External shock, not domestic excess driving current macro pressures: CT Smith

• Says current pressures differ fundamentally from 2022 crisis as reserves, IMF discipline and exchange rate flexibility remain intact
• Nearly $ 1.4 b in multilateral inflows expected as markets watch possible CBSL policy response on 26 May

Sri Lanka’s recent macroeconomic pressures are being driven primarily by an external energy shock linked to the Middle East conflict rather than the domestic imbalances that triggered the 2022 economic crisis, CT Smith Securities said in a macroeconomic update issued yesterday.

The brokerage said rising oil prices, higher import costs, and pressure on the balance of payments had contributed to the recent depreciation of the rupee, rising inflation, and the widening trade deficit, although the country now possesses significantly stronger external buffers than during the crisis period. 

“Oil risk premiums in refined fuels have begun to ease from recent peaks and remittance inflows remain resilient. Combined with improved reserve buffers, a flexible exchange rate, and continued International Monetary Fund (IMF) program discipline, the economy is in a significantly stronger position to absorb these shocks,” the report stated. 

The report noted that the rupee had weakened around 6.2% year-to-date (YTD) as at 21 May 2026, with the indicative selling rate reaching Rs. 329.64 against the US dollar for the first time since December 2023. 

CT Smith said the acceleration in depreciation followed the escalation of tensions in the Middle East, which sharply increased Sri Lanka’s fuel import bill while weakening tourism inflows. Fuel imports rose 74.7% year-on-year (YoY) to $ 630 million in March 2026 alone. 

The brokerage also cited remarks by Central Bank of Sri Lanka (CBSL) Governor Dr. Nandalal Weerasinghe indicating that the four-month fuel import bill of the Ceylon Petroleum Corporation (CPC) had already reached $ 1 billion, compared with $ 1.5 billion for the whole of 2025. 

According to the report, recent vehicle import demand may also have intensified short-term pressure on the currency, following the Government’s decision to impose a temporary 50% surcharge on vehicle import duties from 16 May.

CT Smith said 9,429 vehicles had been brought into the country after 18 May despite the cut-off date for letters of credit (LCs), which it identified as a possible contributor to the sharp 1.5% depreciation recorded since 15 May. 

The report further noted that the CBSL turned a net seller of $ 12.9 million in April 2026, marking its first month of net dollar sales since June 2024, although it remained a net purchaser of $ 697.2 million during the January-April period. 

Despite recent volatility, CT Smith said near-term multilateral inflows are expected to support currency stability.

“We expect the rupee to stabilise around Rs. 335/USD by end-2026, supported by near-term foreign exchange inflows of $ 1 billion, including IMF disbursements,” the firm said. 

It said inflationary pressures were also intensifying as global energy prices filtered through to the domestic economy.

Colombo Consumer Price Index inflation accelerated to 5.4% YoY in April from 2.2% in March, reaching the highest level in two years. 

Fuel price increases alone contributed Rs. 2,640 to monthly household expenditure, while total monthly expenditure increased by Rs. 5,381, according to the report. 

Brent crude oil prices were trading around $ 110 per barrel on 20 May, with CT Smith warning that inflation could rise further depending on oil prices and exchange rate movements.

“We expect inflation to remain elevated in the near term, with a potential peak approaching or exceeding 10%, depending on oil price dynamics and currency depreciation,” CT Smith noted.

The report also flagged emerging tensions between IMF program commitments and the Government’s energy subsidy measures.

While fuel prices were increased by 26% to 30% in March, electricity tariffs rose only between 10% and 13.5%, remaining below cost-recovery levels required under the IMF-supported reform program. 

CT Smith estimated that the Government was currently absorbing around Rs. 20 billion per month in fuel-related costs, equivalent to around Rs. 100 per litre on diesel and Rs. 20 per litre on petrol. 

The brokerage said Sri Lanka is expected to receive around $ 700 million from the IMF by end-May following the combined Fifth and Sixth Reviews under the Extended Fund Facility (EFF) arrangement, alongside expected inflows of $ 480 million from the Asian Development Bank (ADB) and $ 200 million from the World Bank. 

The report also highlighted weakening business activity indicators, with both manufacturing and services Purchasing Managers’ Indices (PMIs) contracting in April. The manufacturing PMI declined to 42.6 from 66.7 in March, while the services PMI fell to 46.7 from 59.4. 

The services New Business sub-index turned negative for the first time since April 2023, reflecting slowing domestic demand conditions. 

The CBSL’s next monetary policy decision is due on 26 May. CT Smith said its base-case expectation remained for rates to be held at 7.75%, although risks of a rate increase were rising if energy prices continue climbing and inflation remains elevated. 

“Sri Lanka’s macro outlook is facing challenges as external pressures re-emerge, however, unlike in 2022, current vulnerabilities are externally driven and are being met with stronger buffers,” the report concluded.