By Indian Foreign Policy Analyst

Western analysis of Iran is not merely flawed but it is structurally illiterate. More than four decades after the Islamic Revolution, large segments of Western diplomatic, academic, and policy commentary continue to operate on assumptions that were rendered obsolete in 1979. This intellectual inertia has produced writing that is polished in tone, confident in posture, and fundamentally detached from operational reality. The central error is simple yet fatal: Iran is persistently analyzed as a centralized state. It is not. This single misunderstanding contaminates everything that follows that is sanctions logic, regime-change fantasies, leadership-decapitation strategies, escalation modeling, and crisis prediction.

The Shah-era fallacy that refuses to die

Under Mohammad Reza Pahlavi, Iran functioned as a classic centralized autocracy. Power was vertically integrated, institutionally hollow, and personally concentrated. When the Shah was removed, the system collapsed in totality and not because Iran was inherently weak, but because everything depended on a single node. Western policymakers internalized this collapse as a universal lesson about Iranian governance. That conclusion was catastrophically wrong. Post-revolutionary Iran was engineered explicitly to ensure that such a collapse could never happen again. The system that emerged was not accidental chaos or ideological improvisation. It was a deliberate act of institutional design, informed by historical trauma and guided by a single objective: anti-decapitation resilience.

Modern Iran is a distributed power system, not a command hierarchy

Contemporary Iran operates as a decentralized, redundant, and compartmentalized power ecosystem. Authority is fragmented across overlapping political, clerical, military, economic, and security institutions. Overlap is not dysfunction; it is the system’s primary defensive feature. Decision-making is slow not because of incompetence, but because no single actor is permitted decisive unilateral control. Competing centers constrain one another, absorb shocks, and prevent systemic failure. This structural reality alone invalidates:

Regime-decoupling theories

Leadership-decapitation strategies

Sanctions-induced collapse models

Yet these ideas continue to dominate Western policy discourse, recycled endlessly with cosmetic updates and zero structural revision.

The Supreme Leader is not the center of gravity

Western commentary routinely mischaracterizes Ali Khamenei as an omnipotent executive authority. This framing is analytically lazy and strategically dangerous. The Supreme Leader does not function as a CEO issuing top-down operational commands. He operates as a balancing and arbitration node and maintaining institutional equilibrium, resolving elite deadlock, and ensuring ideological continuity across competing power centers. If the Supreme Leader were removed, the system would experience turbulence, not collapse. Succession mechanisms, redundancy, and distributed authority would absorb the shock. This outcome is not hypothetical; it is the explicit purpose of the post-1979 political architecture.

The doctrine the West refuses to understand: Ātash be Ekhtiār

At the core of Western analytical failure lies a near-total misunderstanding of the Islamic Revolutionary Guard Corps (Islamic Revolutionary Guard Corps), particularly its foundational doctrine: آتش به اختیار (Ātash be Ekhtiār). In military terms, it means “fire at your own discretion.” In doctrinal terms, it mandates initiative, autonomous judgment, and decentralized execution when higher authority is silent, ambiguous, or constrained. This is not rhetoric. It is a command philosophy. For over forty years, Ātash be Ekhtiār has allowed the IRGC to function as a self-activating coercive network. Local commanders do not wait for orders to suppress dissent. Violence is locally generated, doctrinally justified, and retroactively sanctioned. Western analysts persist in modeling repression as top-down direction from Tehran. In reality, repression is structural, autonomous, and rehearsed.

Internal repression is systemic, not episodic

The IRGC has long functioned as a domestic population-control instrument, particularly during political stress. Protest movements are not treated as civic dissent but as pre-hostile battlespace conditions. The pattern is consistent:

1999 Tehran student protests : dormitories stormed, students bound and thrown from windows

2009 post-election uprising : mass arrests, disappearances, extrajudicial killings

2022 protests following a young woman’s death after hijab enforcement : nationwide repression

These were not anomalies. They were institutional rehearsal cycles, each refining coercive confidence.

The 2026 crackdown and cognitive warfare by silence

When mass repression escalated again in early 2026, resulting in large-scale civilian deaths, the global response was revealing. World leaders deliberately downgraded the violence to “internal unrest” or “domestic instability.” This was not neutrality. It was cognitive warfare by omission. By refusing moral framing, the international system granted the regime operational freedom. The message was unambiguous: internal mass violence would carry no external cost.

