Since the depths of Sri Lanka’s 2022 crisis, our story of the Sri Lankan economy has been of a fundamental transition into a new economic reality. This has been marked by twin surpluses on both fiscal and external fronts - and critically, an accelerating overperformance on these targets. This led Sri Lanka to hold strong buffers. In 2025, these buffers protected us against multiple shocks - a global trade war, the 12-day Iran-Israel war, heavy debt outflows in the middle of the year, and Cyclone Ditwah at the end. However, the 2026 Iran War is far bigger than any shock that Sri Lanka faced in 2025. While we expected flareups in the Middle East, this is much worse than our expectations. Does this mean our story changes? Do we go back to seeing Balance of Payment crises? In this month’s monthly report, we explore these quarries and how Sri Lanka’s macroeconomic trajectory could fair within the three broad scenarios we have outlined for the war in the Gulf.
How will this change Sri Lanka’s macro-trajectory?
In January 2026, we spoke about Sri Lanka’s fiscal overperformance and external surpluses that would help reserve build up and put the country in a much better footing to absorb any shocks coming its way. Since then, the fundamental macroeconomic story has only gotten stronger outside the war with key domestic macro indicators showing continued positive momentum at the start of the year.
However, given the current situation in the middle east and its effects both on the global and domestic end, we do think there could be contained changes to our previous baseline.
The impacts of the Iran War will be large but with many counterweights as well
The obvious message is that an oil shock is negative onto Sri Lanka - as would a global military situation. Alongside oil, we take a closer look at other areas such as remittances, tourism, local and global demand conditions that could possibly take a hit while we also explore some of the ‘counterweights’ that tied to the current context which can go unnoticed since much of the focus is directed towards the clear negatives. It is really how these factors play against each other that will affect the way the war’s impacts play out onto Sri Lanka.
Three main scenarios amidst the fog of war
With all this uncertainty, we’ve gone through multiple scenarios on top of scenarios - but ultimately ended up on 3 key scenarios – as outlined in our Focus here.
What will the combined impact onto Sri Lanka be?
One way to understand this situation is through the lens of “The new Sri Lanka figuring out how a global conflict affects it”. Given the structurally different macroeconomic setting that Sri Lanka is right now, how domestic economic factors would evolve this time can be VERY different to how they did in the past - and that’s part of why we only think 80% of scenarios are covered through our thinking. Additionally, we recognize that there are other knock-on effects that can complicate this situation – stemming both from the local AND global front – that can take us beyond our 3-scenario expectations.
Right now, while we have put our views into these three scenarios, the developments over the next few weeks can change this. By the end of April, we think there will be enough clarity to rule out at least one of the three scenarios as a result, and we hope to be able to give clearer views at that point.
Our clients would have already received a detailed report to their emails on this, alongside the numbers we associate with each of these varied scenarios. The full report has also been accessible on our Athena reports platform since the 31st of March, 2026. If you still haven’t had a chance to read through it, click here! If you are yet to be a subscriber, please do get in touch with us for a trial subscription to our reports at clientconnect@frontiergroup.info.