In the latest escalation of the crisis in the Middle East, Iran has closed the Strait of Hormuz. According to Science Direct, Sri Lanka imports nearly all of its oil and gas, relying heavily on the Middle East, with major suppliers being Oman, Iraq, the United Arab Emirates (UAE), and Bahrain. The country depends on imported crude for its single, aging refinery and purchases refined products, such as diesel, via the spot market. A significant portion of these supplies must pass through the Strait of Hormuz, making the country’s energy security highly vulnerable to any disruptions in that waterway. Significant volumes of jet fuel, diesel, and naphtha that fuel the global market also transit this chokepoint before reaching regional hubs. While Sri Lanka imports large volumes of refined petrol and diesel from India and Singapore, these countries themselves are heavily dependent on crude oil that passes through the Strait. If the Strait is blocked, the cost of refined fuel from these hubs spikes immediately due to global price surges.
Oil and gas price hikes will inevitably follow with the closure of the Strait of Hormuz, driving up the cost of food and energy supplies irrespective of the supplier. Sri Lanka is likely to face a severe shock as a consequence of these developments unless there is a rapid resolution to the conflict, which, unfortunately, seems unlikely. In this context, it is important to note the country’s foreign reserves and their relevance to food and energy requirements. Sri Lanka’s current foreign reserves of USD 6.8 billion will be sufficient to fund food, oil, medicines, and gas imports for approximately 3.1 months, according to CEIC data. This underscores the fragile situation the country is facing.
The intensifying conflict involving the USA, Israel, and Iran—marked by direct strikes on Iranian targets, the death of Iran’s Supreme Leader, and retaliatory strikes on Gulf states—poses a serious shock to Sri Lanka’s tenuous economic recovery. Over one million Sri Lankans work in the Middle East, sending back a major component of the total remittances of over USD 8 billion in 2025. Additionally, the country’s heavy reliance on the Middle Eastern region for energy and exports—tea being a major component of the USD 17.2 billion annual export figure in 2025—means the impact is expected to be profound across economic, political, and social sectors should the conflict accelerate and become prolonged.
According to the Central Bank, both foreign exchange earners—worker remittances and exports—showed significant increases in 2025 compared to 2024, with remittances rising 22.8% and exports increasing 6.32%. This progress could be quickly reversed by the conflict. Other indicators also reflected slow but steady economic recovery. The latest crisis in the Middle East is akin to a missile strike on the economy; its potential damage introduces a challenge to the country that goes beyond the government alone.
The fuel and energy crisis could worsen with the disruption of the Strait of Hormuz, through which 20% of the world’s oil flows. Sri Lanka faces the prospect of soaring crude oil prices. While Sri Lanka has diversified its oil suppliers, the state-run Sapugaskanda refinery relies on Middle Eastern crude and could be forced to halt operations if supply lines are disrupted. The impact on remittances, export disruptions—particularly of tea to the Middle East—higher fuel and electricity costs, inflation, global economic uncertainty, potential capital flight, and currency depreciation are all significant risks.
There are immediate social risks as well, particularly concerning the safety of more than one million expatriate workers in the Middle East. The government may need to organize large-scale repatriation efforts, and if the conflict is framed along sectarian or religious lines, there could be consequences for social cohesion in Sri Lanka. Should these events unfold, the country could experience a sharp rise in the cost of living due to higher transportation and food costs, a drop in national income, and a heightened likelihood of social unrest.
The consequences of these developments, which are no fault of the government, are likely to provide political opportunists with ammunition. The Sri Lankan political opposition has often functioned as a reactive impediment rather than a strategic, constructive force advancing the country’s interests. At a broader level, the crisis presents a foreign policy challenge requiring Sri Lanka to maintain its traditional “Non-Aligned” stance while managing cordial relations with both Iran and Israel. The direct involvement of the USA, combined with the limited pressure from powers like China, India, and Russia, and the ineffectiveness of the UN, adds to the complexity. Sri Lanka must navigate this delicate environment carefully, avoiding internal political point-scoring and working toward a unified national response. The crisis could become an economic tsunami for the country, and political divisions should not weaken the state’s response.
Security concerns, while highlighted as a fallout of the crisis, are largely a function of how the country’s foreign policy is handled. Moves such as joint military and naval exercises may be politically interpreted in ways that could exacerbate domestic or international tensions. The Sri Lankan state, rather than any single government, should focus on a “managed stability” approach, balancing foreign policy challenges with economic and social challenges. Several independent think tanks, including Eurasia Review and ODI Global, have previously suggested high-level strategies to support this approach.