Externalization of crisis and cognitive counteroffensive

Iran did not merely suppress unrest; it exported the crisis outward. Using Russian and Chinese cognitive-warfare methodologies, the regime reframed domestic repression as:

Sovereignty defense

Resistance to foreign interference

Preemption of external aggression

This reframing was aimed inward as much as outward. Domestic anger was redirected into external threat perception. The result was predictable: civilizational consolidation under pressure. Western diplomats, still operating on linear escalation models, misread this as regime stabilization. In reality, it was narrative maneuver warfare.

External coercion has repeatedly rescued the regime from collapse

Iran was approaching a genuine internal legitimacy crisis. By the late 2010s, the majority of the population had turned against the ruling establishment. This was not marginal dissent but near-systemic alienation driven by economic failure, corruption, generational exhaustion, and repression. Under purely internal conditions, the system faced existential erosion of consent.

Externally manufactured confrontation that is sanctions framed as collective punishment, overt regime-change signaling, assassinations, and constant threat inflation and this reversed this trajectory. Despite deep hostility toward the regime, the Iranian population remains intensely patriotic. When external attack occurs, internal divisions are subordinated to national defense. The external enemy is confronted first; internal reckoning is deferred. Foreign coercion thus became political life-support for a regime that had otherwise squandered legitimacy.

The migration paradox strategists fail to understand

Conventional strategic doctrine assumes that unrest produces outward flight: populations escape violence, drain resistance, and weaken opposition movements. Iran defies this model. During every major cycle of repression, Iranians do migrate , but not with the psychology of permanent exit. A significant portion of the Iranian diaspora wants to return, not assimilate. Migration is often tactical, not terminal: survival first, resistance later. Unlike many conflict zones where exile dissolves political agency, Iranian diaspora communities remain emotionally, politically, and operationally tethered to the homeland. Protest waves inside Iran are mirrored by mass mobilization abroad, not as passive sympathy but as active extension of struggle. This produces a rare dynamic: migration becomes a reservoir of opposition, not a release valve. Western strategists, trapped in outdated rulebooks, misread migration as regime stabilization. In reality, it reflects a population that has not psychologically surrendered. The desire is not merely to escape repression and  it is to return and dismantle it. This mindset fundamentally alters deterrence, repression modeling, and long-term regime durability and yet it remains almost entirely absent from Western analysis.

Why rally-around-the-flag theory fails in Iran

Western analysts misinterpret consolidation through rally-around-the-flag theory and a short-term emotional response seen in liberal democracies. Iran’s response is different. It is rooted in civilizational nationalism. Here, priorities reorder:

1. Sovereignty before governance

2. Survival before reform

3. External threat before internal accountability

Opposition is not forgiven; it is strategically deferred. Endurance is mistaken for legitimacy. Resilience is confused with consent.

Leadership decapitation: a catastrophic strategic blunder

The targeted removal of senior Iranian leadership figures under Donald Trump and Benjamin Netanyahu was one of the most damaging strategic miscalculations in recent history. Whoever advised these actions fundamentally misunderstood the system they were striking. In a decentralized architecture governed by Ātash be Ekhtiār, assassinations validate threat narratives, accelerate consolidation, and legitimize autonomous retaliation. Rather than weakening the regime, these actions erased internal fault lines and handed narrative superiority to hardliners. This was not deterrence and it was strategic self-sabotage.

The dangerous fantasy of MEK as an alternative

Compounding this failure is the reckless belief that regime collapse should be followed by installation of the Mujahideen-e-Khalq (MEK). MEK is not a democratic alternative. It is a cult-like, militarized organization with negligible domestic legitimacy and authoritarian internal structure. Replacing the current system with MEK would not liberalize Iran and it would replace one coercive architecture with another, potentially more violent and unstable.

Confidence without comprehension

The West did not merely misread Iran and it learned the wrong lesson, while Iran learned the correct one. Modern Iran is anti-decapitation by design, decentralized by doctrine, and resilient by construction. Much of Western writing on Iran today is not analysis. It is ritualized ignorance wrapped in professional vocabulary. Until these obsolete frameworks are abandoned, policy failure is not accidental and it is inevitable.

