By: Staff Writer
April 02, Colombo (LNW): Sri Lanka’s external sector, which showed signs of recovery in 2025, is once again under pressure as global geopolitical tensions begin to erode its current account position. The sharp narrowing of the current account surplus in February 2026 signals that the country’s տնտեսական stability remains highly exposed to external shocks.
The surplus dropped 68% year-on-year to $117.2 million in February, reflecting a rapid deterioration driven by surging imports and stagnating exports. Although the cumulative surplus for January and February rose modestly to $486.9 million, this aggregate figure obscures the speed of the downturn now underway.
The Crisis intensified following the outbreak of conflict in the Middle East on February 28. The immediate transmission channel has been energy. Rising oil prices have significantly increased Sri Lanka’s fuel costs, cascading through the economy via higher transportation, logistics, and production expenses.
This has had a direct impact on trade dynamics. Imports rose sharply by 25.2% in February to $1.83 billion, while export growth remained almost flat at 0.5%, reaching $1.05 billion. As a result, the trade deficit widened dramatically. Over the first two months of 2026, imports reached $3.6 billion, compared to exports of $2.2 billion, further expanding the deficit to $1.43 billion.
Structural weaknesses are becoming more visible. Sri Lanka’s terms of trade deteriorated as export prices fell faster than import prices, reducing the real value of export earnings. At the same time, higher freight charges and insurance premiums driven by regional instability are inflating import costs and squeezing exporters.
The services sector, another key pillar of external earnings, is also faltering. The services surplus declined 16.7% year-on-year to $340 million in February. Tourism, despite higher arrivals, generated lower revenue, with earnings falling to $352 million. For the first two months, total tourism income declined to $730 million, highlighting the disconnect between visitor numbers and actual receipts.
Flight disruptions and rising airfares linked to the Gulf conflict are dampening travel demand, with estimated monthly losses of up to $100 million. Meanwhile, technology service exports and logistics inflows have both contracted significantly, indicating broader Weakness in service-related foreign exchange earnings.
One bright spot remains workers’ remittances, which surged 33% in February to $729 million and totaled $1.48 billion for the first two months. However, this resilience may not be guaranteed, as economic disruptions in Middle Eastern labour markets could eventually impact migrant incomes.
Financial flows present a mixed picture. While government securities attracted a net inflow of $53 million, the stock market recorded a $30 million outflow, suggesting cautious investor sentiment. Official reserves increased to $7.3 billion, but this has not prevented a 1.6% depreciation of the rupee so far in 2026.
The contrast with 2025 is stark. Last year, Sri Lanka recorded a $1.73 billion current account surplus, supported by strong remittances of $8.08 billion and services inflows of $3.71 billion. However, with imports rising faster than exports and global conditions deteriorating, that stability is now under threat.
The narrowing surplus is more than a statistical shift it is a warning sign. As external pressures mount, Sri Lanka faces a critical challenge: sustaining its recovery in an increasingly volatile global environment.
