May exports were strong, but the export engine is still weak

By Dhananath Fernando

Originally appeared on The Morning

Sri Lanka has reported its highest-ever export performance for the first five months of a year. From January to May 2026, total exports reached $ 7.39 billion, recording a year-on-year growth of 7.5%.

The May numbers are particularly interesting. Merchandise exports grew by around 18%, while services exports also recorded a similar growth rate. For the first four months of the year, export growth was only around 4.3%. With May’s performance, the overall growth for the first five months was pushed up to about 7.5%.

What is more interesting is that this performance has not really come from the apparel industry. Tea exports were also low, partly due to tensions in the Middle East. The growth has come from areas such as electrical and electronic components, processed food and beverages, coconut products, seafood, and a few other sectors. On the services side, Information and Communication Technology/Business Process Management (ICT/BPM) has shown good growth.

This export performance is commendable. But we should not misunderstand one good month as proof that Sri Lanka has solved its export problem.

Building competitiveness

Exports are a function of competitiveness. Some parts of competitiveness come naturally. But most of it has to be built over time.

For example, Sri Lanka’s soil structure and climate may give our cinnamon a unique aroma and our coconut products a distinctive quality. But developing cinnamon and coconut as globally competitive products is a local game. Our coconut has to compete with coconut products from India, Indonesia, and the Philippines. At the same time, coconut-based products also compete with substitutes such as almond-based products, palm oil, and even olive oil in certain categories.

Cinnamon has a similar challenge. Sri Lankan cinnamon has to compete with cinnamon from Indonesia and Vietnam. At the same time, it also competes with other spices such as cloves, cardamom, and nutmeg in the wider global spice market.

So competitiveness is not just about one product competing with the same product from another country. It is also about one category competing with another category. That is where Sri Lanka still has a serious structural problem.

Factor market challenges

The first problem is our factor markets: land, labour, and capital.

For any product category or investor, accessing land has become a major issue. From a cinnamon cultivator to an electronic component manufacturer, land is a binding constraint. The solution is to invest more in Bim Saviya, speed up land titling, and identify industrial zones using underutilised Government land, including land held by major State-Owned Enterprises (SOEs).

But to make this happen, Sri Lanka needs institutions that can move fast. At the moment, we do not have that machinery.

Then comes labour. Sri Lanka has a serious labour problem. On one hand, we do not have enough workers in the domestic market, partly because many skilled people have migrated. On the other hand, female labour force participation remains low. Childcare, unsafe and unreliable public transport, and rigid workplace structures make it harder for women to join and remain in the labour market.

Our labour regulations are also rigid. Hiring is costly. Exiting is complicated. As a result, firms become cautious about expanding. This affects exporters directly, because export competitiveness depends not only on wages, but also on flexibility, productivity, and the ability to scale.

Land and labour constraints also affect access to capital. Because of land title issues, banks are reluctant to accept land as collateral or extend credit easily. For a long time, access to capital was also difficult because the Government was the main borrower in the economy. A large share of credit from financial institutions flowed to the Government and SOEs instead of the private sector.

Now private sector credit is recovering, but these changes take time. Exporters cannot become competitive overnight when the supporting system has been weak for years.

In simple terms, Sri Lanka’s factor markets do not really support our exporters to compete, either on price or quality.

A system lagging behind

Then there are the supporting costs. Construction costs are high. Electricity, which is a key input for almost every export product, is expensive. As a result, energy-intensive industries struggle to maintain their edge under the current cost structure.

On top of that, Customs procedures remain difficult and cumbersome. We still operate with a century-old Customs Ordinance. That does not support a modern export economy. Exporters need speed, predictability, and simplicity. What they often get is delay, discretion, and paperwork.

Another major issue is productivity. Sri Lanka’s productivity drive across sectors is weak. In coconut, tea, rubber, and dairy, the average output per unit remains low compared to many regional peers. Those countries also have problems. But we are far behind. Without improving productivity, we cannot expect our exports to compete purely through branding or sentiment.

In the modern world, competitiveness also comes through market access. When countries sign trade agreements or join trade blocs, their exporters get access to markets at lower tariff rates. That makes a big difference when investors decide where to locate production.

Sri Lanka receives some benefits through arrangements such as the Generalised Scheme of Preferences Plus (GSP+). But countries with wider trade agreement networks have a stronger advantage. They can offer investors access to more markets, better certainty, and greater scale.

Sri Lanka has free trade agreements with India and Pakistan. We also signed the Singapore-Sri Lanka Free Trade Agreement and a trade agreement with Thailand. But the status, implementation, and practical benefits of these agreements are still not very clear to the wider business community. Signing agreements is one thing. Using them to attract investment and expand exports is another.

