External sector deteriorates in 1H, trade deficit widens 67% YoY

• 1H current account swings to $ 245 m deficit from $ 1.4 b surplus a year ago
• Current account posts third straight monthly deficit in June
• 1H exports up 6.3% to $ 6.9 b, imports up 27% to $ 12.4 b

The external current account remained under pressure in June, recording a third consecutive monthly deficit, while the first half of 2026 saw the merchandise trade deficit widen 67% as higher fuel and other imports linked to the Middle East conflict continued to outpace export growth despite resilient workers’ remittances and a narrowing monthly current account gap. According to the Central Bank of Sri Lanka’s (CBSL) latest External Sector Performance report, the current account recorded a deficit of $ 149 million in June, improving from May’s deficit but extending the run of monthly deficits that began in April. The cumulative current account balance for 1H 2026 recorded a deficit of $ 245 million compared with a surplus in the corresponding period of 2025.

The CBSL attributed the latest outturn to the continued impact of developments in the Middle East, with a widening merchandise trade deficit outweighing the services surplus and stronger remittance inflows.

The merchandise trade deficit widened to $ 828.5 million in June from $ 540.3 million a year earlier as merchandise imports increased 17.3% year-on-year (YoY) to $ 1.97 billion, while merchandise exports edged up only 0.2% to $ 1.14 billion.

During the first six months of the year, the trade deficit expanded to $ 5.49 billion, up 67% from $ 3.27 billion in the corresponding period of 2025, as exports grew 6.3% YoY to $ 6.9 billion and imports rose 27% to $ 12.4 billion.

Fuel imports remained elevated, although the monthly bill continued to moderate. Expenditure on fuel imports increased 40.2% YoY in June, mainly reflecting higher expenditure on refined petroleum products, but declined for a second consecutive month to $ 465 million from $ 536 million in May and $ 886 million in April. 

Cumulative fuel import expenditure rose 58.8% YoY to approximately $ 3.17 billion during 1H 2026.

Motor vehicle imports also moderated during the month. Expenditure on imported personal and commercial vehicles declined 27.1% from May to $ 182 million. However, cumulative vehicle import expenditure reached $ 1.25 billion during the first six months of 2026.

The CBSL said Sri Lanka’s terms of trade deteriorated both in June and during the first half of the year as import prices increased faster than export prices.

The services account continued to weaken, with its surplus declining 33.8% YoY to $ 162 million in June as services outflows grew faster than inflows. The cumulative services surplus during January-June was 22.4% lower than in the corresponding period of 2025. Total services inflows increased 1.6% YoY to $ 516.3 million in June, but were 2.2% lower YoY at $ 3.5 billion during the first half of the year.

On the financial account, foreign investors recorded a net inflow of $ 30.2 million into the Government securities market during June, while the Colombo Stock Exchange recorded a marginal net outflow of $ 0.4 million, including primary and secondary market transactions. Gross official reserves, including the People’s Bank of China swap facility, stood at $ 6.5 billion at end-June amid sizeable external debt service payments.

The CBSL said the rupee had depreciated by 7.8% against the US dollar on a year-to-date (YTD) basis by end-July, reflecting external sector pressures arising from the conflict in the Middle East. However, it said the pace of depreciation had moderated recently, with the currency becoming less volatile following recently implemented monetary, fiscal, and macroprudential policy measures.