Sri Lanka’s external sector delivered a mixed and increasingly complex picture in October 2025, underscoring the delicate balance the new NPP government must maintain as it navigates the post-crisis recovery phase.
While some key indicators show continued resilience, the latest Central Bank data reveals emerging pressure points that could test the administration’s economic governance strategy in the months ahead.
The country recorded a current account deficit for the second consecutive month, reversing the earlier trend of steady monthly surpluses.
Yet, cumulatively, the first ten months of 2025 still reflect a US$1.7 billion surplus, indicating that gains from earlier stabilisation measures continue to cushion the economy.
The NPP government has highlighted this surplus as proof of improved fiscal discipline and strengthened governance, but analysts caution that the underlying structural vulnerabilities remain far from resolved.
A primary concern is the widening merchandise trade deficit, driven largely by a surge in imports. Most notable is the dramatic spike in vehicle imports, which reached US$261 million in October alone, pushing cumulative imports for the year to US$1.46 billion.
After years of restrictions, the reopening of imports has released pent-up demand, but without a parallel increase in export earnings, this trend risks re-inflating external imbalances.
Further adding to the challenge, Sri Lanka’s terms of trade deteriorated in October, with import prices rising faster than export prices. This shift increases pressure on the rupee and potentially deepens the trade deficit if left unaddressed.
However, the services sector continued to provide crucial support. Tourism arrivals increased on both a monthly and annual basis, boosting earnings, which rose 4.9% cumulatively over the first ten months of the year.
Meanwhile, workers’ remittances recorded their highest monthly inflow since December 2020, bringing the year-to-date increase to 20.1%. These inflows remain essential pillars of foreign exchange stability and household financial security.
Foreign investment patterns revealed a mixed sentiment: while government securities attracted net inflows, the Colombo Stock Exchange experienced net outflows, signalling cautious investor behaviour despite the political transition.
By end-October, gross official reserves stood at US$6.2 billion, inclusive of the PBOC swap facility. Although this level is broadly stable, it remains insufficient to fully insulate the country from future external shocks. The rupee’s 5% depreciation by end-November reflects lingering currency pressures.
For the NPP government, October’s performance is a reminder of both progress and persistent risk. Governance reforms and tighter fiscal controls have enhanced credibility, but the widening trade deficit and deteriorating terms of trade highlight the urgent need for an export-led strategy. Without decisive action, Sri Lanka risks drifting back toward pre-crisis vulnerabilities.
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