PILLARS OF ECONOMIC GROWTH
Sri Lanka charts its path for growth in an evolving global trade arena
In recent years, Sri Lanka has been navigating a dynamic export environment shaped by both internal challenges and external opportunities. Understanding these dynamics will be crucial for capitalising on the country’s position as a hub for trade and economic growth.
Indeed, the export sector remains an essential pillar of Sri Lanka’s economy.
In the first half of this year, total exports reached US$ 8,338 million, marking a robust 6.7 percent growth over the same period last year. Merchandise exports climbed by nearly seven percent to US$ 4.3 billion while services exports (including logistics and transport) grew by over seven percent to almost 1.2 billion dollars.
Apparel manufacturing continues to be the backbone of Sri Lanka’s export economy. In January, export earnings from apparel and textiles rose by over 22 percent year-on-year to over US$ 460 million. The sector benefits from a reputation for quality and compliance with international labour standards, which has helped maintain steady demand in key markets despite global supply chain disruptions.
Tea exports remain notable with Ceylon Tea maintaining its distinctive market position.
Similarly, the rubber industry made a worthy contribution to both raw and value added exports, including tyres and industrial products.
Other agricultural exports such as coconut based products complement the portfolio and add diversity to the nation’s export offering.
Beyond goods, the services sector has emerged as a vital source of foreign exchange. Sri Lanka has seen considerable expansion in business process outsourcing (BPO), software development and digital services.
Tourism, while impacted by global events in recent years, remains an important industry with prospects for recovery and growth. In 2024, Sri Lanka recorded over two million tourist arrivals, generating more than three billion dollars in earnings – a 53 percent increase compared to 2023. And at the end of August this year, over 1.4 million tourist arrivals have been recorded, which suggests that the industry will comfortably surpass last year’s numbers.
A favourable development for Sri Lankan exporters is the preferential tariff granted by the US on a range of Sri Lankan products including rubber gloves, which constitute a considerable share of Sri Lanka’s export basket.
This preferential access provides Sri Lankan manufacturers with a competitive advantage over other countries facing higher US tariffs, particularly amid ongoing global trade tensions and tariff escalations elsewhere.
Some industry analysts, including Bloomberg and Reuters, suggest that this tariff advantage could help Sri Lanka expand its market share in the United States, supporting export growth and foreign exchange earnings.
Meanwhile, new US trade tariffs of 20 percent on Sri Lankan exports came into effect on 7 August. The Chairman of the Export Development Board (EDB) has stated that further discussions are planned regarding a potential reduction in the tariff rate.
Among Sri Lanka’s top 10 export markets, several have demonstrated noteworthy growth. The UK, India, Italy, Germany, the Netherlands and France all recorded positive export expansion in June, as well as for the cumulative January-June period compared to 2024.
India continues to strengthen its position as Sri Lanka’s second largest export destination, overtaking the UK.
Exports to India increased by over nine percent to almost US$ 96 million in June while cumulative exports from January to June surged by 26.5 percent to almost 506 million dollars. However, the US remains Sri Lanka’s largest single export market, absorbing roughly 23 percent of merchandise exports.
From an investment perspective, Sri Lanka’s policy environment aims to encourage foreign direct investment (FDI) through a combination of incentives and infrastructure development.
Recent infrastructure projects have drawn international attention, particularly the development of a deep-water container terminal at the Port of Colombo. This initiative, supported by partners including the US and India, seeks to expand the country’s capacity as a regional transshipment hub, improving logistics efficiency and connectivity.
Renewable energy is another sector attracting investor interest. Sri Lanka has set ambitious targets to increase renewable power generation to 70 percent by 2030. Recent legislation has sought to reform the power sector by encouraging private investment in sustainable energy projects, aligning with global trends and domestic priorities to reduce reliance on fossil fuels and improve energy security.
Trade agreements and regional integration efforts further underpin Sri Lanka’s export and investment outlook.
The recently signed FTA with Thailand is expected to broaden market access and stimulate bilateral trade with targets set to increase trade volumes. This free trade agreement covers not only goods but also investment facilitation and regulatory cooperation, reflecting a comprehensive approach to trade.
Other regional partnerships, including ongoing negotiations with India and China, signal Sri Lanka’s intent to deepen economic ties within South Asia and beyond.
The nation features a combination of established sectors with proven export performance and emerging areas poised for growth. For investors, understanding the nuances of each sector and the evolving regulatory framework will be key to identifying opportunities, and managing risks.