The Middle East conflict has sent shockwaves across the globe, disrupting oil markets and maritime trade as restrictions on the Strait of Hormuz threaten vital energy supplies and the Houthis intensify attacks on shipping routes.
The widening conflict has also raised security concerns across the region, with attacks on strategic infrastructure and threats involving religiously significant sites adding to tensions.
Meanwhile, major and smaller powers are grappling with food security, economic uncertainty, and the challenge of maintaining diplomatic relations with the warring parties.
Sri Lanka is already feeling the economic impact, with sharp fuel price increases, rising inflation, and pressure on tourism earnings adding to concerns over the country’s external finances.
South Asia was among the first regions to feel the economic shock of the Middle East war, having depended heavily on the region for decades, with few alternatives and little cushion to fall back on, according to Thedini Herath of the Regional Centre for Strategic Studies.
On 4 March, Iran closed the Strait of Hormuz, through which approximately 20% of the world’s oil and Liquefied Natural Gas (LNG) supplies pass daily.
“South Asia is not simply engaged in a partnership with the Middle East, but in a dependent economic partnership built around energy, remittances, trade routes, aid and investment, and political and strategic cooperation. The 2026 Middle East war disrupted all five channels of dependency simultaneously,” she said.
The talks that failed to deliver a breakthrough
Diplomatic efforts have continued alongside the military escalation. On Monday (26 October), senior figures, including Saudi Defence Minister Prince Khalid bin Salman, Pakistan’s Army Chief Field Marshal Asim Munir, and Turkish Intelligence chief Ibrahim Kalin, met Iranian President Masoud Pezeshkian and Security Council head Mohsen Rezaei in Tehran.
The discussions focused on regional security, reducing tensions, and cooperation among the four countries without foreign interference. They also considered mediation proposals relating to the conflicts in Yemen and Gaza and the disruption to shipping through the Strait of Hormuz.
However, the meeting did not produce a major breakthrough or a formal agreement to halt hostilities. Instead, the parties agreed to keep communication channels open, with further diplomatic engagement expected through regional mediation efforts.
The absence of a concrete agreement has left shipping security and the wider regional conflict unresolved.
The Houthis have also continued to use military action as leverage in the wider confrontation. Their claims of missile and drone attacks against Saudi infrastructure have included targets such as the Ras Tanura oil complex, King Khalid International Airport, and military installations. Saudi authorities have reported interceptions, while the extent of damage from individual attacks has remained disputed.
The attacks have added another dimension to the crisis, particularly as Saudi Arabia and other Gulf states seek to protect critical infrastructure and maintain regional security.
SL faces economic consequences
For Sri Lanka, the most immediate impact has been through fuel prices and inflation. The Ceylon Petroleum Corporation (CPC) has raised fuel prices by nearly 50% since the escalation of the conflict, increasing costs for transport, distribution, and businesses already facing pressure from higher operating expenses.
Colombo’s year-on-year headline inflation reached 8% in September. Food inflation rose to 8.7%, compared with 8.5% in August, while non-food inflation stood at 7.7%.
The Central Bank of Sri Lanka expects inflation to remain in the high single digits through the first quarter of 2027 before easing towards its 5% target, provided external conditions improve.
The consequences extend beyond the price of petrol and diesel. Higher energy costs feed into freight charges, electricity generation, agricultural production, and the distribution of essential goods. Fertiliser and other imported agricultural inputs could also become more expensive, adding to the cost of food production.
The International Monetary Fund (IMF), in its March 2026 review of Sri Lanka’s economic programme, estimated that a $ 10 increase in the price of a barrel of oil could widen the country’s trade deficit by around 0.6% of Gross Domestic Product (GDP).
The IMF also warned that a prolonged disruption to the Strait of Hormuz could further widen the trade deficit. Around half of Sri Lanka’s oil imports originate in the Middle East, according to the report, while the country’s strategic petroleum reserves are estimated to cover approximately one month of typical fuel consumption.
The Asian Development Bank (ADB), in its September 2026 Asian Development Outlook, similarly warned that further escalation could increase the cost of fuel, freight, fertiliser, and food, while putting pressure on exports, remittances, tourism, and foreign reserves.
Remittances remain resilient, but risks persist
Despite the conflict, Sri Lanka has not recorded an overall annual decline in official workers’ remittances.
Central Bank figures show that remittances increased 18.1% year-on-year to $ 6.865 billion during the first nine months of 2026. In September alone, inflows rose 5.6% to $ 734.4 million.
However, September’s growth was slower than the 21.4% increase recorded during the first seven months of the year. Monthly inflows also eased from $ 778 million in July to $ 749 million in August and $ 734.4 million in September.
These national figures do not establish whether remittances originating specifically from the Middle East have declined, as the published totals do not provide a breakdown by country of origin.
