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

The American Chamber of Commerce in Sri Lanka concluded its flagship CEO Forum 2026 on 25 February with government officials outlining an ambitious plan to achieve 7% annual economic growth and progress toward a LKR 200 billion economy. The day-long summit, held under the theme “Accelerating Sri Lanka’s Rebuild,” brought together more than 200 C-level executives, senior policymakers, and international partners at Cinnamon Grand Colombo.

Dr. Harsha Suriyapperuma, Secretary to the Treasury, outlined priority reforms including strengthening fiscal stability, maintaining inflation at 5%, improving governance to attract foreign investment, upgrading port infrastructure, supporting IT and pharmaceutical sectors, accelerating digitization, and consolidating the banking sector. The government aims to double the economy within a decade while creating a more predictable business environment.

Opening the Forum, Her Excellency Jayne Howell, Chargé d’Affaires at the U.S. Embassy, called for expanded two-way trade and highlighted opportunities for Sri Lankan buyers to access American technology and energy solutions. She emphasized that growth in trade and logistics, including Port of Colombo expansion, strengthens supply chains and drives economic growth in both countries.

Deputy Minister Chathuranga Abeysinghe announced the establishment of the Industrial Transformation and Innovation Agency (ITIA), with LKR 300 million allocated for capacity-building and a “Level Up” program targeting 6,000 SMEs. Currently, only 20% of financial sector credit is accessible to SMEs, a constraint the new initiatives aim to address through simplified registration, expanded financial literacy, and improved equity financing access.