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

The International Centre for Ethnic Studies (ICES) will premiere its latest documentary, ‘The Saint of the Islands’ on 28th March. The 72-minute documentary, directed by Anomaa Rajakaruna, will be screened at the Tharangani Theatre of the National Film Corporation in Colombo, Bauddhaloka Mawatha, Colombo 7, starting at 4 pm on the 28th.

The film explores the shared devotional traditions surrounding St Anthony of Padua, the patron saint of sailors and fishermen, against the backdrop of the annual feast on the island of Kachchateevu. In Sri Lanka, devotion to St Anthony often crosses religious and cultural boundaries, bringing together different communities that unite across practices of prayer and veneration. At the centre of the story is the annual gathering of devotees from Sri Lanka and India at the St. Anthony’s Shrine on the island of Kachchatheevu, located near the maritime border between the two countries.

Filmed during the annual feast at Kachchatheevu and on the nearby island of Neduntheevu (Delft Island), the documentary reflects on the intersection of faith, livelihood, and geopolitics in the Palk Strait. Kachchatheevu itself is a small, uninhabited island that remains deserted for most of the year.

Yet for two days every year, during the annual feast of St Anthony, it is transformed into a vibrant pilgrimage site as thousands of devotees brave the rough seas, and arrive by boat from both Sri Lanka and India. This year alone, almost 12,000 people from India and Sri Lanka, gathered on the island for prayer, worship, and community.

The film also captures the nearby island of Neduntheevu (Delft Island), one of the northernmost inhabited islands of Sri Lanka. Known for its distinctive landscape, coral-stone architecture, and long maritime history, Delft serves as an important point of departure for pilgrims travelling to Kachchatheevu. Through scenes of travel, pilgrimage, and worship, the documentary reflects on how the sea shapes the lives of coastal communities while also connecting people across national borders and across different religions.

More information can be found on the ICES website, www.ices.lk or by emailing uvini.ices@gmail.com

Sri Lanka’s apparel industry has earned its place in the global market through consistency, trust, and a strong reputation for ethical manufacturing. Over many years, we have shown that Sri Lanka can deliver quality, compliance, and reliability at a level that global brands value. That foundation remains one of our greatest strengths. But the next chapter for this industry cannot be built on reputation alone. It has to be built on growth that is measurable, broader in base, and more resilient in the face of global change. As Chairman of the Joint Apparel Association Forum, I believe the task before us is clear: Sri Lanka must move with greater purpose toward the long-discussed ambition of becoming a US$8 billion apparel export industry.

That ambition is important because it gives the industry a shared direction. But it must now be treated as more than a headline target. It must become a practical national agenda. Sri Lanka Apparel’s published export data show that textile and apparel exports for 2025 amounted to just over US$5.0 billion. That is a meaningful achievement, particularly in a demanding global environment, but it also shows that there is still a substantial gap between current performance and where we say we want to go. Closing that gap will require more than incremental improvement. It will require sharper execution, stronger coordination, and a more deliberate growth model.

By Felix Fernando, Chairman, Joint apparel assoCiation Forum(JaaF)

One of the most important realities we must confront is market concentration. Our industry has traditionally depended heavily on the US, EU, and UK, and together these destinations account for about 85 percent of Sri Lanka’s apparel exports. That concentration has served us well in some respects, because these are mature and valuable markets where Sri Lanka has built long-standing relationships. But concentration at that level also creates vulnerability. When consumer demand weakens, tariffs shift, compliance expectations tighten, or brands change sourcing patterns in those markets, the effects are felt across our entire industry.

This is why diversification must now move to the centre of our export strategy. If Sri Lanka is serious about reaching US$8 billion, we cannot rely on the same market mix and expect a fundamentally different outcome. We need to build stronger export pathways into newer regions and expand our relevance in markets that have not yet been fully developed. ASEAN, the Middle East, Africa, and parts of Asia must become part of a structured and sustained growth effort. This is not about replacing our traditional markets. It is about reducing risk, widening opportunity, and building a more balanced export portfolio over time.

At the same time, diversification should not be understood only in geographic terms. It is also about moving up the value chain. Sri Lanka cannot compete on volume alone, and it should not try to. Our advantage lies in being a premium sourcing destination, one that brings together product integrity, speed, sustainability, technical capability, and increasingly, stronger design and development input. We must ensure that Sri Lanka is not viewed simply as a production base that executes instructions, but as a partner that contributes value, thinking, and innovation throughout the sourcing relationship.

That means we also need to become more disciplined in how we define progress. Export growth should not be reduced to one annual number. We must measure what kind of growth we are generating, where it is coming from, and whether it is making the industry stronger. Are we increasing our share in higher-value categories? Are we entering new markets in a meaningful way? Are we improving lead times and deepening customer relationships? Are we strengthening design capability and sustainability performance in ways that help us command better value? These are the questions that should shape our next phase.

No industry can achieve an ambitious export target, however, without the right operating environment. Sri Lanka must improve the systems that support trade. Faster customs processes, stronger digital integration across approvals, lower administrative friction, and more predictable policy are not side issues. They are core to competitiveness. In an industry where delivery timelines matter, delays at any point in the system affect confidence, planning, and future order allocation. Trade facilitation must therefore be treated as an export growth issue, not merely an administrative reform issue.

The same applies to the broader investment climate. If Sri Lanka wants to attract fresh capital, deepen value addition, and strengthen its manufacturing base, we have to be seen as commercially responsive as well as ethically strong. Investors look for clarity, speed, stability, and confidence that business can be done efficiently. This matters not only for foreign investment, but also for the expansion decisions of companies already operating in Sri Lanka.

The opportunity is still very much in front of us. Sri Lanka apparel has the capability, the reputation, and the institutional knowledge to grow beyond its current scale. But the route to US$8 billion will not come from doing more of the same. It will come from measurable export growth, deliberate diversification, stronger systems, and a clear commitment to higher-value positioning. If we align around those priorities and act with consistency, the industry can move into its next chapter with greater strength and greater confidence.

By Felix Fernando, Chairman, Joint Apparel Association Forum (JAAF)