Mojtaba Khamenei, the son of former Iranian Supreme Leader Ayatollah Ali Khamenei, has reportedly been appointed as Iran’s new Supreme Leader following his father’s death.

The decision is believed to have been made by Iran’s Assembly of Experts, the powerful clerical body responsible for selecting the country’s highest authority. Mojtaba Khamenei, 56, has long been considered an influential figure within Iran’s political establishment and is known to have close ties with the Islamic Revolutionary Guard Corps.

Middle East faces a period of unprecedented tension and instability

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Israeli PM Benjamin Netanyahu 

US President Donald Trump 

Chinese President Xi Jinping 

The 2026 strikes were timed to exploit a moment of perceived Iranian domestic vulnerability, following the massive January 2026 protests

Iranian crude was the lifeblood of China’s economic resilience against Western sanctions and a key component of its long-term strategic planning

In the current geopolitical landscape of 2026, the Trump administration’s maneuvers against Iran and Venezuela appear less as isolated regional disputes and more as a coordinated campaign to preserve American hegemony by strangling the energy lifelines of its primary rival, China

The following article examines how the targeting of Tehran and Caracas serves as a mechanism to disrupt the ‘Beijing-Tehran-Moscow’ axis and maintain the US status as the world’s sole superpower.

The shift from non-proliferation to economic containment

For decades, the US policy towards Iran was framed through the lens of nuclear non-proliferation. However, the re-escalation under the second Trump term suggests a shift in priorities. By moving beyond the Joint Comprehensive Plan Of Action (JCPOA), the US has targeted Iran’s most vital export, oil.

China is currently the world’s largest importer of crude oil, and its economic growth is inextricably linked to energy security. By placing Iran under a “maximum pressure” campaign characterised by the 2026 executive orders imposing 25% tariffs on Iran’s trading partners the US is not just targeting a regime; it is imposing a ‘tax’ on Chinese industrial production.

The energy squeeze: Trump’s strategy to contain China and preserve hegemony

In the early twenty-first century, the international system has transitioned from a post-Cold War unipolarity to a state of intense ‘Great Power Competition.’ Central to this competition is the rivalry between the United States and the People’s Republic of China.

This article argues that the second administration of Donald Trump has moved beyond traditional trade and technological containment, adopting a systemic ‘Energy Squeeze Doctrine.’ By targeting the energy infrastructures and export capabilities of Iran and Venezuela, China’s primary sources of discounted, non-dollar crude the United States aims to stifle Chinese industrial expansion and military modernisation. Simultaneously, this strategy provides a geopolitical shield for Israel to pursue its own regional hegemony and for Prime Minister Benjamin Netanyahu to maintain domestic political survival.

This article justifies these observations through an analysis of energy flow data, currency hegemony, and regional security dynamics.

The geopolitical context: US hegemony and the Chinese challenge

The transition of global power in the early twenty-first century has been characterised by a profound and multifaceted competition between the United States and the People’s Republic of China. This ‘Great Power Competition’ is often analysed through the lens of trade wars, technological rivalry, and territorial disputes in the South China Sea. However, a more systemic and sophisticated strategy has emerged from the second administration of Donald Trump, which we can define as the ‘Energy Squeeze Doctrine.’ This doctrine identifies energy security as the fundamental vulnerability of Chinese global ascension. Rather than engaging in a direct and potentially catastrophic military confrontation with Beijing, the Trump administration has opted for a strategic indirect approach: the systematic dismantling and control of the energy supply lines that fuel the Chinese industrial machine. By targeting Iran and Venezuela two of China’s most vital, non-aligned energy partners the United States aims to reassert its global hegemony and prevent the displacement of the dollar-denominated international order.

This approach represents a shift from traditional non-proliferation objectives toward a more aggressive economic containment strategy designed to preserve American unipolarity at any cost. The rationale behind targeting Tehran and Caracas is not merely a localised desire for regime change or nuclear non-proliferation. Instead, it represents a calculated maneuver to manage the transition of power in the international system.

