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The Sri Lankan economy could face severe external shocks of higher tariffs, high oil prices and lower remittances.

The Sri Lankan economy could be facing these severe external shocks if the tariff wars continue and the West Asian conflict escalates. Higher tariffs on exports to the US, increased prices for oil and other imports, reduced remittances from West Asian countries due to security conditions, and a decline in tourism caused by disruptions and higher travel costs could severely impact the country.

Economic growth

The Central Bank has projected that the economy will grow by 4 to 5 per cent this year, lower than expected earlier. The Central Bank expects this year’s economic growth to be moderate due to the adverse effects of Cyclone Ditwah and global geopolitical tensions.

Remittances

A deterioration of security conditions in West Asian countries could reduce remittances, as one half of our remittances are from West Asian countries.

Economic growth

However, the downside risks to growth projections in the near to medium term could arise due to global trade frictions and elevated geopolitical uncertainty, which may negatively affect growth in key trading partners and tourism source markets. Slower growth and heightened uncertainty globally could weaken tourist arrivals and tourism service exports, lowering export earnings and foreign exchange inflows and weighing on overall economic activity and growth prospects, the Central Bank said.

In a global perspective, global economic conditions remain subject to uncertainty amid recent trade policy developments in the United States and ongoing geopolitical tensions, although the global growth outcome for 2025 and the outlook for 2026 are expected to be stronger than previously anticipated.

Threats

The Sri Lankan economy is threatened by war in West Asia and by the Russian-Ukrainian conflict. The US-Israeli military threats to Iran, the war between Russia and Ukraine and President Trump’s unpredictable tariffs could severely impact the country’s import-export economy. Global tensions, closure of airspace and increased costs of air travel could affect the country’s tourism that is booming.

Imports

Tensions between the US and Iran are increasing. A war on Iran by the US and Israel could have severe adverse repercussions on our economy. Our oil-for-tea agreement with Iran could be jeopardised in several ways. The shipment of oil from Iran could be disrupted if the war erupts, the US imposes tariffs on our exports due to our trade with Iran or the Strait of Hormuz is closed. The inability to obtain Iranian crude is a serious blow, as our refinery is built for the processing of Iranian crude oil. The disruption of our tea exports to Iran will be a disadvantage but one that is sustainable, as we could divert tea to other West Asian markets. Here again the blockage of the Hormuz Strait will matter.

Tariffs

A serious concern is whether the US will impose further tariffs on our exports due to our trade relations with Russia and Iran. If the tariff on our exports to the US is increased from the current 44 per cent, our exports of garments and rubber goods could be severely disadvantaged.

Conclusion

The Sri Lankan economy could be facing severe external shocks if the tariff wars continue and the West Asian conflict escalates. Higher tariffs on our exports to the US, high prices for oil and other imports, lower remittances from West Asian countries owing to security conditions and a dip in tourism owing to disruptions and higher costs of travel could affect tourism adversely. Hopefully, there would be a change in these conditions that would not affect our economic recovery.

Hopefully the ongoing talks between the US and Iran will lead to a durable solution to the dispute between the two countries.