The conflict in the Middle East involving Israel and Iran have raised several concerns over Sri Lanka’s economic recovery. Despite a ceasefire currently being in effect, potential impacts should the crisis escalate are likely to vary.
Releasing a statement to the media, Deputy Minister of Foreign Affairs and Foreign Employment Arun Hemachandra noted that the ministry continued to closely follow developments across the Middle East, especially in Iran and Israel.
He also noted that amid rising public concern over possible disruptions to fuel supplies, the Ceylon Petroleum Corporation (CPC) had confirmed that there was no cause for alarm. Orders covering the country’s fuel requirements for the next two months have already been placed and confirmed.
“The Government remains fully alert and responsive to fast-changing developments. We will continue to make every decision carefully, based on what best serves the people and the country,” Hemachandra said.
Commitment to IMF
Speaking to The Sunday Morning, Advocata Institute Chair Murtaza Jafferjee noted that it was estimated that Sri Lanka exported around $ 70 million worth of goods to Iran, mainly tea. He also added that Sri Lanka mainly imported crude oil but also fish from Iran, with the latter being a significant exporter of sprats.
Hence, he noted that disruptions to logistics due to shipping would have an impact on some of the country’s exports and imports.
Moreover, Jafferjee added that the global oil market remained oversupplied, which had moderated the spike in crude prices. For instance, Brent crude briefly peaked at around $ 80 per barrel following the recent US airstrike on Iran, but quickly retreated and is now trading near $ 69.
“Under Sri Lanka’s current International Monetary Fund (IMF) programme, the Government has committed to a cost-recovery pricing mechanism for energy. Based on prevailing prices, I estimate that domestic petrol and diesel prices need to rise by approximately Rs. 10-15 per litre.
“It is essential that the Government follows through. Failure to do so will once again lead to the misallocation of resources. Prices signal scarcity and global oil prices are rising in response to perceived supply risks. Domestic prices must reflect this reality,” he said.
Historically, he noted that successive governments had resisted adjusting fuel prices in line with international markets, wrongly assuming that it was politically unpopular.
“The evidence shows otherwise; 70% of the benefit from any subsidy, including through lower taxes, accrues to the wealthiest 30% of households. If the Government is serious about protecting the poor, it should channel a portion of the additional revenue from higher import prices, through ad valorem taxes, into direct cash transfers to ‘Aswesuma’ beneficiaries. This approach is fiscally sound and far more equitable than distorting price signals,” he explained.
Trade, tourism and remittances
Speaking to The Sunday Morning, Verité Research Lead Economist Mathisha Arangala, who specialises in trade policy, highlighted three main areas when discussing the potential impact of the Middle East crisis on Sri Lanka’s economic recovery – trade, tourism, and remittances.
From a trade perspective, he noted that Sri Lanka’s direct exposure to the Middle East, regarding both imports and exports, particularly the latter, was relatively limited. However, imports from the Middle East include crude oil, which is a crucial commodity for the country.
Sri Lanka’s overall oil imports comprise both crude oil and refined oil. Arangala noted that while most crude oil used to come from Iran, this reliance had lessened, with the country now primarily acquiring it from the UAE. Refined oil, on the other hand, is mainly imported from Singapore, India, and Malaysia, which themselves often procure it from other Middle Eastern countries.
A key concern for many stakeholders involves shipping fears related to the potential closure of the Strait of Hormuz. Situated at the mouth of the Persian Gulf, this strait sees approximately 20% of the world’s oil cargo transit through it.
Arangala noted that in the event of this closure, overall oil prices would increase significantly, given that Sri Lanka specifically imported approximately $ 3-4 billion worth of oil annually. Hence, he stated that an increase in oil prices would considerably inflate the country’s oil bill, thereby impacting foreign reserves.
Commenting on the potential impact on tourism, Arangala noted that while Sri Lanka did not directly receive a significant number of tourists from the Middle East, the region served as a crucial point of connectivity in air travel. Therefore, a potential closure of airspaces within the region could obstruct tourism from European countries and beyond. A prolonged closure could, then, affect tourism considerably, as it would also potentially increase air travel costs and cause reluctance among tourists.
Moreover, approximately 1.2 million Sri Lankans are estimated to be working in the Middle East. This demographic represents the majority of Sri Lankan migrant workers, with over 80% of them employed in Gulf countries such as Saudi Arabia, the UAE, Kuwait, and Qatar. In 2024, remittances from these workers amounted to approximately $ 3 billion, accounting for 46% of total remittances.
Addressing remittances, Arangala noted that any prolongation of the conflict may lead to foreign employees returning to Sri Lanka, suggesting not only a loss of remittances but also potential social issues. The direct impact on remittances from Israel and Iran however, remains low, as only a limited number of Sri Lankans work in Israel and fewer still in Iran.