Historically, the United States has maintained its status as the ‘World Number One’ through its control over global financial institutions and its role as the ultimate guarantor of maritime security. However, China’s rapid economic expansion and its ‘Belt and Road Initiative’ (BRI) threatened to create a parallel, independent economic ecosystem. Central to this ecosystem was the secure flow of discounted, sanctioned crude oil from Iran and Venezuela, often traded outside the American-led banking system. By disrupting these flows, Washington seeks to impose an ‘energy tax’ on Chinese growth, forcing Beijing back into the US-dominated energy market and preserving the status quo of American leadership.

This article explores the mechanics of this strategy, the role of regional allies like Israel, and the profound implications for global peace in this defining decade.

The Venezuelan precedent: Testing the energy blockade

The execution of the ‘Energy Squeeze’ began in earnest with the 2026 operations in Venezuela. For years, the Maduro administration served as a vital node in China’s energy security architecture, providing millions of barrels of crude in exchange for debt relief and infrastructure investment. These transactions were frequently conducted through ‘shadow fleets’ and opaque financial channels designed to bypass the Office of Foreign Assets Control (OFAC) sanctions.

The January 2026 operation, which resulted in the detention of Nicolás Maduro and the installation of a transitional government aligned with Washington, was a watershed moment in the restoration of the Monroe Doctrine. It was not merely an exercise in promoting democracy; it was a strategic seizure of the world’s largest proven oil reserves to prevent their use by a global rival.

Following the ouster of Maduro, the Trump administration immediately moved to redirect Venezuelan oil flows. President Trump’s rhetoric on board Air Force One in late January 2026 stating that China was ‘welcome’ to buy Venezuelan oil but only under ‘legitimate and authorised channels’ revealed the true objective of the operation. By forcing China to purchase Venezuelan oil in US dollars and through approved companies, the United States effectively reclaimed the power to monitor, tax, and restrict Beijing’s energy intake. The ‘discount era’ for Chinese ‘teapot’ refineries, which relied on cheap, sanctioned Orinoco crude, came to an abrupt end. This move hit the Chinese economy where it hurts most; its industrial profit margins. The loss of cheap Venezuelan energy forced Chinese state-owned enterprises to look toward more expensive alternatives, thereby slowing the capital accumulation necessary for their military and technological modernisation programmes. Venezuela, under the new ‘Donroe Doctrine’ framework, was transformed from a Chinese energy outpost into a lever for American economic diplomacy. This successful operation provided the strategic blueprint for the subsequent, and more dangerous, escalation against the Islamic Republic of Iran, ensuring that the Western hemisphere’s energy resources remained under American oversight.

The Iranian campaign: Cutting the dragon’s lifeline

The focus then shifted to Iran, the most defiant pillar of the Beijing-Tehran-Moscow axis. While the mainstream media and international observers focused on the breakdown of nuclear negotiations and the subsequent ‘Operation Epic Fury’ in February 2026, the underlying strategic logic remained consistent with the Venezuelan precedent. Iran’s nuclear programme, while a significant security concern, served as the primary casus belli for a broader campaign to sever China’s most significant energy lifeline in the Middle East. As of early 2026, China was importing one million barrels of oil per day from Iran, representing a critical portion of its total energy requirements. This Iranian crude was the lifeblood of China’s economic resilience against Western sanctions and a key component of its long-term strategic planning.

Trump’s strategy toward Iran moved beyond the ‘Maximum Pressure’ of his first term into a phase of ‘Maximum Interruption.’ By targeting not just the Iranian leadership but the very infrastructure that enabled the export of oil to the East such as the Kharg Island terminal and the IRGC-controlled shadow fleet operations the United States aimed to create a strategic energy vacuum.

The logic was clear: An Iran, that cannot export oil is an Iran that cannot support China’s rise. Furthermore, the 2026 strikes were timed to exploit a moment of perceived Iranian domestic vulnerability, following the massive January 2026 protests. By degrading Iran’s naval and missile capabilities, the US ensured that Tehran could not effectively retaliate by closing the Strait of Hormuz, a move that would have triggered a global energy crisis detrimental to the U.S. as well. Instead, the US aimed for a ‘controlled strangulation’ where Iranian oil was removed from the Chinese market while American shale production and Saudi output were ramped up to keep global prices stable for Western consumers.

