By: Staff Writer
November 30, Colombo (LNW): Sri Lanka’s external sector delivered mixed signals in October 2025, raising critical questions about the long-term sustainability of the recovery narrative promoted under the new NPP administration.
Central Bank data for the month indicates that while headline indicators show resilience built during stabilisation efforts, underlying pressures—particularly from the surge in imports—are intensifying.
The country posted a current account deficit for the second consecutive month, reversing the gains seen earlier in the year. However, on a cumulative basis, Sri Lanka maintained a US$1.7 billion surplus during January–October, reflecting the lingering benefits of tightened monetary policy, controlled demand, and improved service revenues. Analysts note that the challenge for the new NPP government is to convert these accumulated cushions into long-term external stability while managing a politically sensitive economic reform agenda.
A major stress point emerged in the merchandise trade deficit, which widened year-on-year following a sharp rise in imports. The most striking contributor was the US$261 million spent on vehicle imports in October alone, pushing cumulative vehicle imports to US$1.46 billion in ten months.
This surge is widely interpreted as an outcome of liberalisation measures and pent-up demand after years of import restrictions. However, it also exposes the risks of re-expansion without corresponding export-growth strategies.
Compounding the concern, Sri Lanka’s terms of trade deteriorated, indicating import prices are rising faster than export prices—an imbalance that places pressure on the currency and external stability.
Despite these pressures, service-sector inflows continued to support the external account. Tourism earnings rose moderately, with both month-on-month and year-on-year visitor arrivals increasing. For January–October, cumulative earnings grew 4.9%, showing strong recovery though still below full potential.
Meanwhile, workers’ remittances recorded their highest monthly inflow since December 2020, boosting cumulative inflows by 20.1% year-on-year a critical lifeline for household incomes and foreign exchange stability.
Foreign investor sentiment remained divided. Government securities attracted net inflows, but the Colombo Stock Exchange recorded net outflows, signalling cautious investor confidence during a politically transitional year.
Sri Lanka’s gross official reserves stood at US$6.2 billion, including the PBOC swap a level viewed as stable but not yet comfortable given the upcoming external debt obligations. The rupee depreciated 5% year-to-date, manageable but indicative of persistent market uncertainties.
For the NPP government, October’s data presents both an opportunity and a warning. The administration’s governance model focused on transparency, tighter fiscal controls, and reduced leakages has improved credibility among development partners.
However, the return of import-driven external pressures shows that stabilisation alone cannot secure sustained external resilience. Without stronger export diversification, a clearer industrial strategy, and disciplined trade policy, the economy risks sliding back into pre-crisis vulnerabilities.
