1Q current account surplus down 44% in Sri Lanka as mounting external pressures, a widening trade deficit, and weaker services inflows combined to significantly erode the country’s external balance in early 2026.
1Q current account surplus down 44% as trade deficit and imports surge
Sri Lanka’s current account surplus fell sharply by 43.9% year-on-year to $531.5 million in the first quarter, reflecting the growing strain on the external sector amid rising import costs and subdued earnings from tourism and other services.
Data released by the Central Bank of Sri Lanka shows that the deterioration was primarily driven by a widening merchandise trade deficit, which increased by 50% to $2.31 billion during the January–March period. Imports rose at a faster pace than exports, highlighting structural imbalances in the country’s trade dynamics.
The situation worsened in March, where the current account recorded only a marginal surplus of $44.6 million, marking a steep 90.7% decline compared to the same period last year. The sharp drop underscores the accelerating impact of global economic disruptions, particularly the spillover effects of the Middle East conflict on energy markets and trade flows.
A key contributor to the widening deficit was the surge in fuel imports, which climbed 74.7% year-on-year to $630 million in March alone. Higher global oil prices, coupled with increased volumes, significantly inflated the import bill. This trend reflects broader vulnerabilities in Sri Lanka’s external account, especially its dependence on energy imports.
At the same time, export performance remained relatively subdued. Exports increased by only 3.4% year-on-year to $3.46 billion in the first quarter, while imports rose 18.1% to $5.77 billion. In March, imports surged 30.3% to $2.13 billion, far outpacing the modest 1% growth in exports, which stood at $1.25 billion. This imbalance led to a 122% increase in the monthly trade gap, reaching $880 million.
The terms of trade also deteriorated, as export prices declined more sharply than import prices. This further weakened the country’s external position, compounding the effects of higher import costs and limited export growth.
The services sector, another critical component of the external account, also recorded a notable decline. The services surplus contracted by 20.2% year-on-year to $973.1 million in the first quarter, with a sharper drop of 42.4% in March. The downturn was largely driven by weaker tourism performance, as global travel disruptions linked to geopolitical tensions weighed on visitor arrivals.
Tourism earnings fell 36.8% year-on-year to $223.7 million in March, while arrivals declined 19.8% to 183,979. This reversal comes after a period of recovery, highlighting the sector’s sensitivity to external shocks. Cumulatively, tourism earnings declined 15% to $954 million in the first quarter, reinforcing concerns about the sustainability of services inflows.
Despite these pressures, workers’ remittances provided a degree of support to the external account. Remittances increased by 26.5% year-on-year to $2.29 billion in the first quarter, including a 17.5% rise in March. These inflows continue to play a stabilising role, partially offsetting the impact of trade and services deficits.
On the financial account, foreign investment flows remained weak. Government securities recorded a net outflow of $63.9 million, while the Colombo Stock Exchange saw a net outflow of $10.2 million in March. These trends point to cautious investor sentiment amid ongoing economic uncertainties.
Gross official reserves declined to $7 billion at the end of March, mainly due to external debt servicing obligations. This occurred despite continued foreign exchange purchases by the central bank, indicating the persistent pressure on the country’s external buffers. Meanwhile, the Sri Lankan rupee depreciated by 2.9% against the US dollar on a year-to-date basis as of end-April, reflecting broader external sector challenges.
Vehicle imports also remained a notable component of the import bill. Although the monthly value stabilised at $195 million in March following earlier declines, cumulative imports reached $613 million for the first quarter. The reopening of vehicle imports in 2025 has significantly contributed to import growth, boosting Government revenue but adding to external pressures.
Customs revenue data indicates that vehicle-related taxes played a substantial role in fiscal performance, contributing Rs. 905 billion in 2025. However, recent tax adjustments, including changes to the Social Security Contribution Levy (SSCL), are expected to influence import trends going forward.
The 1Q current account surplus down 44% trend highlights the fragility of Sri Lanka’s external sector in the face of global shocks and domestic structural challenges. While remittances continue to offer some relief, the widening trade deficit and weakening services earnings underscore the need for policy measures aimed at strengthening export competitiveness and managing import demand.
As the year progresses, the trajectory of the external account will depend on global energy prices, tourism recovery, and the effectiveness of policy responses. The 1Q current account surplus down 44% outcome serves as a clear signal that sustained efforts are required to stabilise the external sector and support long-term economic resilience.