This maneuver forced China into a precarious position. Without the one million-plus barrels of Iranian oil, Beijing faced a choice  either deplete its strategic petroleum reserves or accept a significant slowdown in economic growth. The ‘Iranian Squeeze’ also had a secondary effect on China’s military objectives. The People’s Liberation Army (PLA) requires massive quantities of refined fuel for its expanding blue-water navy and air force operations. By increasing the cost and decreasing the reliability of energy supplies, the United States effectively placed a logistical ceiling on China’s ability to project power in the Indo-Pacific.

The targeting of Iran was, therefore, a preemptive economic strike in a long-term war for global primacy, aimed at ensuring that China’s military ambitions remained resource-constrained.

Currency hegemony and the ‘petrodollar’ status quo

The defence of the US dollar’s status as the world’s primary reserve currency is the invisible thread connecting the operations in Iran and Venezuela. For decades, the ‘petrodollar’ system has allowed the United States to run large deficits and maintain an outsized military presence globally, as the world’s need for dollars to buy energy ensures a constant demand for the currency. China’s attempts to promote the ‘petroyuan’ and conduct oil trades with Iran and Russia in local currencies posed an existential threat to this hegemony. By disrupting these non-dollar energy corridors, the Trump administration sought to reinforce the necessity of the dollar in global trade.When President Trump spoke of ‘making a deal’ with China for Venezuelan or (potentially) post-regime Iranian oil, he was asserting that energy must be traded within the American financial architecture. This is why the control of energy supply lines is more effective than direct military conflict.

A war with China would be mutually assured destruction, but an ‘energy blockade’ conducted through the proxy of sanctioning and striking energy suppliers allows the US to degrade Chinese power without firing a single shot at a Chinese vessel. This economic warfare ensures that the United States remains the ‘World Number One’ by default, as no other power can sustain its economy if the US controls the valves of global energy. The world peace is currently in a ‘crucial moment’ because this strategy pushes China into a corner where it must either submit to the American-led order or take desperate measures to secure its energy needs, potentially through territorial expansion in the South China Sea or Central Asia. The hesitation of the American leadership to give up the status quo has led to a high-stakes game of geopolitical brinkmanship where energy is the ultimate prize and the ultimate weapon in the battle for 21st-century supremacy.

Israel’s strategic convergence: The quest for regional dominance

Concurrent with the American global strategy is the regional ambition of Israel, led by Prime Minister Benjamin Netanyahu. In the context of the 2026 strikes on Iran, Israel’s objectives are both domestic and strategic. Domestically, Netanyahu has long utilised the Iranian threat as a unifying force to maintain his coalition and remain in power amidst various legal and political challenges. By positioning himself as the only leader capable of securing Israel against an existential threat, he has effectively sidelined his opposition. However, beneath the rhetoric of national survival lies a broader strategic goal: the establishment of Israel as the undisputed Middle East superpower and the realization of a ‘Greater Israel’ not necessarily in terms of physical borders alone, but in terms of absolute regional hegemony.

Israel has skillfully leveraged the Trump administration’s anti-China energy strategy to achieve its own ends. By taking cover behind the American campaign to weaken Iran, Israel has been able to conduct sustained military operations targeting the ‘Shiite Crescent’ across Syria, Lebanon, and Iran with minimal international pushback. The degradation of Iran’s proxy network, including Hezbollah and the Houthis, serves both US interests (by securing Red Sea energy routes) and Israeli interests (by removing regional rivals). The concept of ‘Greater Israel’ in the 21st century involves a region where Israel’s military and technological superiority allows it to dictate terms to its neighbours, ensuring that no regional power can challenge its dominance.

The total neutralisation of the Iranian regime is the final piece of this puzzle. With Iran weakened and its energy supply lines to the East severed, the regional balance of power shifts irrevocably in Israel’s favour. This synergy between Washington’s desire for global hegemony and Jerusalem’s quest for regional supremacy creates a powerful, if volatile, alliance that shapes the current geopolitical epoch, prioritising the preservation of power over the search for a sustainable regional peace and potentially locking the Middle East into a cycle of perpetual conflict.

