Ceasefire or not? Where does the US-Israel war on Iran leave Sri Lanka
- Rehana Thowfeek
- 5 hours ago
- 5 min read
24 June 2026
US President Donald Trump announced that a peace deal had been reached between the US and Iran. On the 17th of June an MOU was signed between the two countries. While negotiations are ongoing the ending of the war remains uncertain.
The Strait of Hormuz is currently open with some ships passing through. Twenty-three ships transited on the 24th of June. Global oil inventories are approaching historically low levels, as markets have been drawing down from stores of crude and refined oil to plug the loss of Gulf oil. It has been 3.5 months since the start of the US-Israel war on Iran. As US-Iran negotiations reach a critical juncture, here's how Sri Lanka has been affected since the war began.
Oil
Sri Lanka is importing less quantities of fuel but paying significantly more per unit.
Fuel prices have been revised 6 times since the start of the war. Auto diesel is now ~47% higher than it was pre-war, while petrol (octane 92) is ~49% more expensive.
The government’s 3-month fuel subsidy of Rs 57 million is set to run out in June.
Sri Lanka’s fuel import bill grew to $886 million in April 2026 – a 150% increase year-on-year.
Sri Lanka imported ~82,500 MTs of diesel and ~50,800 MTs of petrol in April 2026, down from the previous month’s quantity of imports.
Per unit CIF (cost, insurance and freight) for diesel (diesel and super diesel only) rose by 143% in April 2026, compared to annual averages in 2025. It rose by 92% for petrol (octane 92 & 95 only).
Electricity
Daily electricity demand has fallen since the start of the war, from ~2,900 MWs a day to ~2,590 MWs a day. Much of 2026’s daily electricity need has been generated with the use of thermal coal and oil.
Sri Lanka imported a significant amount of coal in April 2026, amounting to ~363,754 MTs. The import bill for April 2026 was $ 43 million – a 76% year-on-year increase.
Increases in per unit CIF for coal was less significant than for fuel for road transport – at 11% in April 2026 compared to annual averages in 2025.
The growth in the import bill for coal in April 2026 can therefore be attributed to an increase in the quantity of coal imports rather than a price increase.
The increase in quantity may also be attributed to a seasonal spike, as the full year's coal requirement is typically imported in between October and April, before the South-West monsoon begins.
While Russia was a dominant supplier of coal in 2025, South Africa emerged as the dominant supplier in 2026.
Per unit CIF for fuel oil rose by 76% in April 2026, compared to annual averages in 2025.
The government allocated Rs 15.3 billion as an electricity subsidy in response to the West Asian crisis.
Food and Fertiliser
Inflation surged to 5.5% in May 2026, driven mostly by increases in transport and energy costs.
Sri Lanka secured ~55,000 MTs of fertiliser in April 2026, up from ~10,500 MTs in the previous month.
The import cost of fertilisers like Urea doubled in April 2026, compared to averages in 2025. Sri Lanka paid ~Rs 239,000 per metric tonne of nitrogenous fertiliser in April 2026, compared to just ~ Rs 120,500 per metric tonne in 2025.
China was Sri Lanka’s largest supplier of imports, accounting for 64% of fertiliser imports in 2025. This dominance continued in early 2026, however with China banning the export of its fertilisers in mid-March in response to the West Asian crisis, Sri Lanka switched to alternate source markets in April 2026, securing ~25,000 MTs of fertiliser from India and ~19,000 MTs from Vietnam.
China has now relaxed its ban of fertiliser exports in late May 2026 to help ease global market prices.
In April 2026, the government announced the planned fertiliser subsidy for paddy cultivation would be increased to Rs 30,000 per hectare, to aid farmers to face the price shock. The subsidy was increased to Rs 18,000 for other crops.
In June 2026, the Deputy Minister of Agriculture claimed the subsidy had benefited ~571,000 farmers cultivating ~405,000 hectares of paddy and that it would provide another round of the fertiliser subsidy at the same amounts.
Exports, tourism and worker remittances
Merchandise exports declined in April 2026, compared to the previous month, amounting to $ 1,074 million.
There was a marginal year-on-year increase in apparel exports in May 2026. There was a notable increase in exports of petroleum products and base metals and articles in April 2026.
Tea exports declined year-on-year in April by 7%. 42% of Sri Lanka’s 2025 tea exports went to West Asian countries. In April 2026, this has fallen to 30%, while Turkey has emerged as a key new buyer of Sri Lankan tea. Tea exports to Russia have declined marginally.
Earnings from tourism declined by 37% year-on-year in March 2026 – amounting to just $ 223 million, however arrivals picked up in May 2026. Tourism earnings may show positive change in May, therefore.
Worker remittances continue to defy the odds – growing to $ 767.9 million in April 2026 – an 18% year-on-year increase.
Balance of payment implications
Sri Lanka’s current account is in deficit since the last quarter of 2025 – and the pressure continues to mount due to the country’s widening trade deficit.
The deficit in merchandise trade (trade of goods) hit a record high of $ 1,382 million in April 2026. This is driven mostly by the growth in the import bill for oil.
The trade of services has typically been nett positive.
The Rupee has depreciated significantly since the start of the war, rising from Rs 310/$ at the end of February to Rs 334/$ on June 18th – a 7% slide.
The Central Bank hiked interest rates in May 2026 and imposed stricter mandatory conversion rules on export proceeds – signalling towards the foreign exchange risks that Sri Lanka faces.
The growing demand for imports – driven mainly by oil – was compounded by excess liquidity that prevailed prior to the war and market speculation by importers and exporters.
Fiscal implications
The primary balance (the difference between the government’s total revenue and its non-interest expenditures) has been revised downward from a pre-war target of 2.3% to 1.4%.
This reflects the government’s spending packages in response to Cyclone Ditwah – Rs 500 billion and the West Asian crisis – Rs 91.8 billion.
Deviations from the primary expenditure ceiling stipulated in the medium-term fiscal framework (MTFF) under the Public Financial Management Act can be accommodated in cases of unanticipated events or natural disasters that affect the country.
The government has pledged to return to the 2027 fiscal targets stipulated in the MTFF.
Sri Lanka has failed to adhere to cost-recovery pricing on fuel since April 2026 and on electricity since January 2026.
As a prior action (mandatory measures) to satisfy conditions for the next review of the IMF’s EFF programme, the government must make an explicit on-budget transfer to CPC to cover any losses on fuel and implement a new tariff revision on electricity.
Budget 2026 allocated Rs 36.9 billion to provide fertiliser subsidies for farmers, with planned production at ~550,000 hectares. It is likely that the government will exhaust this allocation for the ongoing Yala season, requiring a supplementary allocation to continue providing fertiliser subsidies for the upcoming Maha season.
Notes
Data related to imports and exports are obtained from Sri Lanka Customs and Central Bank of Sri Lanka
By Rehana Thowfeek, Co-Founder & Director of Civic Education, Arutha
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