Following Sri Lanka’s economic crisis, the country has managed to restore macroeconomic and financial stability to a great extent thus far, with the economy growing by around 5% during the first nine months of 2025. However, the ongoing conflict in the Middle East has rendered this recovery vulnerable.
Against this backdrop, The Sunday Morning Business spoke to several experts to understand the potential implications of this conflict on Sri Lanka’s recovery, especially if prolonged.
Speaking to The Sunday Morning Business in the first week following the onset of the conflict, Deputy Minister of Trade, Commerce, and Food Security R.M. Jayawardana noted that it was difficult to conduct a proper assessment yet, especially given the uncertainty regarding the potential duration of the conflict.
“If the conflict ends very soon, the impact on trade would be minimal. However, if it persists in the long term, there will be a notable impact. A significant amount of our merchandise and service exports are directed towards the affected region, which could be impacted. We are yet to conduct a comprehensive assessment,” he said.
According to the latest statements by the President, the Government has established an Economic Monitoring Committee to address the crisis and is holding discussions with friendly countries to maintain supply chains.
Impact on vulnerable aspects
Speaking to The Sunday Morning Business, Advocata Institute Chairman Murtaza Jafferjee highlighted several economic implications.
Regarding aviation and tourism, he noted that March was a peak tourism month for Sri Lanka. Thus, the closure of major transit hubs like Dubai, Doha, and Abu Dhabi since late February has paralysed arrivals. He noted that with approximately 30% of tourists transiting through these hubs, the industry faced massive cancellations. He believes that this disruption threatens the foreign exchange inflows needed for debt servicing and essential imports.
Within the first week of the conflict, Brent crude oil prices surged, trading near $ 82 due to supply risks in the Strait of Hormuz. If sustained, Jafferjee noted that a significant fuel price hike on 1 April was virtually certain. Moreover, on macro buffers, he noted that Sri Lanka’s headline inflation was fortunately low (approximately 1.6–2.4%) at present.
According to him, even with a cost-push shock from fuel, the country remains well within the 5% target set by the Central Bank of Sri Lanka (CBSL), providing a rare but vital cushion for consumers. “Meanwhile, the Middle East remains the lifeblood of the Ceylon Tea industry. The current maritime halt in the Gulf is a direct threat to smallholders due to preference for low-grown tea,” he said. Given the disruptions, the total trade value at risk exceeds $ 300 million annually.
Moreover, 80% of Sri Lanka’s foreign departures are to the Middle East. From CBSL data pertaining to 2024 and 2025, departures are highest in economically vulnerable districts, which could thus be impacted heavily.
“Around 25,000 people depart for foreign employment every month and they may now be unable to do so. Around 60% of remittances come from people working in the Middle East. While this may not pose an immediate threat, it could have an impact if it continues for months. Also, 30% of the world’s fertiliser shipments pass through the Strait of Hormuz, which will create a spike in fertiliser prices. Fortunately, we are closer to the harvesting stage of the Maha season, so fertiliser will only be required for the next cultivation season in a few months,” Jafferjee added.
Relatively large impact due to close economic links
Meanwhile, University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe stated that if the conflict continued for several months, Sri Lanka could face a relatively high impact compared to many other economies due to its strong economic links with the Middle East. Sri Lanka exports a range of products to the region and disruptions to transport or supply chains could therefore affect export activity.
He noted that imports could also be affected, not only through higher oil prices but also through the cost of certain inputs such as fertiliser, which could influence both consumption and production activities in the economy. According to Prof. Dunusinghe, remittances are also a significant concern, since around half of Sri Lanka’s remittances originate from the region, contributing about $ 3.5 billion each year.
“Higher oil prices could increase Sri Lanka’s import bill by an additional $ 1.5–2 billion. And with potential risks to exports and remittances, this could place pressure on the balance of payments and the exchange rate, while also creating short-term foreign exchange liquidity constraints,” he said.
Further, while inflation currently remains low, he noted that the economy was still adjusting to the sharp price increases experienced during the crisis period and households were still dealing with reduced purchasing power, adding that further economic disruptions could worsen these conditions.
He pointed out that sectors such as exports, construction, and small businesses could also face difficulties if higher transport costs, insurance charges, or exchange rate pressures were to increase production costs. Overall, he stated that both Sri Lanka’s economic recovery and the macroeconomic stability achieved in recent years could face pressure if the conflict continued for an extended period.
Prof. Dunusinghe also said that the Government’s decision to increase fuel prices without waiting for the end of the month was appropriate, as it could help adjust consumption and allow existing fuel reserves to last longer. He added that encouraging energy conservation and introducing measures to reduce energy use would also be important in the current context.
