Sri Lanka’s already fragile economic recovery—still reeling from the aftermath of the 2019 Sri Lanka Easter Bombings, the pandemic, and the 2022 financial collapse—is now under renewed strain as the ongoing Iran war sends shockwaves through global energy, trade, and financial systems, experts warn.

Chartered Interior Architect and economic commentator Prof. Rohan de Silva cautioned that the Iran conflict is not an isolated external shock but a “multiplier crisis” that could severely undermine Sri Lanka’s recovery trajectory—particularly for small and medium enterprises (SMEs), which form the backbone of the economy.

Energy Shock Rekindles Crisis Conditions

At the heart of the emerging pressure is the sharp escalation in global oil prices and supply disruptions linked to instability around the Strait of Hormuz—a critical artery for global energy flows.

“Sri Lanka, which already spends around USD 4 billion annually on fuel imports, is extremely vulnerable to such shocks,” Prof. de Silva said. “Any disruption in supply chains or price spikes will immediately translate into domestic inflation and reduced economic activity.”

The situation, he noted, could force authorities to revisit emergency measures reminiscent of the 2022 crisis, including fuel rationing, restricted working days, and reduced transport services—directly impacting productivity.

Inflation Surge and Currency Pressures

Rising oil prices are expected to trigger a fresh wave of cost-push inflation, affecting transport, food, and essential goods. Increased war-risk insurance and shipping delays are further inflating import costs, placing additional pressure on the Sri Lankan rupee and already strained foreign reserves.

“The real danger is a re-triggering of balance of payments stress,” Prof. de Silva warned. “Higher fuel import bills, combined with potential declines in remittances from the Middle East and weaker export earnings, could destabilize external accounts once again.”

Sri Lanka’s export sectors are also facing mounting challenges. Tea exports to Iran and Gulf markets risk disruption, while apparel shipments are being delayed due to rerouted shipping lanes and rising freight costs.

“Transit times are increasing by up to two weeks in some cases. That erodes competitiveness and reliability—two key pillars for export markets,” Prof. de Silva explained.

Industrial supply chains are similarly under strain, with delays in raw materials and petroleum-based inputs threatening production continuity across sectors.

However, the most severe impact is being felt by SMEs, which Prof. de Silva described as “financially exhausted after enduring repeated shocks since 2019.”

“These businesses have not fully recovered from the Easter attacks, COVID-19 shutdowns, and the 2022 economic collapse. Now, they are facing a fresh crisis that is simultaneously increasing costs and reducing demand,” he said.

Operating expenses—including fuel, electricity, and logistics—have surged sharply, while constrained transport and reduced working days are limiting both customer access and employee attendance.

“This is a classic margin squeeze. For many SMEs, profits are not just shrinking—they are disappearing,” he added.

Compounding the crisis is tightening access to finance. With interest rates remaining elevated to control inflation, banks are becoming increasingly risk-averse, leaving SMEs struggling to secure working capital.

At the same time, declining household purchasing power is dampening demand, particularly in non-essential sectors such as retail, interior design, and construction-related services.

“Consumers are cutting back. SMEs are losing revenue streams. It’s a dangerous cycle,” Prof. de Silva said.

Export-oriented SMEs are also facing order cancellations and payment delays from Middle Eastern buyers, further squeezing foreign exchange inflows.

Employment and Social Pressures Mount

The SME crisis is already spilling over into the labour market. Businesses are reducing staff, cutting working hours, or halting expansion plans altogether.

“If this trend continues, we could see rising unemployment and underemployment, particularly among youth,” Prof. de Silva warned.

He also highlighted the risk of returning migrant workers due to instability in Gulf economies, which could intensify domestic job market pressures.

A Multi-Shock Economy on Edge

Prof. de Silva stressed that Sri Lanka is now grappling with a cumulative “multi-shock cycle”:

2019 Easter attacks → Tourism collapse

COVID-19 pandemic → Prolonged shutdowns

2022 economic crisis → Currency and fuel collapse

Iran war → External energy, trade, and financial shock

“Each crisis has weakened the resilience of SMEs. What we are seeing now is not recovery, but survival,” he said.

Without targeted intervention, Prof. de Silva warned of widespread SME closures, job losses, and a prolonged delay in national economic recovery.

“The Iran war is amplifying every existing vulnerability in Sri Lanka’s economy. SMEs are at the frontline of this crisis—and without immediate policy support, the consequences could be severe and long-lasting,” he cautioned.

By Ifham Nizam