Sri Lanka’s external current account reported a deficit of $142 million in July 2026, marking the fourth month in a row that it has been in the negative, largely due to challenging geopolitical factors in the Middle East. The most recent statistics indicate that the total external current account deficit reached $387 million during the first seven months of 2026 (January–July), a significant decline compared to the surplus seen during the same timeframe in 2025.
The primary reason for this downturn is a growing merchandise trade deficit, which has widened considerably as a result of high import costs and a decline in export performance. For the January–July 2026 period, Sri Lanka’s cumulative trade deficit soared to $6.5 billion, an increase from $3.9 billion during the corresponding period in 2025.
A substantial rise in fuel prices continues to heavily impact the trade balance. Although monthly fuel import costs slightly decreased from $465 million in June 2026 to $453 million in July 2026, year-on-year fuel import expenses surged by 68.0% in July 2026, primarily driven by increased spending on crude oil. Cumulatively, fuel import expenditures reached approximately $3.622 billion in the first seven months of the year, reflecting a 59.9% increase compared to the same period in 2025.
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Moreover, July 2026 saw motor vehicle import costs, including both personal and commercial vehicles, amounting to $241 million. This brought the total vehicle import expenditure for January–July 2026 to $1.495 billion.
These escalating import costs have led to a deterioration in Sri Lanka’s terms of trade on a year-on-year basis in July 2026, as import prices have risen more rapidly than export prices—a trend that has been consistent throughout the January–July 2026 period.
The services sector, which has typically been a crucial support system, has shown mixed results. The services account recorded a surplus of $244 million in July 2026, a decline of 23.0% compared to July of the previous year. However, on a month-to-month basis, the surplus rose by 50.7% from June, aided by a recovery in tourism revenues. Nevertheless, the cumulative surplus for the first seven months of the year dropped by 22.4% to $1.8 billion, indicating a year-on-year decrease in the services account.
Tourist arrivals experienced a slight decline of 1.7% year-on-year in July 2026, with cumulative arrivals from January to July 2026 totaling 1,343,418, compared to 1,368,288 during the same period in 2025. Similarly, tourism revenue was estimated at $286 million in July 2026, a year-on-year decrease of 10.3%, but a significant month-on-month increase of 88.9% from June 2026. For the year-to-date, tourism earnings fell by 11.5% to $1.8 billion.
Despite these trade challenges, strong remittances from workers and healthy official reserves have provided an important safety net. Worker remittances rose by 11.5% year-on-year to $778 million in July 2026, leading to cumulative remittances of $5.4 billion in the first seven months of the year—a notable increase of 21.4% year-on-year.
In capital markets, trends were mixed. The government securities market saw a significant net foreign investment inflow of $159.4 million in July, while the Colombo Stock Exchange (CSE) experienced a slight net foreign outflow of $6.3 million across both primary and secondary market transactions during the month.
Importantly, Sri Lanka’s Gross Official Reserves (GOR) remained stable, recorded at $6.6 billion by the end of July 2026. This figure, which includes a currency swap arrangement with the People’s Bank of China (PBOC), has been bolstered by the Central Bank’s proactive foreign exchange purchases.
On the currency front, the Sri Lankan Rupee (LKR) depreciated by 5.5% against the US Dollar year-to-date by the end of August 2026. However, pressures on the rupee have begun to ease, with the currency showing signs of appreciation in recent weeks. This stabilization is credited to the effects of newly implemented monetary, fiscal, and macroprudential policies aimed at guiding the economy through its external challenges.