Hence, he noted that the primary concern lay with the broader Middle East, especially the Gulf countries, with any potential extension of the conflict to these regions likely to cause significant issues.
“However, expansion of the crisis to these regions is highly unlikely as of now and the situation has somewhat calmed down due to the ceasefire, which will hopefully last. If the ceasefire is fragile and leads to a resumption of the war, and oil prices increase by 50-60% as predicted, it will significantly impact the economy, as Sri Lanka depends heavily on oil. The most pressing concern for the economy at present is any potential closure of the Strait of Hormuz and the resultant oil price spike,” he pointed out.
Commenting on what steps can be taken at present, Arangala noted that diplomatic solutions were limited and that the most appropriate approach was the current neutral position adopted by the Government. However, in light of these global concerns, he emphasised the overall need to reduce the country’s general dependency on oil and the need for more renewable energy options while also diversifying Sri Lanka’s export basket and destinations.
Fears concerning shipping lanes and oil
Meanwhile, in light of fears concerning the Strait of Hormuz, Sri Lanka Shippers’ Council (SLSC) Chairman Sean Van Dort explained that Sri Lanka’s internal oil requirements primarily involved purchases from Russia, Singapore, Oman, and Saudi Arabia. Hence, he noted that it was likely for Singapore and Russia to continue supplying oil via alternate routes if necessary.
“From a maritime perspective, it is unlikely for us to experience significant issues even in moving exports and imports. The country’s merchandise exports would not be significantly impacted, although tea might be a concern. Most of the country’s imports also originate from the Far East and would most likely not be affected. Overall merchant shipping might, however, see an increase in freight costs if marine fuel prices rise,” he said.
He also highlighted potential increases in war risk insurance for shipments and the possibility of shipping lines introducing such charges. Certain reports indicate that war risk premiums for shipments to the Persian Gulf have risen to 0.5% from around 0.2-0.3%, as risks intensified around the critical Strait of Hormuz. However, Van Dort noted that while there might be short-term disruptions, there would be no major issues for Sri Lanka’s economy if the ceasefire were to hold.
Meanwhile, Free Trade Zone Manufacturers’ Association (FTZMA) Chairman Dhammika Fernando highlighted the industry perspective regarding the crisis.
“The ceasefire is a positive step. However, if the war continues, logistical costs might skyrocket due to potential increases in fuel prices and disruptions to shipping routes, which would heavily impact industries. This would affect both raw material imports and product exports, especially since most of our export basket is shipped primarily to the UK and US.
“These external factors could, in turn, lead to internal issues such as spikes in fuel prices, transport costs, and electricity tariffs, further increasing the cost of production. On top of this, US tariff concerns should also be factored in,” he said.
Tea to be hit only if shipping services are disrupted
While direct trade with Iran is relatively limited, tea plays a predominant role, constituting 90% of exports to Iran, despite its portion of Sri Lanka’s tea exports dropping from 10% in 2010 to 4% by 2024 in terms of value.
Sri Lankan tea exports to Iran amounted to $ 62.25 million during 2024. Sri Lanka currently engages in barter tea trade with Iran for oil and started this practice in 2023 in place of around $ 250 million owed for oil, sending $ 5 million worth of tea each month for 48 months.
However, according to the Government, Sri Lanka is yet to settle approximately $ 145 million more. In May, Iran imported 5,870 MT of tea from Sri Lanka and remains a major importer of Sri Lanka tea. In addition, the Middle East remains a crucial buyer of Sri Lankan tea, with countries like Iraq, the UAE, Turkey, and Saudi Arabia remaining top buyers.
Addressing the concerns surrounding tea exports, the Tea Exporters Association (TEA) highlighted that the Middle East crisis would affect overall tea exports to the region only if the shipping services were disrupted, since approximately 50% of Sri Lanka tea exports went to Middle Eastern countries.
While tea exports to Iran had been suspended by exporters at the request of Iranian buyers, with the ceasefire in place, Iranian Ambassador to Sri Lanka Dr. Alireza Delkhosh confirmed that tea exports from Sri Lanka to Iran had resumed smoothly, following temporary disruptions caused by regional instability.
“We are not aware whether any Iranian ports have been damaged or closed temporarily. Iran used to buy 35-40 million kg of tea from Sri Lanka before the international financial sanctions were imposed on the country in 2011/2012. Since then, tea export volumes to Iran dropped due to payment problems.
“At present, Iran purchases about 12 million kg of tea per year from Sri Lanka under the tea-for-oil programme. We do not expect any significant drop in tea exports to other countries in the Middle East if the ceasefire holds and shipping services continue without any interruption,” the TEA noted.