Economic resilience requires buffering essential supplies to prevent public distress, such as the “queue culture” that destabilized previous administrations. The government must maintain at least one month’s stock of fuel and essential goods. While global oil price hikes may be unavoidable, careful management of cost-reflective pricing and targeted subsidies can shield the most vulnerable from sudden energy-driven inflation. Export diversification is also critical: moving beyond traditional tea and garment exports into agritech, ICT, and green industries can reduce exposure to regional disruptions.
Political stability and governance reforms are essential to maintain public trust and institutional credibility. Strengthening the Central Bank’s independence and the Commission to Investigate Allegations of Bribery or Corruption (CIABOC) can pre-empt claims of systemic mismanagement. Regular publication of quarterly debt reports through the Public Debt Management Office (PDMO) increases transparency and reduces political exploitation. Digitalization of services, including e-government and digital ID schemes, reduces red tape and opportunities for corruption, which are often triggers for anti-government protests.
Social protection and public trust must also be reinforced. The government should maintain or exceed IMF-mandated social spending targets to prevent low-income households from bearing the brunt of fiscal tightening. Retaining skilled professionals in fields such as IT and medicine is critical to sustaining public services. Reforming security laws, such as the Prevention of Terrorism Act (PTA), and addressing past accountability gaps, can reduce both international pressure and domestic grievances.
The immediate task for Sri Lanka is to assess the impact of the ongoing conflict and devise a plan to minimize its severity while laying the groundwork for long-term economic resilience. National priorities should include maintaining strategic buffers in energy, food, and essential imports, as well as strengthening governance frameworks that ensure consistency regardless of political leadership. A National Governance Framework, supported by all parties, could provide this stability, setting high-level guidelines for economic and social policy that are binding across administrations. Such a framework should be updated periodically but ensure continuity in core strategic policies, reassuring investors and citizens alike.
Looking ahead, Sri Lanka must consider the fragility of the global order and the necessity of systemic governance reform. A framework that transcends short-term politics can provide the confidence needed for education, healthcare, social services, and economic opportunity, mitigating the brain drain and talent exodus. Current political debates, focused on strikes, work stoppages, and parliamentary theatrics, risk overshadowing the country’s long-term interests. Strategic governance should instead prioritize economic management, health and education, agriculture, food security, export development, water management, and energy security.
Economic management strategies should include increasing GDP and per capita income targets. Sri Lanka’s GDP projection for 2025 was around USD 87 billion, with per capita income between USD 3,799 and 3,939. Achieving an 8% annual growth over ten years would result in a GDP of USD 200 billion and per capita income of USD 9,000, qualifying the country for upper-middle-class status. High-income status requires a per capita of USD 13,846 or more. Comparatively, Singapore’s GDP in 2024 was USD 547.4 billion, with per capita income of USD 90,674, projected to reach USD 130,000 per capita in ten years. Sri Lanka must decide its long-term aspirations.
Increasing foreign reserves is equally critical. Trading Economics reports Sri Lanka’s foreign exchange reserves at USD 6.82 billion in January 2026, enough for 3.1 months of essential imports. This is insufficient. Sri Lanka should aim for foreign reserves and assets equal to or exceeding its foreign debt, similar to Singapore, which has zero net debt despite substantial gross external obligations due to its sizable financial assets.
Economic governance measures for a National Governance Framework should include managing recurrent expenditure with domestic revenue, allocating a minimum percentage for essential infrastructure, and financing shortfalls through long-term debt or grants. Taxation should be restructured to widen the tax base and optimize revenue without excessive rates. Export income should be doubled or tripled over 5–10 years, and a local currency reserve should be established for emergencies.
The banking sector must also play a strategic role. The Boston Consulting Group noted that Sri Lankan banks’ deposits totaled approximately LKR 16.16 trillion (USD 57.4 billion) at the end of 2024, growing 18.43% year-on-year. The National Governance Framework should outline how these “sleeping” assets could yield higher returns, funding private-sector ventures while offering depositors higher guaranteed interest for long-term deposits. This would shift banks from being primarily funding arms for the government to catalysts for private-sector growth.
A strategic systemic change in governance is needed to move Sri Lanka from a debt-servicing mindset to an asset-building one, where national assets exceed liabilities. Achieving this requires political will spanning decades rather than five-year election cycles. Immediate relief measures often undermine long-term objectives. A National Governance Framework, supported by all political parties, could enable the country to withstand global shocks while ensuring continuity in high-level governance policies. Whether Sri Lanka’s leaders have the foresight, wisdom, and courage to implement such a framework remains to be seen.