Conclusion: Implications for world peace

In conclusion, the targeting of Iran and Venezuela under the Trump administration is a sophisticated manifestation of the ‘Energy Squeeze Doctrine.’ By controlling the lifelines of the Chinese economy, the United States seeks to prolong its global hegemony and prevent the rise of a peer competitor. This strategy, while avoiding direct war with China, creates a high-pressure environment that threatens global stability. Simultaneously, Israel utilises this geopolitical shift to consolidate its own regional power and secure Netanyahu’s political future. The current era represents a defining moment where the pursuit of ‘Number One’ status quo by the US and the regional ambitions of Israel converge, leaving the prospects for world peace hanging in a delicate balance. The struggle for energy is, in reality, a struggle for the future of the international order, and the actions taken today will echo through the remainder of the century as the world grapples with the fallout of this energy-centric power play. This dynamic underscores the deeply integrated nature of modern geopolitics where economics and security are no longer distinct spheres of action. The Iranian regime finding itself isolated must now rely on a dwindling set of allies as the global hegemon tightens the noose around its energy exports. The strategic implications for the Beijing-Tehran partnership are dire, as the lack of reliable crude imports stifles the very industrial capacity that China requires to contest maritime dominance. Moreover, the Israeli position in this conflict is not merely reactive but proactive, shaping the theater to ensure long-term survivability against asymmetric threats. The preservation of the current order demands a level of strategic discipline that shuns the idealism of past decades in favour of a hard-nosed realism. As we move forward, the interplay between energy markets and military readiness will continue to be the decisive factor in determining which power emerges victorious in the struggle for global leadership. The future of peace depends on it. The United States has long utilised a strategy of ‘energy strangulation’ to impede China’s economic ascent, primarily by leveraging sanctions to sever Beijing’s access to discounted petroleum from Venezuela and Iran. However, the current escalation in the Middle East threatens to transform this containment policy into a strategic boomerang. If the Iranian conflict results in a protracted regional war, the ensuing global energy shock and the potential collapse of Western-aligned security architectures may inflict more damage on the American-led order than on the Chinese economy. History serves as a grim reminder that conflict is inherently non-linear; the ‘perfect plan’ to contain a rival often becomes the very catalyst for one’s own overextension.

(The writer is a battle hardened Infantry Officer who served the Sri Lanka Army for over 36 years, dedicating 20 of those to active combat. In addition to his military service, Dr. Perera is an international researcher and a writer, having authored more than 200 research articles and 16 books. He holds a PhD in economics and is an entrepreneur and international analyst specialised in national security, economics and politics. He can be reached at [email protected]) 

The Sri Lanka Navy has rescued 35 individuals from an Iranian vessel that encountered distress in the southern seas off Sri Lanka.

According to the Ministry of Defence, arrangements have been made to transport the rescued individuals to the Karapitiya Teaching Hospital in Galle for medical attention.

The Sri Lanka Air Force has also deployed an aircraft to the area to support ongoing search operations.

Speaking in Parliament today (04), Minister of Foreign Affairs Vijitha Herath stated that the incident occurred outside Sri Lanka’s territorial waters. He confirmed that the Navy launched immediate rescue operations after receiving a distress call indicating that the vessel was sinking.

Earlier reports indicated that at least 30 people had been rescued from the vessel, which is believed to belong to the Iranian Navy.

The distress call was received from a location approximately 40 nautical miles off Galle Harbour, prompting the Sri Lanka Navy to dispatch vessels to the site to carry out rescue operations.

Deputy Minister of Defence Major General (Retd) Aruna Jayasekara said that necessary measures are already being taken in response to the incident.

Market confidence in Sri Lanka’s financial system remains intact over the next 12 months but beneath that surface stability, medium-term anxieties are rising, according to the latest Systemic Risk Survey released by the Central Bank of Sri Lanka (CBSL).

The biannual survey, conducted between 19 December 2025 and 16 January 2026 among 147 financial sector firms, reveals a cautiously optimistic short-term outlook.

 However, confidence over a three-year horizon has weakened, reflecting deeper concerns about geopolitical instability, natural disasters, and structural vulnerabilities.

 Importantly, the survey was completed before two major global shocks: a US Supreme Court ruling on tariff policy linked to the Trump administration and subsequent military strikes by the US and Israel on Iran.