No other choice

So while May’s export performance is good, Sri Lanka’s export structure is still not properly organised. One strong month has changed the narrative for the first five months of 2026. But it has not changed the fundamentals.

What Sri Lanka needs is export growth driven by structural reforms. That means fixing land markets, improving labour flexibility, expanding female labour force participation, easing access to capital, reducing input costs, modernising Customs, improving productivity, and widening market access.

Of course, structural reforms take time. They are complicated. Multiple teams have to work hand in hand for a reasonable period before we see real results.

But sadly, Sri Lanka has no other choice.

If we want exports to grow sustainably, we cannot depend on one good month. We have to fix the system that produces exports.

The dollar myth we keep getting wrong

By Dhananath Fernando

Originally appeared on The Morning

There is a persistent belief among Sri Lankans that because we import more than we export, we borrow dollars at high interest rates to bridge the gap. 

Many still assume that our external debt is simply the result of financing this trade deficit. The same fear resurfaces every time global oil prices rise. If fuel becomes expensive, people assume we must borrow more dollars to pay for imports. 

This is a compelling story. But it is largely wrong. Let’s take this myth apart step by step. 

It is true that Sri Lanka runs a deficit in merchandise trade. When we look at physical goods such as tea, apparel, rubber, coconut, and fuel, we import more than we export. In January for instance, the country exported goods worth $ 1,148 million and imported goods worth $ 1,803 million. That leaves a merchandise trade deficit of $ 654 million. 

But this is only one part of the picture. 

The flow of dollars into and out of a country is not limited to goods. There is also trade in services, including, but not limited to IT, logistics, insurance, and tourism. Even in a simple tea export, the value recorded at the port is only the ‘free on board’ price. Insurance and freight are counted separately as services. 

In January, Sri Lanka exported $ 734 million in services and imported $ 328 million, generating a surplus of $ 406 million in the services account. When you combine goods and services, the overall trade deficit shrinks significantly, to around $ 248 million. 

But the story does not end there. 

The current account also includes income flows. This is where remittances play a major role. In January this year, Sri Lanka received $ 740 million in inflows such as worker remittances, while outward payments including interest and other transfers amounted to $ 122 million. This leaves a net income surplus of $ 617 million. 

When you combine goods, services, and income, Sri Lanka actually recorded a current account surplus of about $ 369 million for the month.  

This is the critical point – the economy, in that month, generated more dollars than it spent. Therefore, the idea that we automatically borrow to bridge the import-export gap is misleading. 

Now consider a scenario where global fuel prices spike to around $ 120 per barrel due to the Middle Eastern tensions. Yes, the cost of fuel imports will rise. But that does not mean the country will automatically face a dollar shortage. 

Why? Because the economy adjusts. 

If more dollars are spent on fuel, there is less capacity to spend on other imports. Consumption shifts. If tourism declines, dollar earnings fall, but so do the associated dollar expenses. If remittances decline, household consumption reduces accordingly, lowering import demand. 

In short, both inflows and outflows adjust. The total volume of dollar transactions may shrink, and people will feel the pressure, but this does not automatically translate into a balance of payments crisis. 

Crises emerge not from price movements, but from policy failures. 

The real risk arises when domestic policy distorts this natural adjustment. When the Central Bank expands the money supply excessively – beyond what the economy can absorb – it artificially boosts demand. That demand spills into imports, increasing the need for dollars without a corresponding increase in inflows. 

This is why Central Bank independence matters. Its primary objective must be price stability. The moment it tries to chase short-term growth through money printing, the result is temporary expansion followed by currency pressure and instability. 

Similarly, fiscal discipline is critical. A large budget deficit injects excess liquidity into the economy, driving consumption and imports. Reduce the deficit, and the pressure on the external account eases naturally. The trade deficit is not an isolated problem. It is deeply linked to fiscal and monetary choices. 

This is also why price adjustments, including fuel pricing, are essential. Prices carry information. They signal scarcity. When prices are artificially suppressed, consumption does not adjust, and imbalances widen. Allowing prices to reflect global realities ensures that the economy self-corrects. 

The lesson is simple. 

Sri Lanka’s vulnerability does not come from importing more than it exports. It comes from how we manage our policies in response to that reality. External shocks such as oil price increases are inevitable. But whether they turn into crises depends entirely on our internal discipline. 

If we get the fundamentals right, the economy will adjust. If we don’t, even a small shock can push us back into instability. 

The real battle is not in global markets. It is at home, in our policy choices. 