The concern is the potential impact on employment in the Gulf. The Middle East remains a major destination for Sri Lankan migrant workers, particularly those employed in construction, domestic work, hospitality, and other service sectors.
If businesses in the region reduce their workforce, working hours, or wages because of the economic consequences of the conflict, Sri Lankan households could eventually receive less money from family members working overseas. Any significant reduction would also affect an important source of foreign exchange for the country.
Travel warnings and flight disruptions
The security situation has also prompted governments to revise travel advice for the region.
On Tuesday (27 October), the UK’s Foreign, Commonwealth, and Development Office updated its travel guidance for several Middle Eastern and surrounding countries, warning that the situation remained unpredictable and the risk of sudden escalation was high.
The US and many other countries are also taking serious measures on issuing travel advisories. The advice covered Israel, Iran, Pakistan, Türkiye, Egypt, Iraq, the United Arab Emirates, Qatar, Jordan, Bahrain, Kuwait, Oman, Syria, Yemen, and the Occupied Palestinian Territories, among other destinations.
Aviation has been another area directly affected by the conflict. SriLankan Airlines cancelled approximately 30 flights during the first three days of the crisis, according to a report published by a national newspaper on 4 March. The cancellations began on 28 February, when airspace closures disrupted services to and from Dubai, Doha, Dammam, Riyadh, and Kuwait.
On 2 March, the airline cancelled 10 flights amid continued airspace closures, followed by a further 12 cancellations the next day, including two Colombo–Dubai return services and flights to Kuwait, Doha, Dammam, and Riyadh.
The airline has been assessing the financial impact of the disruption. However, a cumulative figure for lost revenue and additional operating expenditure since the conflict began has not been publicly established.
The consequences are not limited to the airline. Gulf airports are important transit hubs for passengers travelling to Sri Lanka from Europe and North America. Airspace restrictions, flight rerouting, cancellations, and higher aviation fuel costs have added uncertainty to international travel.
Tourism earnings have also come under pressure. According to the ADB, tourist arrivals declined 1.8% year-on-year during the first seven months of 2026, while tourism earnings fell 11.5%.
Trade deficit and foreign reserves
Sri Lanka’s external position has weakened during 2026, with imports growing faster than exports.
The ADB reported that the country recorded a current account deficit of $ 387 million during the first seven months of the year, compared with a surplus of $ 1.7 billion during the corresponding period in 2025. The merchandise trade deficit widened 69% to $ 6.5 billion, as imports increased 25.8% while exports grew by 4.4%.
Gross official reserves declined from $ 6.8 billion at the end of 2025 to $ 6.6 billion by the end of July 2026, equivalent to around 3.2 months of imports, according to the ADB. A sustained increase in fuel and freight costs could widen the import bill further.
At the same time, weaker tourism earnings or a future slowdown in remittances would reduce the foreign exchange available to meet import payments. The pressure is particularly relevant to a country still rebuilding its economy following the 2022 financial crisis and seeking to strengthen reserves while maintaining growth in exports and services.
Shipping and tea exports
The disruption to maritime routes has implications for Sri Lanka beyond its petroleum imports. Higher freight charges, insurance premiums, and longer shipping times could affect importers and exporters, particularly those dependent on regular shipments through the Gulf and surrounding waters.
The IMF noted that around 10% of Sri Lanka’s tea shipments were destined for the Middle East and had been affected by disrupted shipping routes. Tea exporters could face higher transportation and insurance costs, while uncertainty in regional markets could delay orders and payments.
Importers, meanwhile, may have to absorb higher costs for fuel, food, fertiliser, and industrial inputs.
Sri Lanka’s position near major Indian Ocean shipping lanes makes the security of maritime trade particularly important. Prolonged disruption could affect shipping schedules and the cost of moving goods even when vessels do not directly enter the conflict zone.
Food security becomes another concern
The Middle East crisis has also raised concerns over global food security, as energy and fertiliser supplies are closely linked to agricultural production.
Disruption to shipping through the Strait of Hormuz and other regional routes can affect the movement of petroleum products and fertiliser inputs. Higher prices for fuel and nitrogen-based fertilisers increase the cost of cultivation, harvesting, processing, and transporting food.
The United Nations World Food Programme has warned of worsening global food insecurity, with 266 million people facing acute food insecurity and a further 45 million potentially at risk from the secondary effects of the conflict.
For Sri Lanka, the immediate concern is not necessarily a shortage of domestically produced food, but whether households can afford it.
Despite an above-average Maha paddy harvest, the cost of agricultural production and distribution remains a concern. Higher fuel prices increase the cost of harvesting, milling, and transporting produce, while more expensive fertiliser and other imported inputs could affect future cultivation.
United Nations updates indicate that around 20% of Sri Lankan households are struggling to meet their essential food needs, compared with 14% previously. The pressure on household purchasing power could intensify if fuel and food prices continue to rise.