LankaBIZ

Overview

Sri Lanka’s external sector in 2025 is projected to build on the recovery seen in 2024, approaching or surpassing the levels achieved in 2019—a pre-pandemic benchmark of economic stability. The growth will be underpinned by improving reserves, expanding trade and service sector inflows, a robust tourism recovery, and stable remittances. By comparing the performance in 2019, 2024, and projections for 2025, we can better understand the trajectory of the external sector.

Key Drivers and Growth Reasons for 2025 (Relative to 2019 and 2024)

1. Gross Official Reserves (GOR):
   • 2019 Performance: GOR stood at approximately USD 7.6 billion at the end of 2019, covering 4.6 months of imports.
   • 2024 Performance: GOR reached USD 6.5 billion by November 2024, covering 4.2 months of imports. This reflected a recovery of over USD 2 billion compared to December 2023.
   • 2025 Expectations: GOR in 2025 is expected to stabilize above USD 7 billion, supported by enhanced export revenues, increased service sector inflows, and reduced external debt pressures. The central bank’s ongoing net purchases of foreign exchange and improving fiscal conditions will further boost reserve adequacy.
2. Merchandise Trade:
   • Exports:
     • 2019: Exports totaled USD 11.9 billion, led by textiles, tea, and rubber products.
     • 2024: Exports grew by 7% to USD 11.67 billion, driven by a recovery in industrial and agricultural exports like textiles (+3.9%) and tea (+8.8%).
     • 2025: Exports are expected to exceed USD 12 billion, surpassing 2019 levels. The expansion will be supported by increased demand for industrial goods, regional trade agreements, and new markets for agricultural exports like spices and coconut products. Petroleum product exports, which doubled in 2024, will remain strong in 2025.
   • Imports:
     • 2019: Imports stood at USD 19.9 billion, creating a trade deficit of USD 8 billion.
     • 2024: Imports rose to USD 16.9 billion, with the trade deficit widening to USD 5.2 billion. The increase was driven by intermediate goods like textiles (+18.6%) and consumer goods like home appliances (+85.2%).
     • 2025: Import expenditure is expected to remain below 2019 levels as policy measures to curb non-essential imports continue. However, intermediate goods imports will rise in tandem with export production, keeping the trade deficit manageable at around USD 6 billion.
3. Tourism Earnings:
   • 2019 Performance: Tourism earned USD 3.6 billion, with 1.9 million tourist arrivals.
   • 2024 Performance: Earnings surged by 56% year-to-date to USD 2.8 billion, driven by 1.8 million tourist arrivals and higher per capita spending.
   • 2025 Expectations: Tourism earnings are expected to exceed USD 3.2 billion, nearing or surpassing 2019 levels. Targeted marketing campaigns, diversification of source markets (India, China, Europe), and improved infrastructure will drive further growth in arrivals, projected to exceed 2 million.
4. Workers’ Remittances:
   • 2019 Performance: Remittances amounted to USD 6.7 billion, a critical inflow for the economy.
   • 2024 Performance: Remittances grew by 10.4% to USD 5.96 billion, supported by stable exchange rates and targeted incentives.
   • 2025 Expectations: Remittances are projected to approach 2019 levels as overseas employment opportunities grow, particularly in the Middle East. Efforts to incentivize formal remittance channels will further boost inflows.
5. Service Sector Inflows:
   • 2019 Performance: Non-tourism service inflows reached approximately USD 3.8 billion, supported by IT/BPO services and transport services.
   • 2024 Performance: Non-tourism service inflows grew by 26.7% to USD 6.2 billion, with IT/BPO services (+6.8%) and sea transport services (+41.5%) leading the way.
   • 2025 Expectations: Service inflows are expected to exceed USD 6.5 billion as investments in digital infrastructure, government support for IT exports, and strategic use of Sri Lanka’s geographic location drive further growth.
6. Exchange Rate and Competitiveness:
   • 2019 Performance: The rupee averaged 180–185 LKR per USD with mild depreciation.
   • 2024 Performance: The rupee appreciated by 10.7% against the USD to 290.92, reflecting improved reserves and reduced external debt pressures.
   • 2025 Expectations: The rupee is expected to remain stable in 2025, supported by prudent monetary policies and increased foreign inflows. This stability will enhance export competitiveness and reduce import costs.

