Big shocks and big underlying change have been the story of the Sri Lankan economy recently
We have been bullish on Sri Lanka’s economy for a few years now. We think that the country turned over a completely new leaf after 2022 and now looks like a completely different beast. The government’s coffers are overflowing, the economy generates extra dollars that fatten up the government’s AND the banks’ books, and many companies see new revenue records every year.
Yet this isn’t all that has happened. Shock after shock has hit the Sri Lankan economy across these years too. The country saw once-in-a-generation storms, once-in-a-generation political changes, trade wars, hot wars, and all other flavors of shocks in between. Every single time that Sri Lanka faced a shock like this in the past, the country would have immediately gone back to its worst habits. The central bank would dust off the money printer, the government would force prices down, and everyone would (rightfully) panic knowing that all this would blow up in everyone’s faces.
Sri Lanka may be different now, with all this history, no wonder that markets were so jumpy this year! It’s obviously much harder to believe in a bullish story when history tells you that shocks prevent even the echo of one from being heard. We think markets are pricing in quite a lot of this. After all, “this time is different” is a very very dangerous phrase to base a market call on!
Sri Lanka’s economy has stayed quite strong outside of the immediate costs of the Iran War
Shocks are costly for any economy, especially when they’re as large as the Iran War. Sri Lanka is no different here. It’s just that the costs are now paid by an economy which has BOTH some money saved up in the bank AND an actual income coming into its pockets.
The obvious cost of the war – Sri Lanka’s oil import bill – will certainly reach a new high. But remittances have also been quite strong this year. In fact, if you exclude oil and tourism - the most affected by the conflict - the external current account doesn’t really look so different from last year.
While all this happens on the dollar side, the fiscal front looks to be far stronger. While we might have a different view to others on the size of the fiscal strength, we think most would agree that the fiscal strength exists.
Given the balance of both these fronts and how they have turned out during the first half of the year in the context of these massive shocks, we start to wonder - is the entire economy now different than the past?
Markets probably need more time and proof to believe such a bullish story, especially when the world is misbehaving
With how the currency depreciated in May and how rates shot up in June, it appears that markets don’t seem to have this sort of story as their own baseline. After all, markets simply don’t have the luxury of waiting for a long-term story and have to deal with the messiness of the real world. Unlike those of us who can pontificate from afar, market participants actually have to deal with the day-to-day reality of doing business and making investments during these world-shaking shocks.
However, we think a lot of Sri Lanka’s underlying story has been masked by all these shocks and at least some level of masking will continue. Yet, despite these shocks, the economy has been beyond resilient. As more and more data comes through that shows this, we think it becomes harder and harder to hold the view that Sri Lanka goes back to where it was.
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 30th June 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.