As the crisis in the Middle East continues, The Sunday Morning examined its potential impact on Sri Lanka’s foreign exchange position, focusing on inflows and reserves.

Sri Lanka directs around 6–8% of its total exports to the Middle East (ME), with Dubai accounting for the largest share at 32%, followed by Iraq at 18%, and Saudi Arabia at 12%. A significant portion of Sri Lankan shipments to the region is routed through Dubai, while the United Arab Emirates (UAE) continues to rank among Sri Lanka’s top 10 export markets, indicating the vulnerability of the export sector amid the ongoing crisis.

In 2025, Sri Lanka’s exports to the ME region amounted to $ 1,084 billion, with tea exports accounting for 52% of those exports, with others including apparel, gem and jewellery, and coconut products.

According to recent statements made by Export Development Board (EDB) Chairman Mangala Wijesinghe, the estimated potential export contraction was around 5–8% in the first few months of this crisis, although he highlighted that this impact could be minimised in the longer term. 

Going forward, the EDB hopes to continue to focus on needs such as diversification of exports and markets and increased high-tech value addition as a medium- to long-term plan, with many programmes already underway.

Sri Lanka imported around $ 2.2 billion worth of oil and gas through the affected region in 2025. The EDB recently convened a meeting between the Ceylon Petroleum Corporation (CPC) and Sri Lanka’s export industry to discuss the current fuel distribution mechanism and its impact on the export sector.

Cash crunch and high cost

Speaking to The Sunday Morning Business, National Chamber of Exporters (NCE) Secretary General and Chief Executive Officer Shiham Marikar observed the impact of a potential cash crunch stemming from rising operational costs alongside a reduction in export orders.

Furthermore, Free Trade Zone Manufacturers’ Association (FTZMA) Chairman Dhammika Fernando stated that the ongoing crisis was beginning to place strain on export industries, specifically through an increase in freight costs and shipping disruptions. 

He explained that freight costs had increased due to changes in shipping routes and fuel-related issues, noting that these compounding factors had led to both higher costs and shipment delays.

Fernando noted that the more pressing concern for factories was fuel availability for operations, with industries requiring heavy oil, diesel, and other fuel types to run production equipment, adding that fuel supply had not been streamlined for industrial users.

“So far, the CPC is not streamlining the supply to the industry. Many remain unaware of the modalities of obtaining fuel since there is lack of clarity regarding a person to contact or how the supply comes in, and lack of accessibility altogether,” he said.

He added that, while transport operations were manageable at present, fuel procurement had become increasingly expensive, as industries had been asked to purchase bunker fuel from private bunker suppliers at significantly higher prices.

Fernando observed that if the situation prolonged, more repercussions could emerge. However, he noted that industries would be able to continue operating as long as fuel remained available and electricity supply was not disrupted.

“We expect that the war will not last long. Other countries cannot sustain this kind of cost and devastation, given that this is the bloodline of the industries,” he added.

Tourism industry

Sri Lanka’s tourism industry is yet another key sector facing direct impact from the crisis in the Gulf region. While flight cancellations are the most prominent issue, the industry must also manage rising operational costs.

Speaking to The Sunday Morning, Deputy Minister of Tourism Prof. Ruwan Ranasinghe noted that the ongoing Middle East crisis had already had a tangible impact on Sri Lanka’s tourism sector.

“With several key Gulf transit hubs disrupted, we have seen approximately 30% cancellations in bookings for March, which translates to a revenue drop of nearly $ 96 million per month. This is a significant setback, especially as we were building momentum towards our 2026 target of three million arrivals after achieving a record 2.36 million visitors in 2025,” he said.

If the crisis continued, the Deputy Minister added that the effects could deepen. This is because airfares are likely to increase due to rerouted flights and reduced seat availability, making travel costlier for long-haul visitors. 

He also noted that transport and supply chains may face delays, impacting both tourists and the hospitality industry, adding that prolonged instability would further wear down traveller confidence, specifically in European and Middle Eastern markets that relied heavily on Gulf connections.