Key Comparisons to 2019 and 2024

Top Growth Sectors

Sri Lanka’s external sector in 2025 offers promising opportunities for investment across multiple high-growth industries. Building on the recovery seen in 2024 and comparing progress to pre-pandemic levels in 2019, several sectors emerge as particularly attractive. These sectors benefit from robust growth drivers, favorable policy environments, and increasing global and domestic demand.

The tourism and hospitality industry is one of the most compelling sectors for investment. In 2024, tourism earnings surged by 56%, reaching USD 2.8 billion, supported by a significant rise in tourist arrivals to 1.8 million. By 2025, arrivals are expected to surpass 2 million, with earnings projected to exceed USD 3.2 billion, nearing the pre-pandemic peak of USD 3.6 billion in 2019. Increased infrastructure investments, targeted marketing campaigns, and diversified offerings such as eco-tourism, wellness travel, and adventure tourism make this sector a lucrative choice for investors looking to capitalize on a recovering global travel market.

IT and business process outsourcing (BPO) sector continues to demonstrate steady growth, with inflows reaching USD 773 million in 2024. Sri Lanka’s competitive labor costs, skilled workforce, and government incentives to promote IT exports position this sector for further expansion in 2025. Investment opportunities abound in areas such as software development, fintech, digital marketing, and data analytics. Additionally, global shifts toward outsourcing and digital transformation will continue to fuel demand for Sri Lanka’s IT services.

Agriculture and agro-exports also present strong growth potential. Agricultural exports, including tea, spices, and coconut products, saw notable increases in 2024, with tea exports alone growing by 8.8%. Rising global demand for organic and value-added agricultural products is expected to drive further expansion in 2025. Investments in modern farming techniques, organic agriculture, and processing facilities for value-added goods will be critical in meeting this demand. The sector’s resilience and export potential make it a compelling investment option.

Textiles and apparel sector remains a cornerstone of Sri Lanka’s export economy, nearing USD 4.6 billion in 2024. With growing global demand for sustainable and ethically produced apparel, the sector is poised for continued growth in 2025. Opportunities lie in expanding eco-friendly and high-tech fabric production, penetrating premium export markets, and integrating supply chains to enhance efficiency. Sri Lanka’s reputation for high-quality garment manufacturing provides a strong foundation for attracting investment in this area.

Renewable energy and infrastructure development represent emerging opportunities aligned with global sustainability trends. With increasing policy emphasis on energy independence, investments in solar and wind power projects, as well as green construction technologies, are expected to grow. Similarly, infrastructure development in tourism zones, industrial parks, and urban centers offers attractive prospects for investors.

Sea transport and logistics have shown robust growth, with sea transport inflows rising by 41.5% in 2024. Sri Lanka’s strategic location as a maritime hub positions this sector for significant expansion in 2025. Investments in port infrastructure, logistics hubs, and shipping services are poised to benefit from growing regional trade and increased export volumes.

Petroleum and chemical export sectors have shown strong growth, with petroleum exports doubling in 2024 to USD 975 million. Increasing demand for refined petroleum products and specialty chemicals creates opportunities for expansion. Investments in refining capacity and high-value chemical products can tap into rising global and regional demand, making this a high-potential sector for growth.

Conclusion

Sri Lanka’s external sector in 2025 is on track to surpass the benchmarks set in 2019 and build on the recovery achieved in 2024. This growth reflects increased export capacity, a robust tourism recovery, and the strategic expansion of the service sector. Effective policies to diversify exports, attract investments, and stabilize the exchange rate will be crucial for sustaining this trajectory amidst global uncertainties. By addressing risks such as global economic headwinds and commodity price volatility, Sri Lanka can leverage its progress to ensure long-term external sector resilience.