Sri Lanka in the middle of the new world’s birth

For nearly a year, this column has written of how the world is in a fundamental moment of transition, a transition that will probably play out over a few years, but one where Sri Lanka’s economy is facing its own moment of transition within as well as outside of this. 

That the world is in transition is absolutely clear – the trade transition in 2025, the geopolitical transition at the start of 2026, and now a security transition as well. 

Sri Lanka’s transition was perhaps less visible on the outside, partly because of how superlative it has been and thereby, hard to believe for a country that has not been particularly so. Yet two types of headlines in the past month can indicate a somewhat different story that points in a somewhat different direction.

The first were the laudatory headlines following the sinking of IRIS Dena off the southern coast of the country. The second were the headlines suggesting that Mattala might be in consideration for a temporary travel hub by Gulf air carriers. 

Regardless of the specifics of these events and regardless of whether the sentiment carried in those headlines were cognisant of reality, the very fact that one of the most significant geopolitical events in a while ended up resulting in positive headlines in relation to Sri Lanka within the first month – probably more than many others – is significant in and of itself.

It is completely possible that neither of these will amount to much in the end. I would consider it far more significant that after a few years of headlines underreporting and underrecognising the superlative transformation of the Sri Lankan economy, we have a few headlines that go the other way. 

This will have a fairly significant impact if it continues; the superlative macroeconomic performance itself can then start to become part of the Sri Lankan story, the way the world engages with Sri Lanka, and even how Sri Lanka engages with itself.

Of course, there will still be plenty of negative aspects as well. A massive oil shock is undoubtedly a negative for a net oil importer. Yet I think we need to be very careful about simply extrapolating this without considering any of the other factors. 

For example, Sri Lanka has around 1% of GDP in oil re-exports – around 7% of our total exports. We have around another 1% of GDP in net port services. Both of these are more likely to grow, and grow significantly in the context of an oil shock stemming from supply disruptions in the Gulf. These may or may not be enough to buffer against the direct impacts, but the very fact that they exist is worth far more than having no such cushions.

This is where that fundamental structural transition and a potential shift in headlines come through. This isn’t the same as the oil shock of the 1970s where Sri Lanka ran such massive fiscal and external deficits that we had one of Asia’s earliest liberalisations. This isn’t the same as the wars of the ’80s where Sri Lanka didn’t even have its current export basket. This isn’t the same as the shock to oil prices in the 2000s, when Sri Lanka started blasting through its deficits again. 

Sri Lanka is running massive surpluses on both its fiscal and external accounts – better than ever before in the country’s history, along with a momentum that is probably one of the best in the world.

The ‘appropriate’ neutral description of the Sri Lankan economy’s performance would probably be as superlative as the performance itself is. Of course, reversal is possible, but that would have to be explained through actual fact. 

Sri Lanka’s public debt profile, for example, shows a decline in payment obligations from 2025 to 2026 and from 2026 to 2027, and although it will rise in 2028, it is at a lower level than in 2025. Taking a partial data point to make the opposite case is a complete mischaracterisation. 

However, if situations like the current one give rise to more superlative narratives (and in this case, perhaps mischaracterised in the opposite direction), then you could have the complete other side coming through.

One way to think of this is that if the superlative performance of the country is considered, then capital flow and investment should follow. If this new story results in the capital flow and investment for different needs, and you have the actual performance itself captured in the narratives, that is a very different Sri Lanka ahead. It suggests a Sri Lanka that better reflects its current strength as well. 

Of course, in a world moving through such a massive transition, who knows what that means for Sri Lanka?

Source: The morning