When goods don’t cross borders, soldiers will

By Dhananath Fernando

Originally appeared on the Morning

• The hidden costs of the Israel-Iran war for Sri Lanka

The escalating conflict between Israel and Iran carries serious repercussions for Sri Lanka on multiple fronts. 

In economic terms, there is no winner in any war; all parties, including those not directly involved, will suffer. Unfortunately, Sri Lanka is likely to be one of those casualties.

Humanitarian impact

An estimated 20,000 Sri Lankans live and work in Israel. If the conflict escalates and lives are lost, the Government will be under pressure to intervene and repatriate citizens. 

This would strain an already tight budget and add pressure to the national balance sheet. However, human life must take priority and any necessary rescue operations must be conducted swiftly.

Beyond the immediate human toll, loss of life could trigger political tensions at home, affecting community relations and domestic stability.

Exports and trade

Both Israel and Iran are key export markets for Sri Lanka. In 2023, exports to Israel were valued at approximately $ 90 million, with key products including bulk tea, rubber products, seafood, and coconut-based goods. Meanwhile, Iran accounted for $ 67 million in Sri Lankan exports, primarily bulk tea.

However, the bigger risk lies beyond these direct trade flows. As major markets like the US, UK, and European Union (EU) align themselves with different sides of the conflict, global trade dynamics could shift dramatically. Increased military expenditure, market polarisation, and slower consumer demand in Western economies could impact Sri Lanka’s export growth across the board.

Meanwhile, our imports from Israel – mainly tech products, plastics, and precious stones – amount to roughly $ 100 million annually. Some of these are intermediary goods essential for local production. 

Imports from Iran are smaller (about $ 25 million), largely fertilisers and food items, but equally vulnerable to disruption. War-driven supply chain breakdowns and rising costs will further strain sectors already under pressure.

Fuel prices and economic slowdown

Middle Eastern instability typically drives global oil prices higher. Already, crude and refined oil prices are rising – the Murban crude variant used at our Sapugaskanda Refinery is up by nearly 10%. Higher global prices must be transparently reflected in local pump prices to avoid market distortions.

It is vital that the Government allows these price signals to flow through while maintaining prudent monetary policy. Artificially low interest rates could lead to currency depreciation, accelerating inflation and further compounding the fuel price shock. If managed correctly, we can minimise the fallout. If not, we risk another wave of inflation at a critical juncture.

In addition, falling remittances and a global economic slowdown will directly impact one of the most critical requirements for Sri Lanka’s debt sustainability – economic growth. Weak growth could force the country into a second round of debt restructuring, and even a modest external shock could be enough to trigger a crisis, given the fragile fundamentals of our economy. 

The only solution is to accelerate economic reforms – removing trade barriers, restructuring State-Owned Enterprises (SOEs), and pursuing sound monetary policy – to build resilience and minimise risks.

Remittances

Sri Lanka receives about $ 40 million in remittances from Israel per quarter. Any major disruption to employment in Israel could directly impact these inflows. 

Moreover, broader instability in the Middle East could affect other labour markets where Sri Lankans are employed, reducing remittance income – a crucial source of foreign exchange for debt servicing and stabilising the currency.

Geopolitical risks

As global powers take sides, Sri Lanka faces new geopolitical challenges. The late Iranian President Ebrahim Raisi visited Sri Lanka last year to inaugurate the Uma Oya project, funded by Iran. Iran also donated the Sapugaskanda Refinery, a longstanding symbol of economic ties.

Israel, in turn, remains an important partner, offering employment opportunities and a growing trade relationship. But with key allies like the US and UK backing Israel, and powers like China and Russia leaning towards Iran, Sri Lanka risks being caught between competing camps.

We must now carefully manage these pressures. Maintaining neutrality while safeguarding national interests will require skilled diplomacy.

A wake-up call

This war is a stark reminder of the importance of global trade and the value of building strong, diversified economic relationships. The situation echoes the famous quote: “When goods and services do not cross borders, soldiers will.”

For Sri Lanka, the lesson is clear: deeper economic engagement and robust reforms are not just about prosperity, they are essential to protecting national stability in an uncertain world. 

Time to rethink export diversification – with India in mind

By Dhananath Fernando

Originally appeared on the Morning

The call to diversify Sri Lanka’s export basket is not new; it’s a conversation that has spanned decades.

