By:Staff Writer
September 02, Colombo (LNW): Sri Lanka’s external sector showed surprising resilience in the first seven months of 2025, but economists warn that mounting political instability could undermine these gains and threaten economic stability.
According to the Central Bank of Sri Lanka (CBSL), the current account posted a $1.7 billion surplus between January and July 2025, a 36.5% increase from the same period last year. The improvement was driven by stronger exports, rising workers’ remittances, and steady tourism earnings. Yet, the underlying picture reveals vulnerabilities, particularly in trade and currency movements, raising concerns about sustainability in the face of fragile governance.
Merchandise trade continued to weigh heavily on the balance. Although the deficit narrowed slightly in July to $580 million compared to $603 million a year earlier, the cumulative deficit widened to $3.8 billion in the first seven months, up from $3.1 billion in 2024. Imports surged 11.8% year-on-year to $11.64 billion, outpacing the 7.1% growth in exports, which reached $7.8 billion.
The spike in imports was largely visible in June and July, with vehicle imports alone accounting for $668 million in the seven-month period. Rising import prices further worsened terms of trade, while the rupee depreciated 3.3% against the US dollar by end-August 2025. These pressures leave Sri Lanka exposed, especially as global commodity prices remain volatile.
Services and tourism provided a buffer, with net inflows in services reaching $2.4 billion, up 3.3% from last year. Tourist arrivals rose 6.6% in July to over 200,000, generating $318 million in earnings. Cumulative tourism revenue stood at $2 billion by July, slightly higher than 2024 levels. Workers’ remittances offered another lifeline, hitting $697 million in July—the highest since December 2020.
Capital market activity, however, sent mixed signals. While foreign investors maintained net inflows into government securities, the Colombo Stock Exchange saw net outflows in both primary and secondary markets, underscoring investor caution. Official reserves held steady at $6.1 billion at end-July, supported partly by the swap arrangement with China’s central bank.
Analysts caution that despite encouraging current account numbers, the economy remains vulnerable to political instability. Growing uncertainty over fiscal reforms, governance disputes, and delays in debt restructuring could shake investor confidence. The widening trade deficit, rupee depreciation, and reliance on remittances and tourism inflows further highlight structural weaknesses.
With elections looming and policy direction unclear, Sri Lanka risks losing the fragile economic stability it has built. Unless decisive reforms are pursued, the country’s external sector resilience may prove short-lived, exposing the economy to fresh turbulence.
