Sri Lanka’s post-default economic recovery could face a severe setback due to the sharp escalation in geopolitical tensions in the Middle East, economist Talal Rafi has warned.
In a statement posted online, Rafi said the recent Israeli military strike on Iran — which has already pushed global oil prices up by over 12% — could have disastrous consequences for the Sri Lankan economy, which is highly vulnerable to external shocks.
Sri Lanka spends around US$4.5 billion annually on fuel imports, and a 12% spike translates to an additional US$500 million in annual costs. “That alone wipes out the country’s entire annual coconut export earnings,” Rafi noted.
He added that continued escalation could result in even higher oil prices, straining foreign exchange reserves, raising freight costs, and putting pressure on the rupee.
“Remittances from Sri Lankans working in the Middle East are likely to drop if the region becomes unstable, while tourism — another key foreign exchange earner — could also take a hit,” he said.
Rafi also warned of rising global inflation as oil prices surge, prompting central banks in developed economies to raise interest rates. “This would weaken demand for Sri Lanka’s key exports like apparel and tea — which are non-essential items — at a time when the country is still struggling to boost dollar inflows.”
He pointed out that while Sri Lanka may struggle to increase export revenue, it cannot significantly reduce imports, which are largely made up of essentials such as fuel, raw materials for apparel, and machinery.
The economist further cautioned against subsidising fuel locally. “It would mask the real cost to consumers, resulting in no meaningful reduction in fuel demand. At the same time, it would widen the fiscal deficit — and Sri Lanka has no fiscal space for this.”
According to Rafi, this would damage the country’s credibility with global credit rating agencies, whose upgrades are crucial before 2028 to avoid a second debt default.
“With major debt repayments looming in 2028 and an ambitious reserve target of US$13 billion by 2027, this new external crisis — along with uncertainty from potential U.S. tariff hikes — will make Sri Lanka’s path to recovery significantly harder,” he said. (Newswire)