For the most part, our approach has relied on supporting Small and Medium-sized Enterprises (SMEs), extending credit, and helping companies find overseas buyers – largely driven by the Export Development Board (EDB).

During the ‘Yahapalana’ Government, Sri Lanka unveiled a comprehensive National Export Strategy (NES) targeting six promising sectors:

• Information and Communication Technology (ICT) and Business Process Management (BPM)

• Wellness tourism

• Boating and shipbuilding

• Electrical and electronic components

• Processed foods and beverages

• Spices and concentrates

In addition, four cross-cutting areas were introduced to complete the export ecosystem:

• Logistics: streamline supply chains and reduce time-to-market

• National Quality Infrastructure (NQI): upgrade testing, certification, and compliance standards

• Innovation and entrepreneurship: promote R&D, tech adoption, and startup growth

• Trade information and promotion: enhance market intelligence, branding, and buyer linkages

This strategy was widely appreciated at the time. Even the EDB Chairman appointed under President Gotabaya Rajapaksa’s administration pledged to take it forward. But strategies need to evolve. And now, the context has shifted.

A case in point is how Ceylon Cold Stores (CCS) – a subsidiary of John Keells Holdings (JKH) – has taken a new route into India. Rather than exporting directly, as it unsuccessfully attempted in the past due to India’s non-tariff barriers, it has now partnered with Reliance Consumer Products. Through this partnership, CCS products will be distributed across 18,000 Indian outlets.

If the venture proves successful, we could see CCS expanding operations further, either producing in Sri Lanka for export or even setting up shop in India. This is a powerful lesson; if we are truly serious about diversifying exports, India is a market we can’t afford to ignore. But the route may not always be direct; it could mean partnerships, joint ventures, or becoming part of Indian supply chains.

And it’s not just consumer goods. While CCS is expanding into India, some Sri Lankan banks, now holding excess US Dollar reserves, are looking to partner with the Gujarat International Finance Tec-City (GIFT City).

Several bank CEOs in Sri Lanka who have already invested have stated that their goal is to support Sri Lankan companies investing in India – or even Indian companies operating here. In fact, many Sri Lankan service sector firms are already functioning in India. This is a clear signal: the momentum has shifted. The landscape is changing and we are slow to adapt.

Meanwhile, India is also reshaping the global trade map. It has already signed a Free Trade Agreement (FTA) with the UK, and is in the final stages of a similar deal with the European Union (EU). Under the UK deal, 99% of Indian exports to the UK will be tariff-free, and 90% of UK goods will get similar access to India – significant reductions even for alcohol products.

Once the EU deal is signed, exporters will have even more incentive to route products from India, especially given Sri Lanka’s uncertain GSP+ status. So, if we try to compete head-on with India in the same markets, we may be setting ourselves up for disappointment. Instead, we should look at how we can complement India – join its supply chains and offer what India alone cannot.

One such overlooked area is electricity exports. Back in 2016-’17, when the NES was developed, the potential of renewable energy in Sri Lanka was limited. Today, that picture has changed dramatically. Solar and wind investments have surged, and with the right policy push, electricity exports to India could become a serious reality.

This example illustrates a broader point: strategies must be dynamic. Markets evolve, technologies advance, and regional power equations shift.

India, for instance, is integrating rapidly with global and regional markets. Sri Lanka can ride that wave, or watch others benefit in our place. With geopolitical winds also shifting – particularly with the West looking for reliable partners in the region – India is too big to be left out of any serious trade or investment plan.

If we play our cards right, Indian growth could also drive investment into Sri Lanka, especially in sectors that support exports. But to unlock that opportunity, we need serious structural reforms:

• Industrial lands must be made available, ideally through private sector-led zones with minimal red tape and a streamlined Board of Investment

• Electricity sector reforms are non-negotiable – both to reduce domestic costs and to enable energy exports

• Trade facilitation through a modernised Customs act is essential to attract investors eyeing India via Sri Lanka

• Debt sustainability must be maintained – no investor will bet on a country flirting with default

• State-Owned Enterprises (SOEs) must be restructured to reduce the fiscal burden and unlock productivity

In short, if we are serious about export diversification, we must acknowledge that the rules of the game have changed. Old models won’t work in a new world. India is no longer just a neighbour; it is a gateway, a competitor, and a partner all at once.

The question is: will we adapt fast enough to matter?