News
Economy resilient enough to weather war, while costs weigh on exporters
View(s):By Niranjala Ariyawansha
Although the war in West Asia will have a significant impact on the Sri Lankan economy both in the short as well as long-term, Sri Lanka can control the economic consequences due to the financial stability, an economist says.
In the long term, the productive economy may collapse to some extent and the current 20-year poverty rate may increase, but there is no chance of a crisis like the economic crisis that occurred in 2022, said Professor Wasantha Athukorala, head of the economics and statistics department of the University of Peradeniya.
He said despite the Ditwah cyclone impact Sri Lanka can expect to maintain a similar growth rate of around five per cent gained in 2024 and 2025.
“Our economy is now much more stable than in 2022. Even though the war in the Middle East has affected the economy with fuel prices rising, tourism has been disrupted and if foreign remittances and export earnings reduce we can manage the economy and move forward,” he told the Sunday Times.
“We now have (US) dollars to import goods, but the supply lines to buy energy products or anything else, including fuel, are blocked; during the 2022 economic crisis, we did not have (US) dollars to import fuel or essentials,” he said.
The massive price increases in export markets, including the country’s main export commodity, tea, the foreign employment market and the energy market, have been identified as areas where short-term and long-term adverse impacts could be felt.
Export Development Board (EDB) Chairman Manjula Wijesinghe said, in 2025, exports generated US$17.3 billion. An increase of 10% was anticipated.
At the moment exports of Sri Lanka are quite restricted due to global shipping routes, trade expenses, insurance costs, and certain logistical delays. Sri Lanka mainly relies on apparel, tea, and rubber, which are significantly impacted by transport costs.
“Consequently, we have observed that export data is affected by nearly 5%. Through the effect that has been currently observed, a decrease by 50% each month, is possible,’’ he said.
“If the war continues, we are planning to divert our products to new markets. We can go to the US, EU countries as well as we can see much potential in African countries. And also, value addition is very much of importance. We have 1,500 buyers and investors for 2026 around the world.’’
According to him, merchandise exports represent 78% of total exports and 22% is service exports.
Goods exports, mainly include apparel (40%), tea, rubber, coconuts, gems and jewellery, food and beverages, and vegetables and electronics. Services sector includes mainly, IT, construction, transport and logistics. The United States is Sri Lanka’s main export market making up 25% and EU countries represent 23%-24%. Other areas including West Asia represent 8%.
“In 2024 to 2025 we have exported to Middle East region nearly US$1,084 million. From that basically tea is 52%, apparel is 9% and also coconut products, food and beverage, gems and jewellery. In that region, three countries are of much importance, including United Arab Emirates (UAE) which represents 32% of our exports. Iraq is 18% and Saudi Arabia is 12%. It means 80% of of existing exports are represented by these three countries,” he said.
Sri Lanka Tea Board Chairman Raj Obesekere told the Sunday Times, as tea is a big foreign exchange earner, disruptions to exports particularly (due) to increased costs rather than value decline, can negatively impact exports earnings.
Higher freight and logistics cost reduce exporter margins, which may affect profitability across the tea value chain, including producers and smallholders. Increased pressure on exporters’ liquidity could lead to cash flow constraints requiring financial and policy support measures.
He said that in the long term, continued geopolitical instability may disrupt key export markets in West Asia which account for a significant share of Sri Lanka’s tea exports. Persistent high logistics costs and route uncertainties could reduce export competitiveness and profit margins.
In the short term, this crisis initially reflected a drop in auction prices and a rise in unsold quantities immediately after the onset of the conflict. However, the market showed early signs of recovery, with prices stabilising and unsold volumes declining in subsequent auctions.
There is an impact on logistics and shipping, with exporters forced to use alternative routes, leading to substantially higher freight cost and delays.
According to him, Sri Lanka exports tea to around 150 countries. The top ten countries include Iraq, Russia, Turkey, Libya, UAE, Chile, China, Iran, Azerbaijan and Saudi Arabia. In 2025, Sri Lanka earned US$1.5bn and in 2024 US$1.4bn. Sri Lanka has earned US$236.8 million up to the end of February 2026.
The biggest contribution to the Sri Lankan economy is from remittances of Sri Lankan workers overseas.
The highest foreign remittances in Sri Lanka’s history were received in 2025, which was US$8.1bn. In 2024, it was US$7.5bn.
Foreign Employment Bureau Chairman Kosala Wickremasinghe said it is difficult to say at this time about the long-term impact of the war on Sri Lanka.
“If the war lasts another month and its shock wave lasts for 5 months, we will suffer a loss of about US$500m a year, although it is not a huge impact. Normally, about 300,000 people go to the Middle East, per year, and about 800 people leave per day, but because of the war, now only about 300 people go per day. This decline is a large percentage,’’ he said.
West Asian countries where the largest number of Sri Lankans are, that is 70% of Sri Lankans working abroad, are Kuwait, Qatar, UAE, Saudi Arabia and from recently, Israel. In 2025 and 2024, 311,000 and 114,000 respectively have gone to West Asia.
In this backdrop Prof. Athukorala said that the one-day holiday per week to manage the fuel crisis is affecting the country’s production.
This may gradually reduce production and in the long run, it may lead to the collapse of the manufacturing economy. The holiday also affects schooling.
In addition, in the short term, the increase in energy products prices such as fuel and gas will adversely affect the country’s exports and imports, which will affect food security, cause instability in the financial market, increase the exchange rate and budget deficit.
But, he said that the crisis is an opportunity.
“A vital need in the Middle East is water. We can export drinking water. We can improve our local production and thereby increase food security. The Government is currently trying to manage energy consumption. The Government is managing the situation very well. The success of that will determine things.’’
The best way to say that you found the home of your dreams is by finding it on Hitad.lk. We have listings for apartments for sale or rent in Sri Lanka, no matter what locale you're looking for! Whether you live in Colombo, Galle, Kandy, Matara, Jaffna and more - we've got them all!