However, Prof. Ranasinghe also gave an assurance that Sri Lanka was taking proactive steps to cushion the impact. One such measure is diversifying transit routes by strengthening connectivity through South and Southeast Asian hubs such as Singapore, Kuala Lumpur, Bangkok, and Chennai. 

He noted that Sri Lanka was also focusing on short-haul markets like India, the Association of Southeast Asian Nations (ASEAN), and the Maldives, which are less dependent on Middle Eastern gateways.

Moreover, he added that Sri Lanka was also to launch reassurance campaigns to emphasise the country’s safety, hospitality, and value-for-money.

“Moreover, we are encouraging flexible booking policies among hotels and airlines to maintain traveller confidence, and are coordinating closely with airlines, travel agents, and foreign missions to monitor developments and provide timely updates. Sri Lanka is also taking steps to explore cost mitigation measures, including incentives for airlines opening alternative routes and support for local operators facing supply chain challenges,” he said.

Tourist cancellations and high operational cost

Meanwhile, industry stakeholders shared concerns regarding cancellations, rising operational cost, and identifying the need to diversify markets.

Former President of The Hotels Association of Sri Lanka (THASL) M. Shanthikumar stated that Sri Lanka’s tourism sector was experiencing turbulence by way of cancellations at present due to the ongoing Middle East crisis and confirmed that the majority were from Europe.

He further noted that operational costs for hotels had skyrocketed, with multiple expenses, including fuel, having increased, further intensifying challenges for the sector.

Shanthikumar also pointed out that electricity tariffs for hotels had been increased beyond the industrial rate, placing additional pressure on the sector.

“It was normally on par with the industrial rate, but the last increase had gone beyond that – higher than any other industry, which is not fair. Regardless of these challenges, the industry and hoteliers remain very resilient and are managing the issues,” he noted.

Impact on remittances so far

The Middle East remains one of the key regions for Sri Lanka’s remittance inflows, accounting for nearly 50% of the total remittances. 

According to an article published by the Institute of Policy Studies (IPS) recently titled ‘Middle East Conflict: The Impact on Migration and Remittances in Sri Lanka,’ recent departure statistics showed that of the 862 Sri Lankans who depart daily for foreign employment through official channels, 666 head to the ME. 

The article also highlights that if the conflict continues and the several potential concerns materialise, preventing Sri Lankans from taking up new jobs in the ME and the extension of expiring contracts, approximately 19,980 foreign employment opportunities would be lost in a month

Speaking to The Sunday Morning about the impact observed so far, Sri Lanka Bureau of Foreign Employment (SLBFE) Chairman Koshala Wickremasinghe noted that there was no significant impact on remittances visible yet, based on data available for January and February with data for March yet to be finalised.

Sri Lanka’s official remittances amounted to $ 751 million and $ 729 million in January and February, respectively. Total remittances for 2025 amounted to nearly $ 8.1 billion.

“We are awaiting the March data, but a substantial impact on remittances is unlikely, while a slight effect is possible. It is also likely that such effects would be reversed in a few months with the end of the conflict, especially given that interest in migration could rise in such a situation. 

“Our understanding at present is that there would not be a reduction in total remittances for the whole year. This does depend on how long the war might last, and we hope it ends soon,” he said.

Wickremasinghe also noted that there had not been a large reduction in registrations for migration, adding that the gap between registrations this year and the corresponding period in 2025 was around 20,000. 

In addition, he noted that some were facing technical issues regarding flights, although these issues were expected to be resolved.

Decline in migrations and long-term labour implications

University of Colombo (UOC) Department of Economics Professor Priyanga Dunusinghe discussed the current situation, as well as the necessary long-term solutions.

He noted that a significant impact in terms of a sudden return of migrant workers was yet to be observed. However, he pointed out that the number of Sri Lankans migrating to the Middle East had declined.

According to recent statements by authorities, requests for return migration had come from fewer than 200 individuals, all of which have already been accommodated.

Prof. Dunusinghe explained that even if those currently employed abroad did not return, the reduction in first-time migrants indicated that remittance inflows would decline. 

