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Foreign reserves increased to US$ 6.1 billion at the end of July owing to increases in remittances, tourism earnings and exports. Especially significant is the increase in merchandise exports despite global trade uncertainties.

Tariff

The reduction of US tariffs (import duties) to 20 per cent makes our exports more competitive. Nevertheless, we must diversify our export products and markets to increase exports substantially.

Export performance

The good performance of our exports in the first half of this year is attributed to our exporters responding to the emerging trading conditions and diversifying our markets.

The diversification of our export markets this year is indeed an encouraging direction in our trade. Exports may have also increased owing to exporters and importers rushing to beat impending increases in tariffs.

External finances

In spite of global uncertainties in trade, our export earnings increased, and external reserves reached the US$ 6.14 billion mark at the end of July. This was achieved despite increased US tariffs this year, trade wars and fears of global recession. Increases in remittances and earnings from tourism also contributed significantly to the reserves.

Balance of payments

The balance of payments improved to a surplus of US$ 1.5 billion in spite of a widening trade deficit owing to increased imports.

Merchandise exports increased by almost 6 per cent in the first half of this year compared to that of the first 6 months of last year.

Trade deficit

The merchandise trade balance continued to show signs of pressure as the trade deficit widened in June 2025 compared to the same month in 2024. This was due to a sharper increase in imports relative to exports. Imports grew by 12.5 per cent in the first half of this year to US$9.8 million, compared to US$8.7 million in the same period last year. Consequently, the merchandise trade deficit widened from US$2.5 million to US$3.3 million.

Exports

In the first half of the year, exports increased by 5.9 per cent to US$ 6.5 billion. Furthermore, there was an increase in remittances from abroad as well as higher earnings from tourism that boosted the reserves. The increased earnings from the export of services and higher remittances and earnings from tourism boosted the reserves.

Merchandise export

Merchandise exports increased by 5.9 per cent in the first half of 2025. The total value of exports for the first six months was US$ 6.5 billion. There were increases in exports of apparel, tea, and rubber products. In the first half of this year, exports increased by a significant US$ 8.3 million.

Especially significant was the increase in merchandise exports to US$ 5.6 billion in the first half of this year. This growth in exports this year was owing to a diversification of export products, as well as a diversification of markets. This move in the correct direction must be pursued more vigorously.

Strategies

In this uncertain and inhospitable global climate for trade, we cannot rely on tariff concessions. We must develop new strategies to increase our exports.

The priority should be to consolidate our established markets. We must ensure the continuance of the EU market’s GSP Plus concessions that we currently enjoy and increase our exports to the European Union countries by expeditiously addressing the human rights concerns.

There are prospects of increasing our exports to EU countries. Therefore, removing the offensive aspects of the Prevention of Terrorist Act (PTA) should be done without delay.

UK, Canada markets

The United Kingdom has reduced tariffs on Sri Lanka’s exports. This provides an opportunity to increase exports to Britain.

Similarly, Canada is another country where we have opportunities for increased exports. Our exporters must explore the opportunities for enhancing exports to Canada.

Eastwards

We must also look eastwards, aiming at Southeast Asia and the Far East, to increase our exports. We must export rubber goods, ceramics and other manufactured goods to these Asian countries. China and Vietnam have already expressed their willingness to expand their trade with us.

Similarly, we must seek markets for our manufactures in Japan and SoutheastAsian countries such as Indonesia and Malaysia and expand exports to Australia and New Zealand that have been neglected owing to our westward focus.

Concluding reflections

The focus of this discussion has been on our export performance. The increasing expenditure on imports has been the reason for the widening trade deficit. The liberalisation of vehicle imports could lead to an erosion of our foreign reserves. Whether the cap on vehicle imports at US$ 1.2 billion is still in force is not clear.

Our exports can be adversely affected by high tariffs in our main markets, as well as disruptions in transport and higher costs due to wars. Our essential imports could cost much more owing to the wars. Petroleum prices could rise sharply, causing fertiliser, food and other imports to increase too.

Our economy, which is very dependent on remittances from abroad, could have a severe setback that would weaken our external finances significantly. Tourism from Western countries too could dwindle if air travel is disrupted.

It is vital that we diversify our exports and markets and increase our export volumes.

Final word

The improvement in our foreign reserves should not detract us from the dangers of the external shocks and the need to strengthen our export earnings.