The association also explained that Iran may have purchased its tea requirements for the first half of the year by the time the crisis commenced. According to the TEA, typically, tea exports are low in the summer months of July and August and exports pick up again from September. Hence, although short-term losses are expected, volumes could pick up from August/September if the ceasefire continues.
“Since tea is an essential beverage, Iranian tea importers may consider land routes through Iraq or Turkey if the situation is aggravated. It is still too early to quantify any volume losses in tea exports to Iran. These external issues are beyond the control of any government.
“However, the Government, in consultation with the Iranian side, should continue with the tea-for-oil programme to sustain tea exports to Iran. This will maintain the demand,” TEA added.
Impact on tourism
In terms of tourism, neither Israel nor Iran, nor any Middle Eastern country has been among the top 15 source tourist markets for Sri Lanka in 2025 so far. Israel, however, stands at the 18th position, accounting for 10,932 tourists from January to 22 June. Moreover, May highlights a marginal share of 1,953 arrivals (1.5%) from the Middle East.
However, in May this year, data for last departure airports for tourists arriving in Sri Lanka, which highlight current travel patterns and global connectivity, shows key Middle Eastern hubs closely following Chennai, which leads the list. These are Dubai (8.25%), Abu Dhabi (7.04%), and Doha (6.79%). This highlights the important role of Gulf cities as major transit points to connect travellers from several regions, including Europe, Africa, and the Americas, to Sri Lanka.
Speaking to The Sunday Morning, Sri Lanka Tourism Development Authority (SLTDA) Chairman Buddhika Hewawasam explained the potential impact of the crisis on Sri Lanka’s tourism sector.
Highlighting the marginal number of tourists arriving directly from the Middle East, he noted that the immediate direct impact would be minimal. However, according to Hewawasam, indirect concerns such as potential airspace closures, increases in fuel prices, and route diversions could lead to a more significant impact.
“Scheduled flights operating from Europe to Sri Lanka typically transit through the Middle East. Hence, any expansion of the crisis will certainly affect tourist flow, as it will impact some of Sri Lanka’s main markets, mostly in Europe, excluding countries like China, India, Asia-Pacific nations, and Australia, unless fuel prices rise and the crisis spreads extensively. However, at present, the immediate direct impact is not very significant. We hope there will be no escalation,” he said.
Hewawasam added: “However, if the crisis expands significantly, arrivals will fall below last year’s target. If the situation normalises, however, Sri Lanka can expect at least 2.7-2.8 million tourists for 2025. While the original target for 2025 was three million, with the effects of the crisis, a slight decrease is likely.”
Sri Lanka Association of Inbound Tour Operators (SLAITO) Immediate Past President Nishad Wijetunga also noted that in the event of a full-blown war in the Middle East, there could be a notable impact on the tourism industry. This would primarily affect Western tourists travelling through the region, as Sri Lanka is now anticipating the winter tourism season, which predominantly involves visitors from Western countries.
While SriLankan Airlines, with its direct flights, might be able to avoid any concerning routes, there are also Middle East-based airlines that carry large numbers of passengers, and their operations could be impacted if the conflict escalates.
Wijetunga also noted that while a certain number of tourists came from Israel, these figures may have already been somewhat affected due to previous geopolitical developments. Meanwhile, he observed that the general Middle East tourism season primarily spanned from August to October.
Positivity regarding ceasefire
Speaking to The Sunday Morning, University of Peradeniya (UOP) Department of Economics and Statistics Professor O.G. Dayaratna-Banda pointed out the unpredictable nature of the current crisis, and consequently, its potential impact.
However, he noted that the conflict between Israel and Iran was one that the two countries could not sustainably continue, primarily due to shifting global politics and ongoing backchannel diplomacy. Hence, he observed a possibility for the current ceasefire agreement to continue.
Regarding international trade and the Strait of Hormuz, Prof. Dayaratna-Banda opined that Iran was not in a position to close the strait either due to the heavy traffic within the strait, which sees thousands of cargo ships from multiple countries transiting daily.
However, according to Prof. Dayaratna-Banda, if there is a possibility for the conflict to escalate and continue, there can be economic consequences for the country, with oil purchasing being a key element. Nevertheless, he also noted that after the initial months of such a situation, Sri Lanka would also have other options for oil acquisition, such as from African countries.
He admitted that an ongoing conflict would lead to temporary disruptions to global supply chains and trade, but these were unlikely to be permanent as alternate options would emerge. He further acknowledged that while there could be immediate, short-term repercussions for Sri Lanka as well, significant long-term repercussions were unlikely.