Based on current conditions, he noted that a reduction in remittances of approximately 10% was likely. He added that if the situation worsened, the combined impact of economic disruption and insecurity in the region could add to this decline.

He also noted that a large proportion of Sri Lankan migrant workers in countries such as the UAE and Qatar were employed by foreign companies in skilled and semi-skilled roles, while low-skilled workers were largely employed as domestic workers.

There are certain developments aimed at encouraging American companies operating overseas, especially technology companies, to relocate back to the US. If this were to occur, workers employed in such companies and related sectors could be compelled to return to Sri Lanka.

“Overall, given that more than half of Sri Lanka’s remittances originate in the Middle East, the current situation is not conducive. If tensions increase or the frequency of attacks increase, there is a possibility that as much as 25% of migrant workers could be forced to return,” he said.

Responding to a question on long-term solutions, Prof. Dunusinghe stated that the only sustainable path forward was to develop the domestic economy to create employment opportunities locally, while expanding exports.

“Sri Lanka must focus on creating sufficient domestic employment opportunities and growing exports. Exports could be expanded by using domestic labour more productively, thereby creating a stronger economy. Sri Lanka must reduce its dependence on migrant workers, especially as we are now facing labour shortages and are no longer in a demographically favourable position to send workers abroad.”  

He noted that labour migration, while bringing in foreign exchange, also carried economic costs, as skilled and capable workers contributed to the development of other countries while Sri Lanka only received their wages as remittances. He explained that retaining such workers locally would allow value addition to remain within the country and create a cycle of economic activity.

“Policies should aim to create domestic opportunities, build an export-oriented economy, promote export diversification, and attract foreign direct investment. This is where structural reforms to strengthen the export sector and support economic transformation must be prioritised,” he said.

Prof. Dunusinghe added that important structural reforms, such as certain changes proposed by the Economic Transformation Act, had not been effectively implemented despite the act having focused on promoting exports with the participation of foreign investment, increasing female labour force participation, and improving productivity across the economy.

Thus, he emphasised the significance of implementing such structural reforms in order to help create necessary economic opportunities in the long term.

SL’s reserve position

Sri Lanka’s official reserve assets increased by 6.6% to $ 7,284 million in February this year, compared to the $ 6,832 million recorded in January, marking its surpassing of the $ 7 billion threshold for the first time since August 2020. This includes the proceeds received under the swap arrangement with the People’s Bank of China.

Commenting on implications of the crisis on Sri Lanka’s reserve position, Frontier Research Senior Research Lead Navinda Meepe noted that Sri Lanka’s foreign reserves had shown some growth during the first two months of the year, partly due to high remittances and possible foreign exchange inflows following the cyclone in November 2025.

He explained that this had resulted in relatively higher buffers just before the conflict began, compared to the beginning of the year.

However, he also observed that the continuation of current developments could place pressure on reserves, depending on sustained increases in global oil prices and the impact on trade due to higher freight costs and overall uncertainty in the shipping sector.

Meepe stated that if this situation persisted, it would be important to assess whether oil prices rose significantly beyond current levels. For instance, if prices continue to increase over the next one to two months, the oil import bill could rise substantially. However, this may also ease pressure on some other current account flows.

Overall, the net impact would become clearer once more data is available and depending on how intense the conflicts become in the coming weeks.

At present, the situation may not result in an outright negative impact on the economy, but some volatility is expected. However, if the duration of the conflicts extends significantly, it could lead to severe shocks across multiple fronts.

Commenting further on foreign reserves and energy-related spending, Meepe explained that the proportion allocated to energy imports within the import bill depended on several factors. 

Sri Lanka imports a significant amount of refined products, and in recent weeks, the spread between crude and refined products has widened significantly. If the conflicts persist for a prolonged period and oil prices rise, Sri Lanka’s oil import bill will increase significantly as a result, potentially affecting non-oil imports as well due to substitution effects.

As a result, the overall outcome becomes more complex, with a larger share of the import bill being allocated to oil, which could negatively impact economic activity within the country.