The last few months have been quite strange. On one hand, there is the very obvious negative shock that the economy is facing – rising oil prices, weakening currency, and more recently, rising interest rates as well. Yet compared to the last time this happened, though for a very different reason, the economy is just humming along. 

Yes, prices have risen for energy, but people simply seem to have enough money to spend. Yet outside of oil and vehicles, we also haven’t really seen the huge import booms of the past. 

Despite this, the currency is depreciating (and even this is not in the usual way). Firms are following their playbooks and these work to a certain extent, but it’s also impossible to brush off the nagging sensation that it is not working in the way that was expected, but in different ways instead. What’s going on in the Sri Lankan economy right now?

A strange contradiction

I don’t think there’s anyone within the Sri Lankan economy who would disagree with the fact that the current moment is shaky. 

We might not be able to agree on what exactly is shaky, what it will mean, and whether it will stop being so – but shaky, the ground definitely is. 

It’s also at least partly clear that the Iran war is a big part of why it is shaky; obviously, if there was no war, at the very least we would have imported cheaper oil and things would have been easier to understand. Yet the war continues to be a factor and the underlying economy continues to react in all sorts of ways.

I find one aspect of these reactions quite interesting. At the start of the year (or even better, at the end of last year before Cyclone Ditwah), the expectations for 2026 were for both Sri Lanka’s fiscal and external balances to weaken relative to 2025. Yet now, after the conflict, the same expectations persist. 

What’s going on here? On the surface, obviously, things are worse than before. Yet expectations are somehow the same. This contradiction also affects how the economy is engaging with the conflict and its impacts. Things are both worse than before but also, at the same time, somehow better as well. 

In a strange twist of fate, a similar situation is going on outside Sri Lanka. On the surface, it very much appears that there is at least some amount of escalation. Yet unlike previous rounds of attacks, oil prices are falling instead.

A fundamental shift

Obviously, everything happening in the economy right now is happening due to a particular set of reasons – there are specific drivers moving in specific ways to create the specific effects that we are seeing. The problem is that we don’t really see these drivers (and, in fact, might not be able to see them for a while) and instead, we have to rely on our memory of how these drivers have behaved in the past. 

In most contexts, this would be quite straightforward. In Sri Lanka, for example, we know that we have always had depreciation that followed imports. Even if we didn’t necessarily understand the underlying mechanism through which that happened, it was almost always true. 

The problem, however, is that the underlying mechanism – the same drivers that pushed the currency weaker in the past – may no longer be operating in the same way or at least may no longer be the only drivers at work.

Time and time again, I’ve written in this column about Sri Lanka’s structural shift away from twin deficits and towards twin surpluses. Once again, I must return to that story. There is no real way to understand the Sri Lankan economy, the current moment of confusion of both positives and negatives, without touching on the fundamental shift that the economy is going through. 

Part of the challenge is that enough of this shift is still not sufficiently visible. For example, why haven’t prices outside of energy risen yet? We have had nearly a 50% rise in domestic energy prices, so why is the price of everything else still largely flat? Perhaps there is a reason (and I have my suspicions), but the fact that we don’t know this reason yet is part of the current uncertainty, in my view.

When you have this kind of situation, it also becomes very difficult to make decisions in the economy. When there is such a large price adjustment in fuel, you would normally expect consumer behaviour to change. Yet outside of a few areas, is this really happening? Perhaps the way in which it is happening is not exactly how it usually does. 

To use a metaphor, the colour is slightly off, or the song is ever so slightly out of tempo. You might have to wonder whether you are painting the wrong hue or singing the wrong tune. The decisions themselves aren’t entirely wrong, but at the end of the day, you still have that voice in the back of your head telling you that something isn’t exactly as it should be.

A case for self-confidence

In a previous column, I wrote that Sri Lanka needs to build up some self-confidence in its economic story. I continue to believe this to be the case. 

Self-confidence won’t change the reality we are in, by any means. But it could give us a slightly better starting point, because it gives us permission to acknowledge some of the changes that have actually taken place and then dare to dream a little differently to the past. Because we don’t fully see what’s happening, that bit of creative visualisation might be far more important than we realise.

At the end of the day, shocks don’t last forever. The biggest shocks in the country’s recent history all lasted at most a year or two. In the absolute worst case, perhaps they can persist for a few more years. The current situation doesn’t really appear to be that bad, but even if it is, it will eventually come to an end. 

At that point, we have to grapple with whatever is happening beneath the surface, and why the economy feels both better and worse at the same time, without the benefit of a shock to blame for either. The world outside will continue to change, as will the country within, but change means change – not more of the same.

(The writer is the Head of Macroeconomic Advisory at Frontier Research, a Colombo-based firm that engages in macroeconomic research and advisory for corporate and investment clients on Sri Lanka, South Asia, and Southeast Asia. He can be reached at chayu@frontiergroup.info)

(The views and opinions expressed in this article are those of the writer and do not necessarily reflect the official position of this publication)