Those developments triggered oil price spikes and temporary shutdowns of major airline hubs in the Gulf region  events likely to amplify the very risks respondents had already flagged. While short-term sentiment remains positive, respondents reported a higher perceived probability of a “high-impact negative event” in both the one-year and three-year outlooks.

That dual signal — optimism combined with elevated tail-risk fears suggests markets believe the system can withstand near-term stress but are less confident about prolonged turbulence.

 The survey framework is expansive, covering seven broad risk categories and 46 sub-risks. These include global macroeconomic risks, fiscal and sovereign risks, domestic macroeconomic conditions, financial market volatility, institutional stability, financial infrastructure resilience, and broader systemic threats.

 Notably, the Central Bank refined its methodology in late 2025 by separating “domestic macroeconomic risks” into two new categories: fiscal and sovereign-related risks, and general domestic macroeconomic risks.

Three new sub-risks were added, reflecting the evolving complexity of Sri Lanka’s post-crisis environment.

 The dispersion of responses across categories indicates no single dominant threat. Instead, risk perceptions are fragmented spanning external shocks, fiscal pressures, and operational vulnerabilities.

 Such dispersion can be interpreted two ways: either systemic risk is diversified and manageable, or uncertainty is too diffuse to isolate. Participants included risk officers from licensed banks, finance companies, insurance firms, unit trust managers, brokerage houses, rating agencies, microfinance institutions, and mobile money providers  a cross-section of the financial architecture. The CBSL emphasised that the findings reflect market perceptions rather than official views.

Still, perception often drives behaviour. If institutions anticipate higher tail risks, they may tighten lending standards, increase liquidity buffers, or delay expansion plans potentially slowing economic momentum.

The contrast between resilient short-term sentiment and weakening medium-term confidence may reflect a belief that immediate post-crisis stabilisation has worked, but structural and geopolitical uncertainties remain unresolved.

In essence, the survey captures a system no longer in emergency mode however not entirely out of the woods. Confidence has stabilised. Conviction has not.

Sri Lanka’s external debt stock is inching upward again raising fresh questions about whether the National People’s Power (NPP) Government can hold the line on International Monetary Fund (IMF) benchmarks while navigating the final stretch of its historic restructuring.

According to the Treasury’s Quarterly Debt Bulletin for December 2025, outstanding Government external debt rose to $ 37.66 billion by 31 December, up $ 425 million from $ 37.24 billion at end-September. Though modest in quarterly terms, the uptick comes at a sensitive moment when fiscal consolidation and debt sustainability targets remain under close IMF scrutiny.

Total gross public debt stood at $ 103.6 billion at year-end, down from $ 106.8 billion in September  reflecting restructuring adjustments and currency effects. Of this, central Government debt accounted for $ 100.3 billion, while guaranteed State-Owned Enterprise (SOE) debt fell to $ 3.48 billion from $ 4.4 billion. Provincial and local government debt remained marginal at $ 21 million.

In composition, multilateral lenders now account for 38% of Government external debt ($ 14.3 billion), commercial borrowings 34% ($ 12.7 billion), and bilateral creditors 28% ($ 10.7 billion). International Sovereign Bonds (ISBs) alone represent $ 10.25 billion of the commercial segment.

Roughly 75% of the external portfolio carries fixed interest rates, limiting exposure to global rate volatility. However, 23% remains floating a risk factor if global financial conditions tighten again.

Sri Lanka’s domestic debt stands significantly higher at $ 62.7 billion, bringing the Government’s total debt stock close to $ 102 billion. In rupee terms, gross public debt reached Rs. 32.2 trillion at end-2025, including Rs. 3.1 trillion in Treasury Bills and Rs. 15.6 trillion in Treasury Bonds.

The central issue is whether incremental external borrowing, even within a restructured framework, aligns with IMF debt sustainability thresholds. Under the Extended Fund Facility program agreed in 2023, Sri Lanka committed to strict primary surplus targets and debt-to-GDP reduction benchmarks through the medium term.

Progress on restructuring has been substantial. Following the April 2022 debt service suspension, agreements were finalised in 2024 with the Official Creditor Committee and key bilateral lenders, including China Exim Bank and China Development Bank. A landmark bond exchange concluded in December 2024 saw approximately 98% participation by ISB holders, converting nearly all defaulted bonds into new instruments.