When prices lie, crises follow

By Dhananath Fernando

Originally appeared on The Morning

The only certainty about the crisis in the Middle East is its uncertainty. Recent attacks on Iranian and Qatari gas infrastructure are already pushing global Liquefied Natural Gas (LNG) and energy prices upwards, and these pressures are unlikely to ease anytime soon.

Many Sri Lankans fear that our economy could collapse because of this crisis. There is some truth in that concern. But if the economy does collapse, it will not be because of the Middle Eastern crisis alone; it will be because of how we respond, or fail to respond to it.

At the heart of this response lies one critical decision: whether we adjust domestic energy prices in line with global realities.

In his address to Parliament on Friday (20), the President signalled the need to revise fuel prices again mid-month. Given the volatility of global markets, even weekly or daily revisions may be justified. This is not policy overreaction; it is economic discipline.

Prices are the most effective tool we have to manage scarcity. When prices rise, demand contracts – that is how markets signal reality. With global energy prices skyrocketing, price adjustments are not optional; they are the first line of defence.

Yet, the pressure to increase prices remains politically constrained. Sri Lanka currently has a degree of buffer, both in foreign reserves and domestic liquidity. This creates the illusion that we can delay adjustments. Governments often hesitate, fearing the political cost of passing global price shocks to consumers.

Keeping prices artificially low, however, has consequences. It encourages consumption beyond what we can afford. Every litre consumed above sustainable levels is paid for with scarce dollars. Eventually, this pressure will hit the exchange rate.

At that point, the Government will face an even harsher choice: either allow the rupee to depreciate sharply, or burn through reserves to defend it. Both paths are far more damaging than timely price adjustments.

If we choose to defend the currency while keeping fuel prices artificially low, we will simply deplete our reserves. If we float the currency under pressure, the impact will be economy-wide higher inflation, eroded savings, and a deteriorating investment climate.

None of these are better alternatives.

That said, fuel price hikes are not painless. They are not a perfect solution, nor a silver bullet. Higher fuel prices will ripple across the economy; raising transport, food, and other essential costs. Given the relatively inelastic nature of fuel demand, the burden will be felt widely, especially by the poorest.

This is precisely why price adjustments must be accompanied by targeted cash transfers. The answer is not to suppress prices for everyone, but to support those who truly need it. Well-targeted assistance can cushion the vulnerable without distorting the entire system.

It is also important to understand this: even if fuel prices rise to Rs. 1,000 in line with global markets, the economy will adjust. Growth may slow, but stability will be preserved.

The alternative, on the other hand, is far worse. If we avoid price adjustments, the gap between real costs and subsidised prices does not disappear, it accumulates. And eventually, society pays the price through currency depreciation, inflation, and another full-blown economic crisis.

We have seen this movie before.

The decision to allow private companies to import fuel is a step in the right direction. The President noted that five licences had already been issued. These players will likely enter the market at higher, more realistic prices. That, in itself, is a signal.

Higher prices attract supply. They also discipline demand. Both are necessary in a constrained environment.

Our hard-earned reserves should not be used to defend an artificial exchange rate. Nor should our hard-earned primary surplus be used to subsidise fuel consumption, especially when, as data suggests, nearly 70% of fuel is consumed by the top 30% who can afford higher prices.

Even mechanisms like the QR code system are, in effect, hidden price controls. Long queues, waiting time, and even informal payments to bypass quotas are simply non-monetary forms of price increases.

If we are serious about reform, we must go further. Price caps imposed on private players such as Sinopec, Lanka IOC, and Shell should be removed. These companies must have the incentive to import and supply fuel based on market conditions. Ceylon Petroleum Corporation (CPC) prices, too, must adjust accordingly.

The real test for the Government is simple: can it allow prices to reflect reality?

If it fails, the Middle Eastern crisis will not remain external; it will become our own economic crisis.

If it succeeds, the economy may slow, but it will endure.

And in times like these, survival with discipline is far better than collapse with denial.

Navigating Sri Lanka’s maritime governance in an era of conflict

By Dhananath Fernando

Originally appeared on The Morning

The war in the Middle East has come uncomfortably close to Sri Lanka. Quite apart from the macroeconomic consequences that may unfold depending on the length of the conflict, the recent torpedo attack on an Iranian ship within Sri Lanka’s Exclusive Economic Zone (EEZ) should have sent a shockwave through our policy establishment. It should have felt almost as serious as a direct strike within our territorial waters.

The reason is not that Sri Lanka must choose sides in this war. Nor is it only about the possible economic ripple effects through oil prices, shipping costs, tourism sentiment, or remittances.

The real alarm bell is something deeper: Sri Lanka still does not have a clear Standard Operating Procedure (SOP) governing research vessels and other sensitive maritime activity within our EEZ.