However, he emphasised that industries like fisheries, agriculture, and small businesses could be heavily affected by higher energy costs, while low-income households may struggle with further increases in living expenses. Thus, he believes targeted support mechanisms should be considered for such groups, perhaps by reallocating resources within the existing budget and the Government absorbing some costs. He also noted that a cost-reflective pricing mechanism was appropriate in certain situations, but given the current context, it could not be justified across the board for all segments.
“On broader policy concerns, moving forward, Sri Lanka should consider establishing a fuel fund that could help smooth out price fluctuations by saving resources when global prices are low and using them to cushion increases when prices rise. It is also important to improve energy security over the long term. This includes diversifying energy supply sources, improving the energy market, and expanding investment in renewable energy such as solar and wind power.”
Conflict could deepen SL’s economic slowdown
According to veteran economist Dr. Howard Nicholas, Sri Lanka’s fragile economic recovery may face renewed pressure from this escalating conflict. He noted that the economy had already begun to weaken even before this particular geopolitical shock, adding that the post-crisis rebound following the 2022–’23 economic collapse had begun to lose momentum.
“The economic damage of Cyclone Ditwah only worsened the situation. In circumstances like these, governments normally act as a buffer to support economic activity. However, given Sri Lanka’s commitment to International Monetary Fund (IMF) policy prescriptions, that has not happened,” Dr. Nicholas said.
He also questioned the narrative that the Sri Lankan economy was outperforming expectations. He argued that if this were the case, a better influx of Foreign Direct Investment (FDI) should already be seen.
Identifying several immediate economic risks for Sri Lanka arising from the escalating Middle East conflict, Dr. Nicholas said that the most immediate threat was to the tourism industry. “The problem is that many flights from Europe to Sri Lanka pass through the Middle East. Thus, even if hostilities do subside, uncertainty about the region could discourage potential visitors. Increasing oil prices is the second major risk.”
In the very first week of the conflict, crude oil prices already increased by around 10%. Dr. Nicholas explained that higher oil prices would likely feed directly into domestic inflationary pressures, while any disruption to supply could trigger more severe economic consequences. Moreover, Sri Lanka’s tea exports to the Middle East is another area of vulnerability. However, he believes the impact is likely to remain manageable unless the conflict becomes prolonged.
“Another concern is the potential impact on foreign worker remittances from the region. In this context, there are concerns about the Government’s recent agreements with Israel to send Sri Lankan workers for the country’s construction sector. The timing of these agreements, given the serious human rights violations by the Israeli Government and the security risks faced by Sri Lankan workers amid the current escalation of the conflict, is questionable,” he said.
A larger danger of global recession
Moreover, Dr. Nicholas believes the greater danger lies in the possibility that the conflict could push the global economy into recession. “We have already warned about rising recession risks before this recent escalation in the Middle East and these developments have made such an outcome more probable this year. A global downturn would be a far greater threat to Sri Lanka than the direct economic consequences of the conflict itself.”
This is because global recessions tend to affect non-industrialising developing countries like Sri Lanka particularly severely and place tremendous pressure on currencies and foreign exchange reserves, according to Dr. Nicholas.
Furthermore, he believes that even if Sri Lanka manages to weather the immediate economic fallout, the other challenge that lies ahead is the resumption of external debt repayments later in the decade. Dr. Nicholas noted that the foreign reserves accumulated in preparation for these repayments could be significantly depleted before payments resumed in 2028.
“To reduce this risk, the Government should begin exploring additional sources of foreign exchange support. These could include bilateral loans and currency swap arrangements with partner countries,” he said.
Concerns and alternatives
Arutha Co-Founder and Economist Rehana Thowfeek also noted the impact on Sri Lanka’s energy import bill as the prices of both oil and gas are likely to increase due to the effect on supply.
“Inflation has been relatively low for the past two years – under 2%. However, given the increasing prices of fuel and gas, there will be a cascading effect on prices and the cost of living if supply chain disruptions persist. We are also still experiencing the domestic supply shock caused by Cyclone Ditwah,” she said.
According to 2025 import data, Sri Lanka imported nearly 100% of its oil from the UAE, whose oil supply has been affected. According to the Ceylon Petroleum Corporation (CPC), stocks will last about a month. However, Thowfeek noted that Sri Lanka had other options for oil purchases, although prices would be high due to the supply shortage. She also pointed to the lack of assurance due to Sri Lanka being a small market with minimal bargaining power.
Furthermore, Thowfeek noted that in February, 31% of electricity was generated through thermal coal and 21% from thermal oil. Sri Lanka’s main supplier of coal is Russia (according to 2025 import data) and she noted that supply was unlikely to be affected. However, she highlighted that electricity generation from thermal oil would be affected depending on supply.