By late 2025, bilateral agreements with Paris Club members and other lenders brought the signing process to roughly 95% completion. Debt servicing to restructured creditors has resumed under revised schedules.

However stabilisation does not equal resolution. External debt has been reshaped, maturities extended, and cash-flow pressures eased but the nominal stock remains high. For the NPP administration, the challenge is twofold: sustaining fiscal discipline while avoiding policy reversals that could unsettle markets or delay IMF reviews.

With global financing conditions uncertain and growth still fragile, the margin for deviation is slim. A $ 425 million quarterly rise may be manageable but sustained slippage could complicate future program assessments and investor confidence.

The restructuring phase may be nearing completion. The compliance phase is only beginning

As at 3 March, the Securities and Exchange Commission of Sri Lanka finds itself at the centre of an unusually public reckoning over the breadth of its enforcement authority under the new SEC Act, with senior jurists warning that credibility in capital markets cannot come at the expense of constitutional guarantees.

The debate unfolded at the Bar Association of Sri Lanka (BASL) National Capital Market Symposium on 26 February at Cinnamon Life at City of Dreams, where two expert panels dissected insider dealing, market manipulation, and the regulator’s expanded investigative reach.

Former SEC Director (Legal and Enforcement) Ayanthi Abeyawickrama defended visible, firm enforcement as essential to investor confidence. “The regulator’s duty is to preserve confidence and ensure orderly markets,” she said, framing deterrence as a systemic necessity in a market still rebuilding depth and participation.

But Heritage Partners Senior Partner Dr. Arittha Wikramanayake delivered a pointed counter: “Presumption of innocence is not optional.” His concern centred on statutory presumptions within the new law that may, in practice, shift the evidential burden onto accused parties  a significant departure from traditional criminal law safeguards.

One flashpoint was the publication of names at the show-cause stage. Under current practice, entities under investigation may face public disclosure before final adjudication. Wikramanayake argued that such publicity can inflict immediate commercial and reputational harm during investigations that often span years. “Publication at the show-cause stage can function as punishment before adjudication,” he warned.

Harsha Amarasekera, PC, analysing insider dealing provisions, noted that liability now turns on possession of unpublished price-sensitive information rather than fiduciary status. “The perimeter is clearly broader,” he observed, underscoring that expanded exposure requires disciplined application of presumptions and investigative tools.

Former Supreme Court Justice Buwaneka Aluwihare, PC, reinforced that statutory presumptions “cannot displace fundamental criminal law principles,” signalling judicial unease over the balance between efficiency and fairness.

Panellists also scrutinised institutional design. Investigations are conducted under the Commission’s authority, findings evaluated internally, and enforcement determinations made by the same body. “We cannot allow a system where the same institution effectively investigates, determines, and enforces without robust procedural safeguards,” Wikramanayake cautioned.

Concerns extend beyond doctrine to capacity. Reported vacancies at the Commission estimated at around 50 positions raise questions about whether the regulator possesses sufficient technological expertise and commercial depth to apply sophisticated insider trading and manipulation provisions consistently.

The debate sharpened around the Act’s compounding powers, which allow administrative settlement of offences through financial penalties linked to benefit gained or loss avoided. While efficient in theory, significant monetary consequences may create strong inducements to settle. Where penalties are substantial, Wikramanayake warned, proportionality and procedural clarity become paramount.

Speakers were careful to distinguish between statute and stewardship. “I do not fault the statute,” Wikramanayake concluded. “The Act provides the tools. The question is whether the institution has the capacity to apply them in complex commercial environments.”

As enforcement activity intensifies, the central tension remains clear: market confidence depends on firmness but its durability may ultimately rest on fairness.

President Anura Kumara Dissanayake has extended an official invitation to Pope Leo XIV to undertake a state visit to Sri Lanka.

The letter of invitation was handed over at the Vatican by Minister Bimal Rathnayake, who is currently on an official visit to Italy. The letter was presented during a meeting with the Under-Secretary for Relations with States, Monsignor Mihaita Blaj.

Further details regarding the proposed visit have not yet been announced.