A few hours prior to the writing of this piece Pakistani Prime Minister Shehbaz Sharif announced that the United States and Iran had agreed to an “immediate and permanent termination of military operations on all fronts, including in Lebanon“. Global financial markets have been quick in responding to the news. Oil prices are currently at the lowest levels since early March, shortly after the Iran war began. The formal signing ceremony is scheduled for 19 June in Switzerland, and separate preparatory meetings between each side are set to take place in Doha this week, brokered in part by Qatari negotiators who flew to Tehran on Sunday and departed after seventeen hours of intensive negotiations.
What precisely has been agreed, however, is a question to which no complete answer can yet be given.
The Known Knowns
The framework of the announcement is at least clear in a broad sense. President Trump declared an end to the United States naval blockade of the Strait of Hormuz. Iran’s deputy foreign minister confirmed that the text of a memorandum of understanding had been finalised and would be signed on Friday. Prime Minister Sharif was unequivocal. All military operations have been declared immediately and permanently terminated.
The Known Unknowns
Three issues stand above the others in their ability to determine whether this agreement holds.
Trump’s initial declaration of an immediate, toll-free opening and the removal of the naval blockade has now changed to be contingent on the Friday signing and initially limited to mine removal. Iran’s state media reported that the memorandum calls for reopening within thirty days under “Iranian arrangements,” which creates considerable tension against the American stance that no single party would control the waterway. The UK, France, Germany and Italy have quickly added that any reopening must be unconditional and accompanied by unrestricted freedom of navigation. The question of authority over the strait remains uncertain.
The second unresolved matter is Lebanon. Prime Minister Sharif and Iranian deputy foreign minister Kazem Gharibabadi both explicitly mentioned that the ceasefire will cover all fronts, including Lebanon. Trump, however has made no mention of Lebanon. Israel, which has not been in favour of the Iran negotiations, have not officially responded to news of the deal and struck a building in Beirut’s southern suburbs on Sunday, killing three and injuring six. Prime Minister Benjamin Netanyahu arguably has his own domestic political reasons to continue pursuing conflict with Iran and its proxies, including Hezbollah. The question of the durability of any arrangement that does not formally bind Israel remains uncertain.
The third, and arguably most consequential, known unknown is Iran’s nuclear programme. Nuclear negotiations are set to continue over the next sixty days, with the threat of renewed military action if talks fail. Iran has not publicly committed to surrendering its enriched uranium which amounts to more than 400 kilograms at near bomb-grade purity, held across three sites which are damaged due to American strikes. The UK, France, Germany and Italy group have stated their willingness to lift relevant sanctions in exchange for “ clear, verifiable steps by Iran on its nuclear program”. The question of what those steps would look like, and whether Iran will accept them remains uncertain.
What does this mean for Sri Lanka?
The most immediate impact would be on the import bill. Sri Lanka lately has been spending a considerable amount on petroleum related imports. A sustained fall in global oil prices, which the reopening of the Strait of Hormuz would produce reduces that outflow, strengthening the current account further and relieving pressure on the rupee. A more stable rupee and a cheaper import bill can dampen imported inflation which has been a significant component of Sri Lanka’s recent inflationary pressure, given the economy’s dependence on fuel for transport, electricity generation and industrial activity. Headline inflation can be expected to trend downwards in the near future.
The fiscal side has remained largely insulated from the Middle-Eastern tensions. Even so, lower global prices reduce the political pressure to subsidise which in turn protect the current primary surplus that the IMF programme requires Sri Lanka to maintain.
The known unknowns however pose risks to the positive implications the peace deal can have on the Sri Lankan economy. Until the memorandum is signed, the situation in Lebanon is made clear, the nuclear issue is addressed, and the Strait is unconditionally open, the peace deal, at the time of writing leaves us with more questions than clear cut answers.