This is not simply a diplomatic oversight. It is a strategic blind spot. Sri Lanka’s EEZ is roughly 7.8 times larger than our land mass. In maritime terms, Sri Lanka is far bigger than we often think. Yet our national conversation still treats the ocean as empty space rather than a strategic economic frontier.

Within that maritime zone lies enormous potential. Fisheries, marine biodiversity, ocean science, seabed resources, and new opportunities linked to the emerging blue economy. But resources alone do not create prosperity. Economics teaches us that prosperity comes from clear rules, defined rights, and institutions capable of managing resources productively.

Navigating geopolitical complexities

Property rights matter on land. They matter just as much at sea. The problem is that governing an ocean space of this scale is not easy for a small state. Sri Lanka’s enforcement capacity is limited. Monitoring marine scientific research, regulating foreign vessels, and ensuring compliance with national conditions requires technical expertise, institutional coordination, and consistent policy.

The difficulty, however, does not end there. Sri Lanka also operates in a complex geopolitical neighbourhood. This means we cannot simply permit any research vessel access to our waters without considering wider security implications.

If a scientific mission is perceived as compromising India’s security interests or regional stability, the consequences for Sri Lanka could be serious. At the same time, refusing access arbitrarily can damage relations with other major powers.

We have already seen this dilemma play out. On several occasions Sri Lanka found itself caught in a diplomatic crossfire when Chinese research vessels requested permission to operate near our maritime zone, triggering strong concerns from India.

When a country lacks a clear framework, every decision becomes a political crisis. If Sri Lanka allows the vessel, India is displeased. If Sri Lanka refuses, China is unhappy.

Both countries are critical economic partners. Both are far larger powers than Sri Lanka. But Sri Lanka’s objective should not be to please everyone in the moment. The objective should be to protect sovereignty while maximising the economic value of our maritime space. The only sustainable way to do this is through clear rules.

A shift from reaction to preparation

Sri Lanka needs a well-defined Standard Operating Procedure governing research vessels and other sensitive maritime platforms entering our waters. Such a framework should specify what types of activities are permitted, under what conditions, and with what safeguards.

Any marine scientific research conducted in Sri Lankan waters should be subject to strict conditions. Research data must be shared with Sri Lankan authorities. Sri Lankan scientists must participate in the research. Equipment and research objectives must be disclosed in advance. And the Government must retain the right to halt activities that violate agreed conditions.

If these requirements are unacceptable to a foreign vessel, permission should simply not be granted. This is not about confrontation. It is about governance.

Fortunately, the global legal framework for such governance already exists. The United Nations Convention on the Law of the Sea (UNCLOS) provides the legal architecture for managing maritime zones and regulating marine scientific research. Sri Lanka, India, and China have all ratified this convention.

The task before Sri Lanka is therefore not to invent new law but to translate existing international principles into clear operational rules tailored to the country’s national interests.

Sri Lanka also has a proud legacy in shaping global maritime law. The late Shirley Amerasinghe, one of Sri Lanka’s most distinguished diplomats, chaired the Law of the Sea Conference until his death in 1980. It is no coincidence that soon afterwards Sri Lanka established the National Aquatic Resources Research and Development Agency (NARA), under the leadership of Dr. Hiran Jayewardene, with the intention of building national expertise in marine science and maritime governance.

That vision remains relevant today. Unfortunately, Sri Lanka’s institutional capacity has not kept pace with the strategic importance of our maritime domain. We are still reacting to events instead of preparing for them.

If domestic capacity is insufficient, Sri Lanka should draw on partnerships with countries that possess strong maritime research systems. Nations such as Norway and others with advanced ocean governance frameworks could support Sri Lanka in building technical capacity, developing institutional structures, and training local experts.

An untapped economic opportunity

Strengthening maritime governance is not merely a defensive exercise. Done properly, it can generate economic benefits.

Sri Lanka can capture knowledge rents through shared research data about the Indian Ocean. We can build expertise by training Sri Lankan marine scientists and expanding opportunities for research institutions and private sector collaboration. Ports can generate additional commercial revenue through logistics, services, and maritime support activities. And the country can position itself as a credible neutral hub for humanitarian maritime services in the Indian Ocean.

In short, maritime governance is not just about security. It is also about economic opportunity. This is why it would be a mistake to view the Middle Eastern conflict only through the narrow lens of tourism losses or remittance risks.

Sri Lanka’s strategic thinking must go deeper. The real question is whether we are capable of turning our geography into an advantage rather than a vulnerability.

Because the uncomfortable truth is this: Sri Lanka’s greatest vulnerability is not that we refuse to choose sides. It is that we continue to operate without a rulebook. And in an increasingly contested Indian Ocean, that is no longer a luxury we can afford.