the Millennium Development Goals, the SDGs apply to both developed and developing countries. This necessitates that the developed world take a hard look at its own governance and institutions. For example, addressing development in Africa requires tackling tax havens in Europe. It also requires Western donors to closely examine the effect of their aid expenditures. We must shift from viewing development as something done to the Global South, to viewing development as a collective process of global transformation.




ChariTea, a tea infused lemonade drink, served to us at a meeting at Social Impact Lab, Berlin. Even for a tea purist like me, this was deliciously refreshing. How can srilanka break out of the commodity price sensitive low value added tea rut and in to the rapidly growing flavoured tea and tea-mixed beverage market in Europe and elsewhere? It’ll have to have a “good” cause as well, to latch on to the increasingly ‘conscious consumer’

‘Intrapreneurs’ and human-centred innovation


They call themselves ‘The Berlin Consulting Dudes’, and they are making waves in how German businesses engage with people in the process of innovation. The focus of this Berlin-based startup, Intraprenör, is on helping companies do ‘human-centred innovation’.I was fortunate to catch up with one of the company’s co-founders, Gregor Kalchthaler. He says they have found a small but growing niche. “Old economy businesses want to know how to become new economy businesses. They are struggling to do it alone, and they come to startups like us, to help them think differently”. We both agreed that most businesses looking at innovation tend to focus on the tech angle, but do little on the human or people angle. Given that innovation is not just about devices and tech, but also necessarily must engage people, the human-centered approach is gaining a lot of traction.


Gregor gave me an example of one of their clients, a budget supermarket chain that was focussing on sustainability and wanted to convey that to its customers. Unlike premium stores who’s customers may understand ‘sustainability’ and value it, a budget store doesn’t have that luxury. So instead of trying to push sustainability down the throats of the customer in a clinical way – the only way they knew how, the company hired Intraprenör. The guys at Intraprenör immediately took a human-centred approach to the challenge. They followed some of the customers of the budget supermarket store, engaged with them, embedded themselves in their daily lives for a few days. They explored their motivations, attitudes, aspirations, behaviour – to understand what makes them tick . They didn’t just call a focus group and ask a set of questions – in the usual market research way. As a result they found a clever and relatable way to explain the fair trade and sustainability approaches of the supermarket chain without using those very words.

They work very closely to build a team in a client company that can become champions for innovation inside the organisation – thus creating “intrapreneurs” within the firm to drive innovation continuously.

I also found Intraprenör’s approach to how they work and organise the business very interesting. Gregor tells me that they recently shifted to a 4-day work week Why? “Most of our clients can’t take decisions after 1pm on Friday, so why would we work? Instead, we give one day to work for our team to work on something for themselves and maybe bring that to the business”. They also don’t have dedicated finance or other support teams. Each founder works on each assignment from end-to end, from drawing up the contracts to invoicing. “That instils a sense of ownership for each client. Each person is very independent from one another.”


The facility used to be a massive coin factory, and is now a hub for creativity.

As we wrapped up our meeting and I walked out, I was fascinated by the space that Intraprenör occupies. And as it turns out, the space has a remarkable story. The entire building complex used to be a massive coin factory from 1930s to 2003. It was then suddenly abandoned a few years after the Euro was minted here. The visionary Berlin city government decided that they didn’t want to give it to the highest investor but to the best concept. The legendary supporter of the Berlin startup ecosystem, realtor Andreas Kruger (who connected me to Gregor and this meeting) helped push the project, and now, the facility is home to several startups and creative economy businesses.

Shifting Lending from SOEs to SMEs

The issue of constrained access to finance for SMEs continues to plague our small business sector, and it is often blamed on the narrow approach to SME lending by banks. The lack of cashflow-based lending, the heavy focus on high collateral requirements, inability to assess risk in SMEs, are the usual suspects. These are all very valid, and probably the most crucial factors. However, in recent conversations with bankers and financial sector leaders I’ve realised that there are at least two other factors we need to consider, which often don’t get highlighted. One is the high operational expenses of Sri Lankan banks (cost to income ratio). On this, I don’t have enough information and it’s something I would be taking a closer look at. There is some limited analysis in this paper by two University of Colombo academics, but it limitedly looks at the factors influencing the efficiency of Sri Lankan banks and does not actually quantify the efficiency levels.

The second is the concentration of banking in the state banking sector and the role that might play in constraining credit to SMEs. The eight state banks in Sri Lanka account for close to half of the assets of the total banking sector. And the larger share of lending by these banks tends to be to state-owned enterprises (SOEs) . The largest commercial bank, Bank of Ceylon, lent a staggering 38% of its total portfolio to SOEs in 2013 and the second largest bank, People’s Bank, lent 28% of its total portfolio to SOEs. And many of these are loss-making entities, as this latest study by Advocata Institute has shown. No doubt this would crowd out the available funds for lending to enterprises. We must shift lending by these state banks from SOEs to SMEs.