In this context, another option for Sri Lanka is hydro power. Thowfeek noted that Sri Lanka generally increased electricity generation through hydro to approximately 50% during the rainy season, and since the monsoon season starts in May, this would also act as a buffer.
“Our main supplier of gas is Oman, a country that enjoys friendly relations with Iran. Given its location, it also does not need to use the Strait of Hormuz to send its shipments out. Thus, Sri Lanka can continue buying from Oman. However, prices may increase due to higher shipping insurance costs. As Oman is geographically quite close to the conflict, its ability to get its shipments out may also be affected.
"We are already facing a bit of a shortage of gas due to reasons unrelated to the war,” she explained.
Thowfeek also highlighted fertiliser supply chain disruptions. However, she noted that as Sri Lanka received 57% of fertiliser from China and another 10% from Uzbekistan, the situation should be fairly manageable. Nevertheless, she added that prices may still increase due to the impact on supply chains as these were interdependent.
“The depth and persistence of the impact will depend entirely on how long the war will go on for and how much it will escalate in terms of regions. In terms of recovery prospects, yes, we are facing a very volatile and unstable global environment. Also, the impact that energy prices will have on the buying power of our export markets remains a concern,” she added.
She also highlighted that if the tensions were to escalate, migrant workers in the region may have to return, causing a significant impact on worker remittances and reserve-building capabilities. While the tourism industry is also likely to face adversity, especially from EU markets, she noted that this was the off-season for these markets. According to her, arrivals from India, Russia, and China might be affected due to the volatility.
“On the other hand, this is a reminder to continue the structural reform programme that we have embarked on. Without these reforms, like transitioning to renewables or reducing inefficiencies in power generation, we remain highly vulnerable to these global shocks. With the reforms, we will be better positioned to face them,” she said.
Limited losses if conflict eases within 1–2 months
Meanwhile, Frontier Research Senior Research Lead Arshad Ismail stated that while the duration of the conflict remained uncertain, the current level of intensity could continue for about one to two months before easing. Based on this assumption, Ismail observed that the most direct impact for Sri Lanka would likely be on oil prices.
Volatility regarding oil prices can currently be observed, with oil prices rising to around $ 120 per barrel before falling back to the $ 80 range. According to him, such fluctuations could continue depending on developments.
Ismail noted that once the situation stabilised, oil prices could settle slightly higher than pre-war levels. He also explained that this could lead to a moderate increase in Sri Lanka’s oil import bill. However, he noted that the overall cost impact may remain limited due to changes in domestic energy consumption. With solar power generation expanding rapidly in Sri Lanka, the country could import lower volumes of oil compared to the previous year.
As a result, Ismail stated that even if oil prices were to increase by around 10%, this would not necessarily translate into a similar increase in the value of oil imports, since the volume of oil used for electricity generation was likely to decline due to the increased use of solar energy. Overall, he described the potential impact on oil imports as manageable.
On remittances, Ismail said that he did not expect a significant decline should the conflict remain at its current intensity for only around two months. He noted that approximately 40% of Sri Lanka’s remittances last year, out of about $ 8 billion, originated from the Middle East, which was comparatively much less than it had been in the past.
Ismail also observed that the kinds of jobs had also changed, from largely low-skilled labour to mid-level and higher-skilled workers. As a result, he noted even if companies in the region were to reduce employment due to prolonged conflict, such workers would be less likely to be laid off first.
“Given these factors, I don’t think we will see a notable drop in remittances, although growth could slow down. Remittances increased sharply from 2024 to 2025, but inflows in the 2025–2026 period could likely remain around the $ 8 billion level, or slightly higher or lower,” he said.
Ismail also noted a potential positive impact for Sri Lanka’s port sector that could counter some negative implications. During the Red Sea crisis a few years ago, disruptions to shipping routes resulted in increased activity at the Colombo Port. He noted that a similar situation could arise if tensions were to escalate around the Strait of Hormuz, potentially diverting more shipping traffic towards Colombo.
Considering all these factors, Ismail noted that Sri Lanka had maintained its current account surpluses for the past three years and while the surplus could narrow slightly, it was unlikely to turn into a deficit.
“My view is that the overall economic impact of the conflict on Sri Lanka would likely remain below $ 1 billion, assuming the conflict continues for another two to three months and gradually cools down. However, the situation could change significantly if the conflict continues at the same intensity for a year.”
Ismail added that he did not expect significant depreciatory pressure in relation to the exchange rate in the near term. He noted that Sri Lanka had better buffers in the present than in the past and was in a better position to absorb external shocks compared to two years ago.