Sri Lanka’s external sector showed a temporary improvement in August 2026, but the latest figures reveal that the country’s balance-of-payments position remains under considerable pressure, with the widening merchandise trade deficit, weakening tourism earnings and deteriorating terms of trade threatening to offset gains from remittances and foreign-exchange reserve accumulation.
The current account recorded a surplus of US$133 million in August, ending four consecutive months of deficits. However, this monthly improvement does not yet signal a decisive reversal. During January-August, the current account still recorded a deficit of US$291 million, highlighting the continuing pressure on Sri Lanka’s external finances.
The merchandise trade position remains the principal source of concern. The trade deficit widened to US$7.2 billion during the first eight months of 2026, compared with US$4.3 billion during the corresponding period of 2025. This represents a substantial deterioration and indicates that the country continues to require large foreign-exchange resources to finance its import bill.
The situation is particularly significant because the widening deficit comes despite restrictions and adjustments in import demand in several categories. Fuel imports illustrate the scale of the problem. Although monthly fuel import expenditure declined for the fourth consecutive month in August, cumulative expenditure reached approximately US$4 billion during January-August, representing a massive 61.6% year-on-year increase.
The fuel bill therefore remains one of the most important external vulnerabilities. Higher international energy costs or disruptions in global supply could rapidly increase Sri Lanka’s foreign-exchange requirements and place renewed pressure on the rupee and domestic energy prices.
Vehicle imports provide a contrasting picture. Expenditure on motor vehicles amounted to US$189 million in August, down 24.2% from August 2025. Nevertheless, cumulative vehicle-import expenditure reached US$1.684 billion during the first eight months, demonstrating that reopening import channels can quickly create additional demand for foreign currency.
Another warning signal is the deterioration in the terms of trade. Import prices increased faster than export prices in August, weakening Sri Lanka’s purchasing power in international trade. The same deterioration was recorded cumulatively during January-August.
The services account also weakened. Its August surplus fell 24.4% year-on-year to US$220 million, while the cumulative surplus declined 21.4% to US$2.1 billion. Tourism was an important factor. Tourist arrivals fell 3.3% in August and 2% during January-August, while cumulative tourism earnings fell 10% to US$2.1 billion.
Against these pressures, workers’ remittances remain a major stabilising force. August inflows increased 10% to US$749 million, lifting cumulative remittances 19.8% to US$6.1 billion.
Gross official reserves, including the China swap facility, nevertheless rose to US$6.9 billion by end-August, supported by Central Bank foreign-exchange purchases. But by end-September, the rupee had depreciated 6.3% against the US dollar year-to-date.
The figures therefore present a mixed external picture: stronger remittances and reserves provide a buffer, but the widening trade gap, expensive fuel imports, weaker tourism earnings and currency depreciation show that Sri Lanka’s external recovery remains vulnerable.