Colombo, Sri Lanka – 31 August 2026 – Sri Lanka’s external sector exhibited mixed signals in July 2026, with a widening merchandise trade deficit and a continued current account deficit, largely influenced by global developments, particularly those in the Middle East. The Central Bank of Sri Lanka (CBSL) released its latest External Sector Performance report today, providing a comprehensive overview of the nation’s economic ties with the rest of the world for July and the cumulative first seven months of 2026.
Current Account Registers Fourth Consecutive Monthly Deficit
The external current account recorded a deficit of US$142 million in July 2026, marking the fourth consecutive month in deficit. This trend contributed to a cumulative current account deficit of US$387 million for January-July 2026, a notable shift from the surplus recorded during the corresponding period of 2025. The CBSL attributed this sustained deficit to ongoing developments in the Middle East, indicating broader geopolitical impacts on Sri Lanka’s economic landscape.
Merchandise Trade Deficit Expands Significantly
The merchandise trade deficit saw a substantial increase in July 2026, driven by a combination of higher import expenditure and a dip in export earnings. Goods imports surged by 19.6% year-on-year to US$2,251 million in July 2026. This pushed the cumulative trade deficit for January-July 2026 to US$6.5 billion, a significant widening compared to US$3.9 billion in the same period of 2025.
A key factor in the import increase was fuel expenditure, which, despite a marginal month-on-month decline, rose by a substantial 68.0% year-on-year in July 2026, primarily due to higher crude oil imports. Cumulative fuel imports reached approximately US$3,622 million during January-July 2026, marking a 59.9% year-on-year increase.
Expenditure on motor vehicle imports also saw a rise, amounting to US$241 million in July and a cumulative US$1,495 million for the first seven months of the year.
Export Performance and Deteriorating Terms of Trade
On the export front, merchandise exports experienced a 5.3% year-on-year decline in July 2026, reaching US$1,233 million. However, cumulative goods exports for January-July 2026 showed a modest increase of 4.4%, totalling US$8,137 million.
The report also highlighted a deterioration in the terms of trade for July 2026, both on a month-on-month and cumulative basis, as import prices outpaced export price increases.
Services Account, Tourism, and Workers’ Remittances
The services account recorded a surplus of US$244 million in July 2026, although this represented a 23.0% year-on-year decline. Encouragingly, it increased by 50.7% compared to the previous month, boosted by higher tourism earnings.
Tourist arrivals, however, marginally declined by 1.7% year-on-year in July 2026. Cumulative arrivals for January-July 2026 stood at 1,343,418. Tourism earnings, based on the revised methodology by the Sri Lanka Tourism Development Authority (SLTDA), were estimated at US$286 million in July, reflecting a 10.3% year-on-year decline, despite an 88.9% month-on-month increase. Cumulative tourism earnings also saw an 11.5% decline to US$1.8 billion.
A silver lining was the significant increase in workers’ remittances, which rose by 11.5% year-on-year to US$778 million in July 2026. Consequently, cumulative remittances for the first seven months of 2026 surged by 21.4% to US$5.4 billion. It is noted that this figure may include other remittances, such as those received following Cyclone Ditwah.
Gross Official Reserves and Exchange Rate Movement
Sri Lanka’s Gross Official Reserves (GOR), including the swap facility with the People’s Bank of China (PBOC), stood at a healthy US$6.6 billion by end-July 2026. This was supported by the Central Bank’s foreign exchange purchases, maintaining a crucial import coverage of 3.2 months.
The Sri Lanka Rupee (LKR) depreciated by 5.5% against the US dollar on a year-to-date basis by end-August 2026. However, the CBSL noted a recent appreciation of the LKR, attributing it to the impact of recently implemented monetary, fiscal, and macroprudential policy measures.
Investment Flows
Foreign investment in the government securities market saw a notable net inflow of US$159.4 million in July 2026. Conversely, the Colombo Stock Exchange (CSE) recorded a marginal net outflow of US$6.3 million during the same month, encompassing both primary and secondary market transactions.
The CBSL’s July 2026 external sector performance report underscores the ongoing efforts to stabilize the economy amidst challenging global and domestic factors. While the widening trade deficit and current account deficit present concerns, the growth in worker remittances and stable foreign reserves offer some resilience to the Sri Lankan economy.
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